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UK Trade Unions Call For Higher Taxes On Private Equity Firms

by Robert Lee,, London

24 May 2007

The Trades Union Congress (TUC) is calling on the government to introduce a comprehensive set of measures to deal with threats to the economy and workforce from the growth of private equity funded takeovers.

In its submission to the Treasury Select Committee, the TUC says that ministers should investigate whether tax relief should end on loans used for company takeovers; and ensure that private equity partners pay proper income tax on their earnings.

The TUC says the government should close the tax loophole that exempts private equity firms from rules that require employees to declare shares received as part of their pay package as income.

"Treating carried interest as capital gains rather than income for tax purposes is an anomaly that is extremely unfair to the very many people on far lower incomes who pay much higher levels of tax", the report says.

However, the TUC argues that the growth of private equity has wider economic implications and is urging a government investigation of whether the growth of highly leveraged buy-outs is building up a speculative bubble would lead to mass job losses.

The rise of private equity is reducing the size of the stock market, the submission says, as private equity takeovers have risen from 9% of all deals to 25% in nine years, with UK equity market capitalisation falling by nearly GBP50 billion in the first half of last year. This could result in a dangerous reduction in the liquidity of capital, the report warns.

"This reduces investment opportunities open to pension funds and other investors, and means that an increasing proportion of the wealth generated by UK companies is not available to pay pensions either today or in the future. Instead profits are going into the pockets of a handful of super-rich private equity partners who receive specially favourable tax treatment," the TUC said in a press release.

Trade unions are also calling for an investigation of the potential for conflicts of interest in private equity takeovers. These start with a potential conflict between the directors of takeover targets who may be offered highly lucrative stakes by the new owners and other existing shareholders. And after any takeover there are potential conflicts between the long-term interests of the company and the new fund manager owners. New laws and regulations are required to end these conflicts of interest, the TUC says.

Speaking at the Congress of the European TUC in Seville, TUC General Secretary Brendan Barber said:

"It's time for action on private equity. The rise of super-rich private equity players is beginning to fundamentally change the nature of British and European capitalism. We need a Europe-wide campaign led by unions to secure proper rules at both European and national levels.

"A new super-rich elite can suck value out of companies without even paying proper UK tax on their windfalls or disclosing what they are doing. Meanwhile the rest of us face possible reduced returns on our pension investments, the risk of economic slowdown if the takeover debt bubble bursts, and - if we are unlucky enough to work for a takeover target - real threats to jobs, pensions and living standards.

"The Government cannot just sit back worried that action might make it appear anti-business. Taking action on private equity would be pro all the businesses that think long term, have to fully report what they do and whose owners pay proper tax on their investments."

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