Buyout firms will 'restructure to avoid higher taxes'

22 August 2007

Private equity firms will seek to mitigate losses from mooted tax increases through restructuring programmes, it has been claimed.

Moves are currently afoot in congress to raise taxes on private equity managers from 15 per cent to 35 per cent in response to controversy over the high returns enjoyed by the sector. The moves are intended to fund tax cuts for the American middle class.

However, according to a mathematical study of the sector conducted by Michael Knoll of the University of Pennsylvania, - which was seen by the Bloomberg news agency - the firms involved will undertake restructuring measures to shift costs to the companies in their portfolios.

He told Bloomberg: "Transactional structures are likely to change in response as tax rules change. Those changes are likely to reduce additional tax revenues.''
The firms will also raise fees on wealthy clients who are then able to deduct the higher fees, Mr Knoll claimed.

Furthermore, Mr Knoll stated the moves from the leveraged buyout firms would effectively limit the increase in annual revenue from tax to $3.2 billion - far less than had been intended.

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