Private equity firms around the world have avoided paying income tax on around $1 trillion (£780bn) worth of gains from successful deals through the carried interest loophole, new research suggests.
According to a new paper from Ludovic Phalippou, a professor at Oxford’s Said School of Business, the world’s largest buyout firms, venture capital funds and infrastructure investors have earned more than $1trn (£780bn) in carried interest pay since 2000.
Carried interest is a share of the profit that private equity bosses make from an investment when an asset is sold.
Globally it tends to be taxed as a capital gain rather than ordinary income, although many governments around the world are considering upping the tax rate on carried interest.
“All the governments are talking about taxing carried interests. So my role is to provide the best estimate of the number,” Phalippou told the Financial Times. He reckons governments could get hundreds of billions through such a move.
“It shows you the upper bound of what you could collect if all of the countries in the world co-ordinated to tax that pot,” he added.
The private equity industry in the UK is braced for a crackdown, with Labour first signalling it would change the system in 2021.
Despite repeated lobbying, Labour has insisted they will move the tax paid on carried interest in line with income tax, which would see it climb from 28 per cent to 45 per cent. The opposition hopes that this will raise about £440m per year.
Think tank the Resolution Foundation has found that carried interest amounts to £2bn a year, with an average gain of £1m for the approximately 2,000 investors who receive it every year.
Critics argue that closing the loophole would put off big international private equity firms from investing in the UK. France, Italy and Germany tax carry between 26 and 34 per cent, and in the US, the level sits at 20 per cent.