Medicines sometimes have hazardous side-effects. As the boss of the world’s biggest chemist, Stefano Pessina really ought to have known that.
When the Walgreens Boots Alliance chief executive suggested in a newspaper interview at the weekend that Labour would be a “catastrophe” for British business, the 74-year-old Italian no doubt imagined he was administering a healthy dose of reality to the UK electorate. But instead Mr Pessina’s political intervention has itself provoked an angry rash of complaints about his own history of tax avoidance.
Part of that anger is due to his personal tax arrangements. Mr Pessina, who is reported to be worth more than $11bn (£7bn), lives in zero-income-tax Monaco. But the main charge relates to the nature of the corporate ownership of Boots, the ubiquitous high- street pharmacy chain.
In 2006 Alliance Boots was a large, but relatively unexciting, listed company. But then private equity money saw an opportunity. Kohlberg Kravis Roberts and Mr Pessina’s AB Acquisitions, two private equity investment vehicles, took control of the firm in a £12.4bn leveraged buyout.
Private equity normally targets smaller companies. But this was something different. Funded by the ultra-cheap money that was sloshing around the global economy in the years before the financial crisis, the deal made Boots become the first FTSE 100 firm to be acquired in a leveraged buyout.
The key word is leveraged. The acquisition was mostly funded by debt, rather than equity. And £9bn of liabilities ended up being loaded on to the firm’s balance sheet.
The taxation rules in the UK, as in most other Western countries, permits a company to offset debt repayments against profits. So if debt repayments are large enough, they can wipe out corporate tax liabilities altogether. A coalition of campaign groups estimated last year that Boots had legally avoided up to £1.3bn of UK tax over seven years through this route alone.
There were other bits of corporate restructuring that may have helped Boots reduce its contribution to the UK’s coffers. Its headquarters was moved from its historic home in Nottingham to the canton of Zug in Switzerland.
The ownership of UK store properties was transferred to group of opaque offshore partnerships. Campaigners said such aggressive – albeit legal – accounting techniques were inappropriate for a firm that received 40 per cent of its UK revenues from the National Health Service.
Boots’ management responded by saying the firm had invested £2bn to expand the business, creating thousands of new jobs and generating large amounts of other UK taxes, such as business rates and national insurance. Boots’ total UK tax bill, they added, was higher than it was when it was a public company. But Boots did not deny the central thrust of the campaigners’ report.
The firm is still sensitive. Boots put out a statement at this weekend largely echoing the tax defence from last year and stressing that Mr Pessina’s comments about Labour were “personal”.
Mr Pessina certainly takes a close interest in minimising tax. Boots was acquired by the giant American chemist Walgreens for £9bn last year, another deal engineered by Mr Pessina. Documents released in the US show Mr Pessina lobbied intensely for Walgreens Boots to shift its registered headquarters out of the US in order to avoid America’s relatively high corporation tax rates.
He was ultimately overruled. The firm’s US directors apparently understood that the political wind was changing in the US and that these “tax inversion” manoeuvres were now anathema to US politicians and the public.
The wind seems to be changing elsewhere, too. The International Monetary Fund has for some time been urging Western governments to end the bias in tax systems that incentivise firms to fund their operations with debt, rather than equity – the tax loophole that has benefited the owners of Boots and many other private equity firms in recent years. The multilateral OECD is also leading a programme to clamp down on firms artificially shifting their taxable profits offshore to low tax regimes.
The public debate has also broadened out in recent years, too. High-street retailers are beginning to echo the complaints of activists, recognising that legal tax avoidance by some major firms is putting them at an unfair trading disadvantage. It’s no longer considered “anti-business” to be anti tax avoidance.
Yet the political influence of those who profit from the status quo has not disappeared. For all their anti-avoidance rhetoric, politicians are still furtively trying to attract foreign investment though competition on tax rates. Mr Osborne has been a notably active participant in this race to the bottom, slashing the UK rate from 28 per cent to 21 per cent in the past five years.
When powerful and wealthy business leaders open their mouths and demand lower taxes and looser regulation, it’s still hard for many politicians to say no.
The Apple method: avoiding the tax bite
Apple confirmed yesterday that it is planning to sell a further $6.5bn (£4.3bn) of bonds, on top of the $32.5bn of debt it has raised since April 2013. It will likely be used to fund stock buybacks and special dividends. It seems odd for a successful company with around $150bn in cash (as profit from its overseas sales), to be issuing debt. Why not simply use the cash to fund the dividends?
The reason is tax avoidance. Apple has been raising debt in recent years, rather than using its offshore cash pile, because to repatriate the cash to the US would mean paying American rates of corporation tax on those historic profits. Plus the interest repayments on its new bonds can be used to offset its US corporation tax liability.Reuse content