WSJ Goes Easy on Private Equity in Oz

Why does The Wall Street Journal think tax enforcement is “hostility”?

That’s what a news report on the front of its Money & Investing section calls Australian tax officials’ move against American private-equity firm TPG. Well, TPG is partially American or something—also Australian, Dutch, Cayman, Luxembourger—countries where it has set up “a latticework of companies… to funnel its Myer profits out of Australia without paying taxes there.”

Man, if Dow Jones funneled its profits (such that they exist) to the Caymans and Luxembourg, I imagine the IRS would get pretty “hostile,” too. Would that be a bad thing? That’s what the WSJ implies, and we’re talking about $620 million in unpaid taxes (and penalties) here.

The tax office hasn’t alleged any criminal wrongdoing by TPG. But in pursuing the case, Australian authorities are displaying a measure of hostility toward private-equity investors, which have invested roughly $20 billion into Australian investments over the past half-decade. Large firms such as Kohlberg Kravis Roberts & Co. and CVC already have substantial investments there.

Is it hostile to try to get people to quit stealing from you? That’s what Australia is alleging here. I don’t know if that’s true, but it sure sounds legitimate. And the implication is that such a move will have a chilling effect on outside capital in Australia. I’m chilled when taxes drain out of my paychecks, too. Waaaah.

Why should a country let a company from another country (or countries or the ether or a sandbar in the Carribbean or whatever) come in and buy up its companies and not pay taxes on them? Do these guys pay taxes on the IPOs at the corporate level? Is the corporate level in the Cayman Islands where there are no taxes on it? We’re not told.

You may have heard of regulatory arbitrage, where a company plays one regulator off another to see which it can get the lightest touch from. One effect of globalization is another kind of arbitrage, where companies can threaten to pull out if you tax them because those guys over in another tax them less or not at all:

With the sharp rally in the markets, a number of buyout firms are contemplating listing their companies and returning profits to their cash-strapped investors. But the tax office’s action against TPG has now caused them to reconsider floating their companies for fear of a tax hit, according to several private-equity deal makers doing business there.

That’s also revealing of a certain mindset in this story—calling it “fear of a tax hit” rather than “fear of paying taxes you owe.”

Here’s the Rube Goldberg setup the Texans use Down Under—one that’s “widely used by foreign investors holding assets in Australia”:

The Myer assets are held by a Netherlands company, which has a tax treaty with Australia. The Dutch entity is in turn owned by a company based in Luxembourg. The Luxembourg outfit is owned by a TPG unit based in the Cayman Islands.

Not much of a stretch to see a possible “tax-avoidance plot” there, and the paper doesn’t tell us how it wouldn’t be, if there is any such argument. There’s only one real quote in the story and it’s the old you-can’t-do-that-it’ll-hurt-business thing:

“The uncertainty created by the tax office’s actions has spooked not only the private-equity industry but all types of investors,” said Andrew Rothery, chairman of Australian Private Equity & Venture Capital Association.

I’m sure the APEVCA loves this story.

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Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at Follow him on Twitter at @ryanchittum.