BYU Law Review


Omri Marian


The taxation of private equity managers’ share of funds’ profits—the twenty percent “carried interest”—received much attention in academic literature and popular discourse. Much has been said and written about the fact that fund managers’ profits are taxed at preferred rates. But what about the other eighty percent of funds’ profits? This Article theorizes that the bulk of such profits are never taxed. This is a result of a combination of three factors: First, private equity, venture capital, and hedge funds (collectively, Private Investment Funds, or “PIFs”) are major actors in cross-border investment activity. This enables PIFs to take advantage of international taxation planning schemes not available in a purely domestic context. Second, PIFs are aggressive tax-planners. The Article summarizes some existing evidence that suggests that PIFcontrolled multinational enterprises (“MNEs”) are more likely to engage in aggressive international tax behavior when compared with MNEs that are not PIF-controlled. The result is that PIF-controlled entities are uniquely situated to avoid tax at the source jurisdiction. Lastly, PIFs are dominated by tax-exempt investors. This enables PIF profits, which escaped source taxation, to also escape taxation at the jurisdiction of residence. The result is that most private equity gains from cross-border investment activity are taxed nowhere. The Article concludes, therefore, that PIF-controlled entities should be a target of international tax policy making. However, such policymaking must be grounded in better understanding of PIFs’ international tax behavior. This is a difficult task, since PIF operations are rarely subject to public disclosure requirements. The Article proposes opening PIF international tax planning to public scrutiny through a revision of the country-by-country reporting (CBCR) standards adopted under Action 13 of the BEPS Project. It is hoped that information garnered from such increased reporting will assist in developing anti-tax-avoidance policies that are better targeted at PIF-controlled MNEs.


© 2016 Brigham Young University Law Review