Corporate tax avoidance has risen to the top of the political agenda in the UK as Britons tire of austerity measures aimed at tackling large public debt built up as a result of the financial crisis.
The UK government has backed international action to reduce corporate profit shifting, but has resisted calls to amend domestic rules which tax advisers say offer greater opportunity for tax minimization than tax systems in other large industrial countries, such as Germany, the United States and France.
A consortium led by private equity group KKR and the drug distributor’s billionaire executive chairman Stefano Pessina took Alliance Boots private in 2007. Last year U.S. drugstore chain Walgreen Co bought 45 percent of the company.
Anti-poverty group War on Want and Unite, the UK’s largest trade union, published a report on Oct 15 which said that after being delisted from the London Stock Exchange, Alliance Boots’ owners loaded the company up with loans from affiliates in low-tax jurisdictions.
These debts sent interest costs rocketing to 853 million pounds in 2008, the year after the acquisition, compared to 42 million pounds in the year to March 2007, said Nell Geiser, a researcher at Change to Win, an advocacy group backed by U.S. labor unions, which co-authored the report.
The year before its leveraged buyout, Alliance Boots had a UK tax expense of 181 million pounds, but in the six years since going private, rising interest payments turned healthy operating profits into tax losses, resulting in a cumulative net tax credit of over 130 million pounds, the report said.
“Ministers have allowed corporations such as Boots and its private equity owners to abuse the UK’s tax system. It is time for proper rules to make companies like Boots pay their fair share,” said John Hilary, executive director at War on Want.
Alliance Boots, which operates the Boots chain of pharmacies that dot main streets across Britain, said in a statement: “Alliance Boots conducts its business and organizes its tax affairs strictly in compliance with all applicable law (including legislation in the UK) and observes the highest standard of good ethics.”
KKR and Walgreen declined to comment.
There was no suggestion in the report that Alliance Boots had engaged in any unlawful activity.
Interest on debt is tax deductible and the Organization for Economic Co-operation and Development (OECD), which advises its mainly rich nation members on economic policies, said in a report in July that intra-company loans via tax havens were a popular method for shifting profits out of countries where they were made.
The OECD called on members to change their tax laws to stop this kind of income shifting.
Many countries, including Germany and the United States, already impose restrictions on the extent to which interest payments can be deducted for tax purposes.
Britain allows all debt payments to be deducted from taxable income, so long as the total debt burden does not exceed a group’s total, worldwide borrowing level.
The report said Alliance Boots was heavily reliant on taxpayer-funded health programs for revenue and called on the government to “consider excluding companies that do not pay an appropriate level of tax from consideration for public contracts”.
But Heather Self, a tax partner at international law firm Pinsent Masons, said there was nothing wrong with companies minimizing their tax bills by taking large interest deductions.
She said that while the UK rules on debt were “relatively generous” to companies, they were “a result of policy decisions made by governments over a number of years.”
Tom Bergin is a reporter for Reuters News in London