Blackstone IPO faces tax danger(2)

The Blackstone Group’s forthcoming public offering might be the first casualty of US legislation aimed at tightening the tax treatment of private equity, according to reports.

The Blackstone Group looks increasingly likely to see many of the tax benefits of its imminent public listing taken away by US legislators, amid a growing political consensus in the US for stricter tax treatment of private equity.

The Financial Times reports that representatives from both sides of the US political divide are set to meet with Treasury and Internal Revenue Service officials this week to discuss tightening the tax rules for private equity firms, in the hope of increasing the revenues they yield.

Any changes to the tax regime are unlikely to be in place before Blackstone completes its public offering, but it could mean that any tax advantages provided by the listing are short-lived.

One area reportedly under review is a loophole that allows buyout firms like Blackstone to list as a limited partnership, thus obviating the need to pay corporation tax. If this loophole was removed, Blackstone would have to list as a corporation – which would have an adverse effect on its valuation, according to the firm’s recent IPO prospectus. “If we were treated as a corporation for US federal income tax or state tax purposes, then our distributions to [investors] would be substantially reduced and the value of our common units would be adversely affected,” the firm admitted.

The tax-writing committees are also considering changing the treatment of carried interest, the portion of a private equity firm’s profits that accrues to the partnership. This is currently treated as capital gains and taxed at 15 percent, but there is a growing consensus to treat it as ordinary income instead, which is taxed at a far more punitive rate of up to 35 percent.

Any moves by the US government will invariably have a knock-on effect on the industry in Europe. Trade unions are already agitating for a review of the tax treatment of carried interest in Europe too, although so far legislators have shown no appetite for the kind of changes under discussion in the US.