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Tax Subsidies to Private Equity: The Case of BCE

Today’s Globe and Mail (Report on Business, p. B4) reports that when (technically, if) BCE Inc goes private as a result of the sale to the Ontario Teachers Pension Plan led group, interest-bearing debt will likely rise from $12 Billion to some $38 Billion, according to Chris Diceman of the Dominion Bond Rating Service.  That would more than triple BCE’s annual deduction of interest expense for tax purposes, from about $1 Billion to about $3 Billion. That in turn would just about wipe out BCE’s corporate income tax liability going forward. Diceman similarly “doesn’t expect much in the way of tax payments.”

BCE would have paid $765 Million in 2006 (before an extrordinary capital loss which cut tax payable to just $85 Million) and paid corporate income taxes of $803 Million in 2005,  $605 Million in 2004, and $1086 Million in 2003.  In short,  a significant source of corporate income tax revenues is about to  dry up, to the tune of about $50 per ordinary Canadian taxpayer per year if one assumes a “normal” BCE tax payment of $600 Million per year which will have to be made up elsewhere. In effect, ordinary taxpayers are subsidizing this private equity buy-out.  Why?

(Data on BCE’s tax situation is available at http://www.bce.ca/annual_report/index.php?note_id=2#note8
Unfortunately this will be the last data we get if BCE goes private.)

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Comments

Comment from Darwin O’Connor
Time: July 6, 2007, 10:58 am

Will the tax end up being paid by the holders of the debt as they are now making money from interest?

Comment from Andrew Jackson
Time: July 8, 2007, 10:07 am

According to yesterday’s Report on Business, almost all of the junk bonds being floated to finance the purchase will be sold outside the country, so any tax revenues on interest will not flow to Canadian governments. Also, pension funds – which don’t pay taxes – have been big purchasers of such bonds in recent years.

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