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.)