In Brief: PE tax treat targeted, Dodd-Frank reform & looming EU data deadline


Your gain is their loss

The controversial carried-interest loophole, despite surviving last year's federal U.S. tax reform, is under siege from state and local governments. The loophole – which allows private-equity fund managers to halve their tax bills by treating their earnings as capital gains rather than income – was an early target of Donald Trump’s ire during his presidential election campaign but has vanished off the Washington radar.

However, state capitals are homing in. In March, the California state assembly saw the introduction of a bill to close the loophole and bring in an estimated US$1 billion a year extra in tax, to be earmarked for public schools. New York, New Jersey and Illinois are among other states where officials say they would try to capture lost tax revenue at the state level by circumventing the loophole.

The fight against carried interest has even been brought to Greenwich, Connecticut, the world’s hedge fund capital – although hedge funds have been targeted, they are unlikely to gain as much from the tax treatment as their private-equity counterparts. “Connecticut has a legitimate budget crisis,” Michael Kink, a member of the Hedge Clippers, an activist group calling for an end to income inequality, told the Financial Times last week. He has given evidence to the Connecticut state legislature’s banking committee, arguing for the loophole to be closed.

Fund managers are alarmed, arguing that punishing private equity will leave cash-starved entrepreneurs without savvy investors. Blackstone has warned shareholders that it faces a growing risk of significantly higher tax bills because of the efforts. Most funds defend the loophole as a legitimate capital gains structure with Carlyle Group saying such a provision enables it to carry out patriotic and philanthropic activities.

Dodd-Frank differences

The bill amending the 2010 Dodd-Frank act passed the U.S. House of Representatives on May 22, two months after the Senate approved it, giving banks with less than US$250 billion in assets a chance to escape stress tests, capital and liquidity requirements and living wills.

However, some analysts say the bill, likely to be signed into law by President Trump, is unlikely to significantly affect lending or growth.

“Cutting compliance costs might boost bank shares… but it is doubtful whether easier financial regulations would have any impact on either small business lending or economic growth,” says Tan Kai Xian, U.S. analyst at GaveKal Dragonomics.

“U.S. companies already have sufficient credit,” he added. “Making it easier for banks to lend to them will not significantly boost growth.”

Protecting data (non) compliance

Many companies, especially in the U.S., are reportedly struggling to ensure they’re compliant with the European Union’s General Data Protection Regulation that takes effect from May 25. However, laggards might be able to mitigate the possibility of punishment by insuring against financial penalties.

A new guide released this week reviews the insurability of GDPR fines across Europe, which can reach up to €20 million (HK$185 million) or up to 4 percent of a group's annual global turnover – whichever is higher. It also looks at insurability of costs associated with GDPR non-compliance, such as litigation, investigation and compensation.

Only a few jurisdictions in Europe allow the coverage of civil fines by insurance and, even then, “there must be no deliberate wrongdoing or gross negligence on the part of the insured,” according to the guide. (Criminal penalties are almost never insurable, of course.)

“While there are only a few jurisdictions where GDPR fines are insurable, insurance against legal costs and liabilities following a data breach is widely available across Europe and may provide valuable cover to organizations,” said P.K. Paran, partner and co-chair of the global insurance practice at DLA Piper law firm in London.