The Other Eighty Percent: Private Investment Funds, International Tax Avoidance, and Tax-Exempt Investors

49 Pages Posted: 27 Dec 2016 Last revised: 14 Feb 2017

See all articles by Omri Y. Marian

Omri Y. Marian

University of California, Irvine School of Law

Date Written: December 26, 2016


The taxation of private equity managers’ share of funds’ profits — the twenty percent “carried interest” — received much attention in academic literature and popular discourse. Much has been said and written about the fact that fund managers’ profits are taxed at preferred rates. But what about the other eighty percent of funds’ profits? This Article theorizes that the bulk of such profits are never taxed. This is a result of a combination of three factors: First, private equity, venture capital, and hedge funds (collectively, Private Investment Funds, or “PIFs”) are major actors in cross-border investment activity. This enables PIFs to take advantage of international taxation planning schemes not available in a purely domestic context. Second, PIFs are aggressive tax-planners. The Article summarizes some existing evidence that suggests that PIF-controlled multinational enterprises (“MNEs”) are more likely to engage in aggressive international tax behavior when compared with MNEs that are not PIF-controlled. The result is that PIF-controlled entities are uniquely situated to avoid tax at the source jurisdiction. Lastly, PIFs are dominated by tax-exempt investors. This enables PIF profits, which escaped source taxation, to also escape taxation at the jurisdiction of residence. The result is that most private equity gains from cross-border investment activity are taxed nowhere. The Article concludes, therefore, that PIF-controlled entities should be a target of international tax policy making. However, such policymaking must be grounded in better understanding of PIFs’ international tax behavior. This is a difficult task, since PIF operations are rarely subject to public disclosure requirements. The Article proposes opening PIF international tax planning to public scrutiny through a revision of the country-by-country reporting (CBCR) standards adopted under Action 13 of the BEPS Project. It is hoped that information garnered from such increased reporting will assist in developing anti-tax-avoidance policies that are better targeted at PIF-controlled MNEs.

Keywords: Private Equity, Venture Capital, Hedge Funds, International Taxation, Tax Avoidance, Luxleaks, BEPS, Country by Country Reporting

JEL Classification: H25, H26, K34, E22, F21, G24, O16, P45

Suggested Citation

Marian, Omri Y., The Other Eighty Percent: Private Investment Funds, International Tax Avoidance, and Tax-Exempt Investors (December 26, 2016). Brigham Young University Law Review, Vol. 2016, 2016, UC Irvine School of Law Research Paper No. 2017-10, Available at SSRN:

Omri Y. Marian (Contact Author)

University of California, Irvine School of Law ( email )

401 E. Peltason Dr.
Ste. 1000
Irvine, CA 92697-1000
United States

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