Corporate Tax 2018: Discussion

Who’s Who Legal brings together Steve Edge at Slaughter and May and Niklas Schmidt at Wolf Theiss to discuss issues facing corporate tax lawyers and their clients in the industry today.

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What impact do you see tax reforms in the USA having on clients in your jurisdiction?

SE: You need, of course, to think about this from both an outbound and an inbound point of view. UK multinational corporations with operations in the US will be pleased about the reduction in the corporate income tax rate. MNCs in both categories will be concerned about the way any R&D cost sharing or other arrangements work to make sure that they do not run into problems under the GILTI rules or suffer the base erosion tax. US MNCs will also be thinking about where they should now hold IP in the longterm and whether things like the new royalty withholding taxes in the UK should cause them to restructure their operations or decide to hold their IP elsewhere. The UK’s competitive domestic tax system will now be slightly less of a pull – but will not, at least, be a disadvantage. US groups will also need to take some decisions on whether or not they return excess cash to the US and how they structure their group financing operations in the light of anti-hybrid rules in the UK and springing up elsewhere in Europe.

NS: The US tax reform under president Donald Trump definitely is a major development. On the one hand, it shows that the US is serious about providing a competitive tax system. Lower US corporate income taxes will raise the attractiveness of the US relative to other countries, which will influence corporations’ incentives to invest there. It is anticipated that the tax reform will lead to a rise in inbound foreign direct investment into the US originating for example from the EU. On the other hand, the reform of the international tax system allows the conclusion to be drawn that the US is serious about protecting its tax base and that the days are over when US corporations could get away with very low effective tax rates by utilising certain overseas structures.

 

Sources have noted an uptick in enforcement activity from tax authorities worldwide. How is this affecting the type of work you are seeing?

SE: We are certainly doing more enquiry work now. Most of it is in the transfer pricing/diverted profits tax area as HMRC steadily works through the list of people (UK and non-UK) with significant amounts of offshore intellectual property. DPT is certainly living up to its initial proclamation of being all about improving the response rate to transfer pricing investigations. “Transfer pricing with added brutality” might be the best description. The tight time periods are making life difficult for both taxpayers and HMRC. More generally, people are finding that HMRC is looking over their shoulders at the possible prospect of criticism of any decisions they take and so inherently more cautious about what they do. This will hopefully settle down over time.

NS: We are definitely seeing a trend of more aggressive tax audits, more reporting obligations of taxpayers vis-à-vis tax authorities and more information exchange between tax authorities of different countries. All of this has meant that tax litigation is on the rise in Austria. This will probably outweigh some of the tax planning work that has steadily been getting less important since the OECD’s initiative against base erosion and profit shifting.

 

Have there been any significant regulatory changes in your jurisdiction? If so, how have they affected the practice area?

SE: Brexit will have a major impact – and we are still working through the consequences of BEPS, of course. The enablers’ rules (tax avoidance scheme reporting obligations for facilitators) will keep some people on their toes.

NS: One of the most significant regulatory changes that will affect tax lawyers in the whole of the EU is the recent passing of the directive on a mandatory disclosure regime. Basically, intermediaries such as law firms and accounting firms will have to file specified information on reportable cross-border arrangements. These are certain transactions for which there is a potential risk of tax avoidance and which concern more than one EU member state. The system will give tax authorities advance warning of tax schemes and will surely have a further dampening effect on the tax planning industry. Although said directive is applicable only as of 1 July 2020, it has a retrospective effect so that actually practitioners will already have to consider its consequences.

 

What effect do you expect AI to have on tax practices such as transfer pricing?

SE: AI will improve information access and things such as due diligence on transactions but transfer pricing is inherently a matter of understanding the dynamics of the business and reflecting the contributions of each part. Each business will have its own problems and it is difficult to make one size fit all. So humans will still have an important role in an area where subtle judgements are as important as data analysis.

NS: AI has come a long way since its humble beginnings in the 1950s, as can be seen today, for example, with self-driving cars and chat bots. Certainly there are many applications for AI (and also Big Data) in the field of transfer pricing. All activities that are manual and repetitive are ideal candidates for the use of AI. Transfer pricing apps powered by AI will certainly not replace tax lawyers, but will be tools in the hands of more efficient tax lawyers.

 

How do you expect the legal competition in the corporate tax arena to develop over the coming years?

SE: It will continue much as before. As markets change and particular areas become more active, different firms will be able to play to their respective strengths. Tax departments within MNCs are getting stronger and more aware of the contribution that individual firms can make.

NS: I believe we will continue seeing competition for high-level tax structuring work between accounting firms and law firms.

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