Who’s Who Legal brings together Thierry Lesage at Arendt & Medernach, Niklas Schmidt at Wolf Theiss and Peter Maher at A&L Goodbody to discuss issues facing corporate tax lawyers and their clients in the industry today, including the effects of geopolitical changes, the development of tax regulation and the role of non-traditional service providers in the field.
Thierry Lesage: US multinational groups impacted by BEPS also face the uncertainties of a US tax reform announced by the Trump administration but with its frameworks and timeline still very much in the dark.
For Luxembourg, Brexit mainly creates an influx of business for the asset management industry. The phenomenon is driven by regulatory reasons due to the likely loss of the EU passport for UK managers and not by tax reasons. As far as direct taxation is concerned, the impact on relationships with the UK should be fairly limited. Luxembourg has an open economy and, to take an example, dividend withholding tax exemption is not restricted to EU intercompany distributions but also applies to dividends paid to a treaty country resident parent company. A UK parent company will thus still be able to benefit post-Brexit from a withholding tax exemption on distributions from a Luxembourg subsidiary.
Niklas Schmidt: Brexit will certainly have significant tax repercussions for EU businesses trading with the UK and vice versa, in particular due to the loss of certain rights afforded to taxpayers under primary EU law (eg, the fundamental freedoms as understood by the European Court of Justice or the customs union) as well as secondary EU law (eg, the EU Parent Subsidiary Directive or the EU Interest and Royalties Directive). In the area of direct taxation, bilateral tax treaties will get more important. However, at the present stage it is far too early to make accurate predictions of what exactly will change and what rules will stay in place. This will depend on the outcome of the negotiations between the two parties. The Trump presidency, on the other hand, will definitely have less impact on corporate tax affairs of European clients.
Peter Maher: Most certainly, the corporate tax affairs of a number of our clients have been affected by worldwide geopolitical issues such as Brexit and the US election.
Many UK-based insurance companies, banks, asset managers and fintech companies, which have availed themselves of UK passporting throughout the EU, have been actively involved in contingency planning to prepare for the post-Brexit world. Some of these companies have moved beyond contingency planning and made the decision to establish regulated operations outside the UK. Ireland has obviously been one of the chosen destinations for a number of these, which include some high-profile banks such as Citi, JP Morgan, Bank of America and Barclays.
With regard to the United States, Ireland has obviously been a major beneficiary of US multinational investment in Europe for many years and so the ongoing debate on US tax reform is being followed closely in Ireland.
Not surprisingly, a number of US companies, either with existing operations in Ireland or contemplating establishing operations in Ireland, have put on temporary hold new start up/expansion plans until such time as there is greater clarity on the likely direction of the US tax reform. M&A activity has also been affected, evidenced by Pfizer CEO, Ian Read, recently citing the need for clarity on US tax reform as a factor in causing deal-making to be delayed. No doubt other jurisdictions in Europe have seen similar trends.
The shelving of the border adjustment tax proposal is good news for Irish exporters. As the US tax reform debate drags on, with continued uncertainty on how any reduction in the headline rate will be funded, and what the final outcome may look like, there are signs that some multinationals are proceeding with their original plans.
Thierry Lesage: Tax harmonisation is looming within the EU and Luxembourg tax legislation will increasingly be influenced by external factors. Corporate tax legislation will notably be impacted by the forthcoming implementation of the EU Anti-Tax Avoidance Directive.
Mutual agreement and arbitration procedures will undoubtedly increase as a result of enhanced international tax cooperation. The Luxembourg tax authorities are preparing for this and have recently released guidance on the application for a mutual agreement procedure.
Niklas Schmidt: The last few years have seen an incredible multiplication of legal instruments enabling better cooperation between tax authorities of different countries (eg, the Common Reporting Standard or the OECD’s push regarding Country-by-Country Reporting). This trend will certainly continue. The only backlash that I anticipate is a discussion on taxpayer rights and privacy issues, which will inevitably commence. In addition, the EU’s impact on Austrian tax law will certainly increase considerably.
Peter Maher: Increased taxpayer disclosure obligations (through various initiatives at EU and OECD level) will undoubtedly lead to greater scrutiny by tax authorities of the measure of tax paid by multinationals in the jurisdictions that they operate in and this will likely lead to an increase in cross-border tax disputes. In anticipation of this, the Irish tax authorities recently expanded their transfer pricing unit to enable them to better deal with transfer pricing disputes.
Ireland has also signed the OECD Multilateral Instrument and opted in favour of mandatory binding treaty arbitration (MBTA), so this will be a feature of many of Ireland’s double tax treaties in the future. Following implementation of BEPS recommendations (including, for example, a new principal purpose test to be considered in the application of treaty provisions) it is expected that the number of mutual agreement procedure consultations will increase so an efficient and streamlined dispute resolution process through the MBTA will be welcomed.
Thierry Lesage: Law firms like ours which have been investing in transfer pricing and tax compliance have been able to keep pace with accounting firms. Comprehensive assistance spanning advisory, transfer pricing, compliance and litigation is essential to serve the needs of institutional clients. A litigation capacity is also a distinguishing factor in favour of law firms.
Niklas Schmidt: There has always been competition for high-level tax structuring work between accounting and law firms in Austria. This is not new. What is new is that the so-called “Big Four” firms are setting up legal arms and encroaching on corporate and M&A work.
Peter Maher: Actually, we are not seeing this trend in Ireland. The tax work done by the law firms has principally involved significant corporate transactions (eg, M&A, capital markets) and structuring advice. The continued expansion of the tax practices of the large law firms, and the increasing number of law firms, year-on-year, which are establishing tax practices, would suggest that there is little encroachment in these areas and the other areas of tax law (eg, controversy) that law firms do.
Where the accounting firms tend to have particular advantage is in relation to multi-jurisdictional restructuring of the operations of multinationals. Their networks very often make them better placed than the law firms to do this type of work. Also, in our experience, many clients engaging in larger multi-jurisdictional projects, increasingly, are tending to favour having both a law firm and an accounting firm acting in complementary tax roles.
Thierry Lesage: Internal tax functions have significantly shifted towards tax risk management. Issues associated with media scrutiny and biased perception are part of the picture. Multinationals also seem less receptive to advisory firms which were used to mass-market tax products.
Niklas Schmidt: Negative publicity caused by the scrutiny of multinationals’ tax affairs in newspapers and TV shows has certainly dampened the willingness of clients to get involved with somewhat more aggressive tax structures. The OECD’s Base Erosion and Profit Shifting (BEPS) project will sooner or later reinforce this trend.
Peter Maher: A number of clients, but not all, do approach their tax affairs differently now, but due more to pending legislative change (eg, BEPS responses), I would have said, than the actual criticism itself. In the post-BEPS world, quite apart from the greater challenges in implementing them, I do think there will be less all-round appetite for implementing aggressive structures.
Some examples of the change in approach which have already been seen are clients bringing IP onshore and clients, increasingly, aligning substance (eg, DEMPE functions) more closely with revenues. I don’t see this trend reversing. To date, Ireland has benefited from this trend with many multinationals relocating IP from offshore jurisdictions to Ireland where many already have existing substance and employees.
Thierry Lesage: Tax litigation is definitely on the rise in Luxembourg. This is mainly due to the increasingly complex domestic and international tax environment.
Niklas Schmidt: Tax litigation is definitely on the rise in Austria, driven mainly by the following factors: less legal tax certainty for taxpayers due to sloppily drafted laws; more international cooperation between tax authorities; and budgetary constraints.
Peter Maher: I would say it is increasing. Traditionally there has not been a large volume of tax litigation in Ireland but this is very likely to change.
First, Ireland introduced transfer pricing rules a number of years ago and the Revenue Authorities have, over the last two years, upscaled their resources and expertise in this area. A greater number of disputes on transfer pricing matters would seem to be likely.
Secondly, the appeal procedure has been overhauled over the last couple of years with, in particular, the introduction of the Tax Appeals Commission which is intended to provide a more modern, independent and efficient appeals process in relation to decisions and determinations of the Revenue Commissioners.