The International Who’s Who of Corporate Tax Lawyers has brought together three of the world’s leading practitioners to discuss key issues facing corporate tax lawyers today. They consider reasons for the increase in transfer pricing work and litigation, and provide an insight into the relationship between tax lawyers and accounting practices in their respective jurisdictions.
CMS Bureau Francis Lefebvre
Many international lawyers have spoken about the increase in transfer pricing work over the past 12 months. What do you think accounts for this rise in activity, and what do you consider to be the future impact of such a trend?
Nathan Boidman: The underlying reason is, to me, simple. The incessant and increasingly intense disputes over TP reflect a dynamic akin to two ships passing in the night.
On the one hand there is the undeniable essence of TP based on the arm’s length principle (ALP) – that it defies “legislative” elaboration and is, as was so well put by Mr Justice Hogan of the Tax Court of Canada in the 2009 landmark guarantee fee decision in General Electric Capital Canada, largely a matter of “facts and circumstances coupled with a high dose of common sense”. On the other hand this essential factor is ignored and, effectively but inappropriately, rejected by the interrelated effects of (1) ceaseless efforts by governments (assisted by and, in fact, usually led by the OECD) to “write rules” for (and apply) the ALP and (2) governments insisting on assessing taxpayers on the basis of such futile “rules”.
However the recent decisions – rejecting such OECD/government approaches – in the US in Xilinx and Veritas, in Australia in SNF and in Canada in both GE and Glaxo, indicate that for those multinational enterprises (MNEs) that have the will to challenge those approaches, the prognosis is promising.
Michel Collet: The increase is due to the current context of crisis and budget deficit. The French tax authorities as many other ones tend to retain as much tax revenue and tax basis as possible. Transfer pricing is regarded as an efficient tool to capture revenue which would otherwise not be taxable in France. There exists numerous tax planning structures in France deriving from supply chain-types of structuring that favour efficient planning in the EU, and France has decided to have her share through aggressive audits. For the time being, a privileged tool that the authorities resort to is Permanent Establishment in France of Multinationals. Aside from the current work of the OECD on those issues, the government is giving some thoughts on how to “seize” e-business income from multinationals in France.
Richard Palmer: We have definitely seen more cross-border activity in the last 12 months (particularly inbound investment and acquisition by overseas corporates) and this inevitably results in greater emphasis on transfer pricing issues as such multinationals look at tax synergies. There is an emphasis within such groups to ensure that their documentation matches up to more stringent requirements (which means more legal work). We also see tax lawyers (particularly in the large law firms with sizeable tax practices) picking up the fiscal planning work involved with transfer pricing, often working alongside specialist economic consultants. There is an increasing focus by HMRC on group transfer pricing and therefore more enquiry work. Clients have been choosing lawyers for a number of reasons, including the desire to separate audit/accounting issues from the more legalistic concepts of transfer pricing and the attraction of legal professional privilege, and consequential confidentiality protection from HMRC which attaches to dealings between a client and its lawyer.
LAW AND ACCOUNTING FIRMS
Can you describe for our readers how your jurisdiction’s tax market is composed? How evenly split is the tax work between tax departments in law firms and accounting practices, and is there an argument for more collabouration between them? What does this mean for the future of tax experts in your country? How has it changed in the past year?
Michel Collet: In France, CMS Bureau Francis Lefebvre is the firm with the largest and strongest tax practice. We cover all areas of tax with specialists in all matters – from day-to-day advice to international planning, from audits to mutual assistance procedures and transactional work. The independent rules for accountants are very strict in France. They do not prevent the big firms from having a strong tax practice. Clients, more and more in need of independent advice and certainty, tend to resort to firms like ours.
Nathan Boidman: Since the advent of Canada’s tax reform in 1972 (which adopted, inter alia, complex and comprehensive rules for capital gains, foreign operations, shareholder/corporation transactions and corporate reorganisations) Canada’s major, and sometimes smaller, law firms and accounting practices have been competing for transactional/tax planning work.
More recently accounting firms have been establishing captive and satellite law firms that also compete for tax litigation work. There are areas which remain more suitable for the work of tax accountants, for example computations of “surplus” accounts of foreign subsidiaries, and some by tax lawyers, such tax avoidance matters; however the division of mandates has been and remains a highly random matter, often dependent upon personal relationships and reputation. The latter factor precludes any generalised statement as to particulars of any trends or development in the tax services market place in Canada in the past year and precludes any realistic predictions for the future.
Richard Palmer: Tax work in the UK market has always been split between lawyers and accountants, particularly when structuring large transactions, especially when these are cross-border deals. Although lawyers generally do not deal with routine compliance work, large firms continue to have a major role in tax structurings and bespoke tax planning where the issues are essentially ones of tax law and its interpretation/application. In addition, we are often asked to comment and opine on structures and tax schemes put to clients by their accountants, particularly because of the confidentiality afforded by legal professional privilege. In the current tax climate, where tax planning is a sensitive area and where the prospect of a General Anti-Avoidance Rule is looming, clients often desire a second pair of eyes to look at tax structures from a slightly different perspective. Our experience generally, however, is that on the bigger-ticket work, tax lawyers and tax accountants often work together to achieve tax-efficient structures that are accurately represented in the underlying legal documentation and reflect the client’s commercial operations. We do not consider that this is likely to change dramatically in the future or indeed that it has done so in the last 12 months.
Last year lawyers remarked on the increase in tax litigation, fuelled by tougher standards and aggressive enforcement by authorities. The trend appears to have continued into this year as litigation work seems to have overtaken transactional work for lawyers. Do you expect to see more legislation and regulation as a result of the increase in disputes work?
Richard Palmer: It is certainly true that we have seen a larger number of tax cases, particularly HMRC challenges to perceived avoidance, this year, although it is notable that there are still relatively few HMRC challenges to stamp duty land tax (SDLT) planning, for example. This increase is partly due to the introduction of such regimes as the disclosure of tax avoidance schemes (DOTAS). HMRC have had significant success in the courts in overturning tax avoidance schemes based on an evolved line of case law and this has encouraged them to take a more aggressive stand. We also notice an increase in the potential for using criminal sanctions in tax prosecutions in some of the more egregious tax schemes, a trend which is also apparent in a number of other jurisdictions. Litigation work will, we believe, only increase in the near future.
Nathan Boidman: Increased tax litigation leads to increased tax legislation and regulation in two distinct ways; but, by the same token, increased legislation and regulation spawn increased tax litigation.
With respect to the first dynamic, legislatures sometimes react to court decisions in favour of taxpayers by legislatively changing the law involved. No better recent example is the new, retroactive, Indian legislation in response to the Vodafone controversy. Or, consider also the 2011 US legislative response to losing the decision in Container Corp, involving the source of outbound intercompany guarantee fees. As well, but conversely, government successes before the courts in tax avoidance matters can encourage further anti-avoidance legislation. In Canada, occasional government successes before the courts under our general anti-avoidance rule have seemed to encourage more specific anti-avoidance legislation.
With respect to the second dynamic, there is little doubt that the onslaught in recent years in many countries of complex (sometimes, indecipherable) legislation leads to more dispute and tax litigation. This is exacerbated in the EU by ECJ decisions.
Michel Collet: The increase in dispute and enforcement work has changed the practice. Tax authorities have much more ability to go after taxpayers through newly adopted tools such as exchange of information, stricter enforcement rules and capabilities. Taxpayers may also resort to innovative arguments under EU law, namely under the EU Convention on Human Rights, since the tax ramifications, already tested, prove efficient.
If the transactional work remains active, it goes without saying that the increase in dispute work will grow in profile and scope.
Some lawyers explained that advising clients on how to utilise their cash buildup without triggering tax liability has made planning for the future difficult. What are the major challenges facing clients in your country at the moment?
Nathan Boidman: There probably is no country to which this question is more applicable and timely than Canada, because of the highly controversial proposed legislative changes relating to so-called “foreign affiliate dumping” involving Canadian subsidiaries of foreign multinationals.
The irony of the most recent version of these draft rules is that they see both a new radical restriction on the use of, and a new totally unexpected access to, the cash reserves of such foreign-controlled Canadian corporations. Neither was contemplated when intense debate about “debt dumping” began in 2008 over concerns with foreign-controlled Canadian corporations borrowing to acquire foreign subsidiaries whereby inbound dividends would be tax exempt while interest would be deductible against Canadian profits.
In a nutshell, the 14 August 2012 draft legislative proposals contain a rule that both would lift the long-standing tax on loans by Canadian corporations to their foreign shareholders in certain cases, and a rule that would tax the use of surplus cash by a foreign-controlled Canadian corporation to acquire a 10 per cent or greater share interest in a foreign corporation.
Michel Collet: It may prove difficult for corporate and individual taxpayers to make efficient medium-term tax planning since the rules change very frequently. Due to this situation and to the significant increase of tax due to the budget deficit, more and more clients are tempted to personally migrate and to move their assets to more tax-friendly jurisdictions. Care should be taken since anti-avoidance measures tend to reduce that trend. Finally, the increase of tax tends to increase the cost of capital. For all these reasons, taxpayers require more creativity and certainty from their advisers.
Richard Palmer: The build-up of cash in UK corporate groups can cause real problems for shareholders in relation to major reliefs, such as substantial shareholdings exemption, where excess cash can affect whether a group is “trading” and accordingly whether a disposal can be effected free of taxation on chargeable gains. We have seen an increase in numbers of UK corporates wishing to return cash to shareholders, usually incorporating structures allowing shareholders to choose between capital or income treatment (which for individuals can mean significantly different tax rates). That cash may have come from overseas operations because the existence of a UK dividend exemption for UK and foreign dividends means it is easier to repatriate cash back to the UK without tax leakage. To the extent that the choice of return is tax driven it remains to be seen how the proposed general anti-abuse rule (GAAR) will apply to these transactions.