The International Who’s Who of Corporate Tax Lawyers has brought together six of the leading practitioners in the world to discuss the key issues facing tax lawyers today.
Who’s Who Legal: How are tax practices in your jurisdiction responding to the current shortfall in transactional activity? Are there any new growth areas for tax work?
Manuel Tron: The recent activity of the OECD (reports on Tax Intermediaries, Tax Compliance and Banks, and High Network Individuals) and the G-20 concerning exchange of information are creating an increasing interest in the use of tax amnesties and other programmes for tax regularisation by individuals holding money out of their countries.
This seriously affects the international estate planning practice, at least the part directly related with taxes on international transactions.
Alain Ranger: The slowdown in the economy and the resulting decline in the value of shares of public corporations have allowed some of these publicly traded corporations to structure tax-efficient issuer bids and even going-private transactions. For private corporations, it has proved to be a useful time for individuals to rethink their estate planning structure, allowing them to “defreeze” existing structure and “refreeze” at lower values in order to minimise taxes upon death and to transfer additional value to future generations.
Edouard Milhac: The current economic conditions have created interesting opportunities for industrial investors, leading to interesting tax acquisition structures. The slowdown of the economy also provides for estate-planning opportunities for investors in privately held companies.
The economic downturn also raises questions about the appropriateness of multinational current transfer pricing policies and the allocation of losses among the different countries. France is also contemplating the introduction of transfer pricing documentation requirements in the 2009 tax bill.
Richard Dukes: The current economic conditions have led to the creation of work in the M&A area, particularly in relation to demergers and acquisitions of currently lower performing businesses with future upside. This has had positive spin-off for taxation advisers.
Interestingly the Australian Taxation Office believes that the current economic environment “heightens the risk that some taxpayers will move into offshore arrangements to avoid tax, transparency and regulation. We will continue to work with other agencies and cooperate with other revenue authorities internationally to detect and deter abusive activities.”
Friedrich Hey: We see a lot of debt restructuring activity involving both borrowers and lenders but also debt opportunities funds that buy pieces of debt from banks or in the open market. This trend will likely increase and continue for a while as the deleveraging occurs.
Who’s Who Legal: Several of the lawyers we surveyed have noticed increased tax controversy activity. What changes, if any, have you noticed in the number of tax disputes being heard? And what are the trends in settlements?
Martin Phelan: The trend at the moment in Ireland is that the Irish Revenue is conducting more tax audits, across several tax heads, over longer periods. Irish Revenue’s emphasis is on settlements rather than engaging in protracted litigation.
Manuel Tron: The shortage of revenue is affecting the behaviour of the tax authorities, by increasing the number of tax audits being performed; in addition, it seems that law interpretation criteria that were acceptable a few years ago are being revisited in order to find out if it is possible to generate additional revenue.
In Mexico the authorities are willing to settle as long as the taxpayer agrees to pay in full the assessed differences, and are not shy of going to court. A clear trend of court rulings favouring the tax authorities’ position is evident in Mexico.
Alain Ranger: In Canada, tax authorities, federal and provincial, have significantly increased their audit force in the past couple of years and they have intensified their audit process. They have in several instances changed their administrative positions and are now insisting on a strict observance of the tax legislation, even for small administrative compliance obligations. They have sometimes even adopted “hard line” positions, which inevitably leads to contestation either at the administrative level or before the courts. The increase of audits and assessments in international matters, including in transfer pricing, is noteworthy.
Friedrich Hey: In Germany there has similarly been a trend that started about 10-15 years ago that the authorities have become much more adversarial. Often extreme positions are taken as regards the interpretation of the law and with respect to the facts it is often difficult to persuade them to drop a point on the argument that their position runs counter to how business is being done. In essence, one has the feeling that the government is looking for footfaults and forgets that the concept of fair dealings applies to both sides. I cannot say that I am optimistic as regards a change in this attitude.
Edouard Milhac: Tax controversy is indeed a growing activity in France. The French tax administration is not conducting more tax audits than before, but the magnitude of the issues raised is more important and there are more matter of principles for which a settlement is more difficult to reach. On the contrary there is a strong willingness for the tax administration in reaching settlements before going to courts. Transfer pricing issues are now also a common field of audit and dispute.
Richard Dukes: The trend in recent times has been a reduction in disputes being heard in the courts. Australian corporates are loath to end up fighting the ATO due to the drain on resources and distraction that inevitably occurs in litigation. Nonetheless disputes and differences with the ATO are part of corporate life: what happens is that they are frequently settled before being heard in the courts. Further the growth in the public and private ruling process has led to disputes being avoided as the revenue’s position is signalled in advance.
REGULATION AND TRANSPARENCY
Who’s Who Legal: At April’s G20 summit in London, delegates stated that “the era of banking secrecy is over” and agreed “to take action against non-cooperative jurisdictions, including tax havens”. With the Stop Tax Haven Abuse Act in the US and “taxation and good governance” in the EU, are we witnessing a decisive move towards greater transparency in corporate tax? How might such proposals affect tax work in your jurisdiction?
Friedrich Hey: One is well advised to view the latest crusade “for transparency” by developed – deficit-running – nations with some suspicion. Such countries are quick to point out that they do not want to prohibit establishing and maintaining foreign bank accounts but merely want to ensure that everybody pays his or her fair share of taxes. I query whether that is the sole concern. Countries have always preferred to keep the money onshore for a variety of reasons. Making it increasingly burdensome even for an honest taxpayer to maintain a foreign account is a subtle way of protecting the local banking industry, which one implements under the guise of “transparency and honesty” so as to put it beyond criticism, while it also serves the purpose of discriminating against foreign financial institutions but in a way which is seemingly beyond reproach and in compliance with obligations under international treaties of free trade and free flow of capital. If a taxpayer, no matter how honest, is the subject of presumed wrongdoings and will face increased scrutiny and suspicion by the tax authorities as well as increased compliance burdens, it is easy to conclude that the honest taxpayer will not want to face that extra burden and suspicion and will choose the easy route instead and keep the money local. For example, Germany does only allow for a carry-over of basis in securities if brokerage accounts are transferred from one financial institution to another financial institution if the transferee is located within the EU. What better way to protect one’s local financial community by labelling everybody, who for whatever reasons decides to keep some or all of his or her money in an offshore account, a potential tax dodger? Viewed economically, these measures will hurt smaller countries where there is no industrial base for lack of a large consumer population but where a specialised financial industry is easier to establish due to the fungibility of money. To wit: the latest crusade by the US in the form of foreign bank accounts (FBAR filings) with horrendous penalties that bear no relationship to the non-compliance is all but an example of the deplorable path that many of the governments of industrialised nations have taken.
Manuel Tron: Transparency is always good; it certainly means that elusive taxpayers will not be able to hide behind international non-disclosure regulations. Individual tax audits and the subsequent litigation will increase most probably.
Edouard Milhac: Indeed France has already introduced rules aiming at more transparency (with more reporting obligations) and should introduce a new set of rules in the 2009 tax bill. Transparency is already the rule for French multinationals, but we notice a change in the behaviour of corporate clients: risk to reputation is becoming an increasing concern in tax efficient structures.
Alain Ranger: These proposals had and will continue to have two major effects. First, the Government of Canada introduced in 2007 incentives for non-treaty countries to enter into Tax Information Exchange Agreements (TIEA) with Canada. Particularly, Canadian corporations having foreign affiliates carrying on business in these non-treaty countries which will conclude a TIEA with Canada will benefit from the same tax advantages previously reserved to Canadian corporations with foreign affiliates carrying on business in treaty countries, ie countries having generally a tax system, and corporate tax rates, similar to those of Canada. There is a clear incentive for non-treaty countries to conclude a TIEA with Canada as it may make them more attractive for Canadian investment. This will create corporate and tax activities in Canada in reorganising multinational Canadian corporate groups. Secondly, the voluntary disclosure process which allows Canadians to come forward to the tax authorities and report previously undisclosed income, including investment income generated offshore in tax havens, without incurring tax penalties nor prosecution is becoming even more popular as some of these tax havens are now entering into negotiation with Canada to conclude TIEA.
TRENDS AMONG FIRMS
Who’s Who Legal: Is it an advantage to have an international network, or are smaller boutique firms better placed?
Martin Phelan: We are certainly benefiting from our Taxand affiliation. Taxand is a global team of independent leading tax firms represented in over 45 countries worldwide with over 2,000 tax professionals. Wiliam Fry Tax Advisers is the Irish member firm of Taxand.
Edouard Milhac: We also benefit from our CMS affiliation: the European network and the strong implementation in Eastern Europe strengthen our international tax practice.