Research Trends and Conclusions: Corporate Tax 2009
Helen Lamb -
Helen Lamb identifies the leading corporate tax lawyers and the issues they are facing.
While the global economic downturn has impacted on the levels of activity in the transactional arena the inescapable nature of taxation means that the area is still relatively busy. Notwithstanding this much has changed since the last edition of The International Who’s Who of Corporate Tax Lawyers was published two years ago. The expert practitioners who feature in this publication are operating in a transformed market, where the changed needs of their clients are having a profound effect on practice. Lawyers are shifting their focus and developing new areas of speciality and firms are starting to diversify practice groups.
Like their colleagues in other disciplines, corporate tax lawyers have noted a marked drop in the ‘bread and butter’ transactional work seen over the past few years. But tax issues are pervasive in business and this practice area is faring relatively well despite the absence of big ticket deals.
LEGISLATION
Tax administrations in many jurisdictions are becoming ever more aggressive and this new mood among tax authorities has resulted in a rise in audits and in widespread revision of tax regulations. In recent months authorities in the US have been accused of reinterpreting current tax codes in order to boost revenue, seemingly applying them differently for different corporations, depending on whether it increases revenue to the state. The highest-profile tax issue, however, relates to tax havens and banking security. This is a considerable issue in both the US and the UK, with governments on both sides of the Atlantic as well as other jurisdictions, clamping down significantly on tax avoidance in line with international efforts towards combating evasion and boosting revenues. These measures are already impacting tax planning and litigation practices globally.
The Stop Tax Haven Abuse Act was introduced to the US Senate in March 2009. The high stakes were illustrated in Senator Carl Levin’s accompanying statement: “Offshore tax abuses cost the US Treasury an estimated $100 billion each year in lost tax revenues, including $40-$70 billion from individuals and $30-$60 billion from corporations. Abusive domestic tax shelters cost tens of billions of dollars more.” This bill has considerable ramifications for international tax planning and represents a significant change in US tax policy, as do the international tax provisions in the Obama administration’s budget, which would raise approximately $210 billion in revenue. President Obama has also proposed doubling the agency’s enforcement budget for 2010, including hiring about 800 new staff whose main responsibility would be to enforce international tax law. That is part of a wider effort by the administration to crack down on what it defines as the “abusive use of tax loopholes and outright tax evasion”. In April 2009 the European Commission proposed actions that EU member states should take to promote “good governance” in the tax arena. These aim to improve transparency, the exchange of information and fair tax competition.
It was announced in August 2009 that the US and Switzerland have settled a Justice Department lawsuit against UBS, which sought the names of Americans suspected of evading taxes through 52,000 secret Swiss accounts. The governments have initialled agreements and will later sign a final accord, which is expected to reveal thousands of accounts and fuelling speculation as to how many UBS clients will be prosecuted. A package of measures was also announced in the same month between Liechtenstein and the UK. These intended to ensure effective exchange of information for tax purposes between the two countries and to address the issue of undeclared funds. In the past year the UK tax authority, HMRC, has also reached similar agreements with Guernsey, the Isle of Man, Bermuda and the British Virgin Islands. Clients with undeclared accounts in these jurisdictions will look to their counsel as they come forward in amnesties or face prosecution.
The move towards increased banking transparency will affect tax lawyers in other ways. Ireland, for example, is benefiting from a rise in corporate migration. Martin Phelan from William Fry in Dublin is looking forward to the country “playing a role in the future of American groups” who will be attracted to the transparent tax regime. It is also a white-listed jurisdiction for the purposes of the US Stop Tax Haven Abuse Act and the OECD/EU codes, which is a factor for large international companies moving their corporate holding companies to Ireland. Multinational and UK companies like Shire, Henderson and Accenture have all recently migrated to the Republic.
FILLING THE VOID
What is taking the place of the transactional work? One of the main trends across the board is the increase in tax litigation. What is abundantly clear to lawyers is that tax administrations across the board have become more aggressive. Tim Sanders from Skadden Arps Slate Meagher & Flom (UK) LLP observes that in the UK “we are now seeing both sides turning to litigation as the pressure to contest rises”. This pressure is the result of HMRC being more willing to resort to litigation and, when the stakes are high, this is also the most commercially viable option for the companies. The same is happening in the US with the recession making state and local tax agencies much more aggressive, which will continue to provide significant work for tax lawyers across the country and internationally as clients contest their decisions. Tax controversy has always been a big area in the US but lawyers are seeing an increase in tax litigation in the international arena as well.
International transfer pricing is also a growing field and is widely noted to be the most significant tax matter for multinational businesses. Global trading has led to intercompany transactions becoming more complex and the tax authorities are concerned about artificial profit shifting which might contribute to unfair tax advantages. The resultant litigation is a significant source of work for our featured firms. In the UK it has been reported recently that HMRC has given Lovells LLP a major tax litigation project, which is thought to centre on transfer pricing. This is the first time that HMRC has outsourced a whole case to an external law firm and demonstrates the opportunities that remain for skilled tax lawyers in private practice.
Many are also busy with refinancing and restructuring work, and these matters have picked up a considerable amount of the slack left by the reduction in international M&A deals. This change in focus has other positive effects for practitioners. “Restructurings are extremely interesting for the tax lawyer,” Sanders says. Several other sources also mentioned that they enjoy the challenges presented by complex workouts. There is also a considerable amount of debt restructuring and insolvency work to be done with a trend emerging whereby clients return to the firms that assisted them during the boom to represent and advise them in restructuring now that the market has fallen away. In the case of debt restructuring it is the magic circle firms – in London at least – who are picking up a sizeable proportion of this work.
Private equity funds remain key clients. Some well-managed funds were able to weather the downturn and still have cash to invest. A number of countries are introducing tax reforms to attract these funds, as Eric Roose details in his article in relation to Japan. Fund work also has a longer transactional tail compared to corporate transactions, so deals that began before the crunch are still ongoing and a source of work. There is high demand for specialist tax advice to counterbalance and restructure assets meant for resale, which are being held on to in the unfavourable economic conditions. Sidley Austin LLP, which has a strong funds dimension to its tax practice, says activity is increasing as institutional investors’ and high net worth individuals’ appetites for certain types of funds grow. Other practitioners, many of whom are based in Europe, have taken on work for high net worth individuals, diversifying their traditionally corporate practice.
WHAT THIS MEANS FOR LAWYERS AND LAW FIRMS
There have been seismic shifts in the corporate tax landscape. The most dramatic is the enhancement of tax litigation practices in the UK. This is not historically a large practice area in London relative to some other areas, however many firms are now starting to dedicate more resources to tax litigation. Sidley Austin LLP are boosting the tax dispute resolution dimension of the practice in their London office with Drew Scott and David Hinds identifying it as “an area that we hope to continue to develop, and continue even when transactional work volumes return to historic levels”. A number of other UK firms also see tax litigation as a “growth area”. Herbert Smith LLP is Who’s Who Legal’s litigation law firm of the year and is renowned for its strength in dispute resolution. Heather Gething, former head of the tax practice at the firm, and a group of associates have refocused their practice and are now dedicating themselves to tax litigation. Gething considers that there is “a demand for high-quality tax litigation services and our dedicated group is able to provide that service. Tax litigation requires a different mindset from that needed to give non-contentious advice and clients expect their advisers to be up to speed with issues, process and tactics. You cannot be in that position if you are doing disputes work occasionally.” Freshfields Bruckhaus Deringer is also developing its tax practice, appointing economist Danny Beeton as head of transfer pricing economics. Murray Clayson sees this as a response to market conditions, boosting capabilities in this area “at a time when transfer pricing is assuming ever increasing importance to our clients”.
There has also been movement in the market with a number of lateral hires and mergers. Canadian firms are bolstering their tax litigation practices with strategic hiring at both partner and associate level. Firms with renowned tax capabilities are increasingly valuable and recent mergers in this field include the combination of Bingham McCutchen LLP and McKee Nelson LLP, which according to Bingham Chairman Jay Zimmerman “expands the firm’s tax capabilities ‘with one of the most prominent tax teams in the country.’”
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While times have certainly changed for corporate tax lawyers it is clear that experts in this area are adapting and refocusing their practices to thrive in this new market. New areas of increased activity such as tax litigation and restructuring are prompting lawyers and law firms to make changes to their practices that they view as permanent developments rather than emergency measures. Where the downturn was no doubt a catalyst for change these developments should be seen as long-term commitments rather than knee-jerk reactions. Tax is an essential service and, in times of economic uncertainty, lawyers who can provide flexible, up-to-date and practical counsel remain invaluable to their clients.