Research Trends and Conclusions: Corporate Tax 2011
With the benefit of over 14 years of research and tens of thousands of votes from clients and private practitioners, Who’s Who Legal takes a closer look at developing trends in the corporate tax legal marketplace worldwide.
MARKET OVERVIEW
The most common word used by lawyers we spoke with to describe the current financial climate is “uncertainty”. Early on in 2011 there was a greater sense of optimism that the global economy was making progress towards recovery. As the year draws to a close, this enthusiasm has been dampened with the continued concerns surrounding the Eurozone crisis and recent stock market turmoil. Given the nature of their practice, tax lawyers continue to see a steady stream of work, although they noted that they are not totally sheltered from changes in market conditions. Lawyers we spoke with commented on a shift back to traditional M&A work, a rise in tax controversy matters and an increasing desire from clients to explore opportunities in emerging markets.
Over the last few years, clients have been focusing on repairing their balance sheets; with this in mind restructuring work was an important part of what kept tax lawyers occupied. Although it was by no means a return to the levels of 2005 and 2006, 2011 provided a welcome uptick in traditional M&A activity. The tail end of 2010 and earlier on this year saw more activity in terms of mid-market deals. Big-ticket transactions have yet to return to a still volatile market.
When asked to comment on the division of their work in percentage terms, the majority of lawyers that took part in our research have seen an increase in the transactional work they have been involved in compared to last year. Advisory work remains at a stable level, and there has been a clear increase in tax controversy matters.
The strain on governments to increase revenue is evident across the globe. The Hungarian government levied a windfall tax in October last year on the energy, telecommunications and retail sector, raising a combined US$809 million, which is due to expire in 2013. Following a complaint from a group of companies, including major German and Austrian energy and financial firms, the European Commission is investigating the legality of Hungary’s decision to impose this “crisis tax”. On an international scale, tax authorities have been cited as being seen as more aggressive in their approach, including in the transfer-pricing arena, a sector that has been keeping lawyers particularly busy of late. Although historically a specialism that was carried out by accountancy firms, law firms continue to view transfer pricing as an area to build on in their practices, with some firms recruiting economists to their teams.
The concept of reviving sluggish economies by increasing competitiveness has certainly made its way onto the agenda. In the US, Washington lobbyists backed by powerful high-tech and pharmaceutical companies have been pushing for an overseas profit tax repatriation holiday. The US has one of the highest corporate tax rates in the industrialised world and US companies are reluctant to bring the cash they earn overseas back into the country. In the UK, the Treasury also hopes to prevent business leaving the UK due to concerns over tax competiveness. The government is currently examining options to reform the UK’s “controlled foreign companies” rules with a view to taking a more business friendly approach.
Tax planning remains an important sector of the work tax lawyers are involved in at the moment. Clients continue to look for the most effective means of reducing their tax bills. Tax practitioners in North America and Europe also noted how their clients remain keen to look at opportunities in emerging markets, in particular in South America and Asia and international tax planning is a growing part of their work.
FIRM ANALYSIS
Confirming the popular opinion that tax is a resilient practice area, there was an increase of 208 lawyers that featured in the 2010 edition compared to the predecessor a year before. Fast forward to 2011 and it is a different story. There has been a small reduction in entries between 2010 and 2011 with 21 fewer people listed.
This is a trend that echoes throughout the research, with leading jurisdictions and firms seeing a similar increase in inclusions from 2009 to 2010 and a corresponding fall or levelling out in 2011. Although the lawyers we spoke with commented on tax being a particularly hardy sector, in instances where it acts as a support, there has been less in terms of big-ticket work. Furthermore, although the start of the year saw greater activity, work has quietened down on the M&A front as the year comes to an end. The uncertainty in the market, which so many lawyers spoke of, has made it increasingly difficult to identify clear-cut trends. A point that was made by most was the need for tax practitioners to have versatility to deal with the varying market conditions.
North America and Europe have historically performed well in our research. Canada, England, France, Germany and the US all saw a significant increase in inclusions from 2009 to 2010, which have plateaued in 2011. American lawyers remain particularly active and have been recognised by peers and clients alike for their outstanding practices. With more lawyers than any other country, a total of 171 practitioners feature from the US, over three times more than the next leading jurisdiction, England which has 52 inclusions. Following closely behind England with 51 listings is Germany. The strength of the US and German practices is evident with a significant increase in the lawyers selected to feature since 2009.
Loyens & Loeff has impressed in our research with more practitioners listed than any other firm for two years running. With a total of 26 listings, over half of these hail from the firm’s Netherlands office. UK magic circle firms have also performed well, in particular Freshfields. Here the talent is divided across a host of jurisdictions and Germany and England perform especially well with six inclusions in the former and five in the latter. Taking a look at the leading firms over the last three years, our research reveals that from 2009 and 2010, with the exception of Skadden, there was an overall increase in the number of practitioners across these firms. Once again, the period between 2010 and 2011 identifies a different trend, with only Linklaters and Loyens & Loeff seeing an increase in the number of lawyers selected. The remaining firms have either maintained their numbers or seen a decline in them. It is difficult to pinpoint the exact nature of this trend, but the majority of lawyers we spoke with commented on how the work has varied over the last year or so. Lawyers working on tax controversy work are particularly busy and those focused on pure transactional work, less so. There has also yet to be a revival of certain sectors, with private funds and structured finance work still slow.
The leading firms in our research demonstrate the breadth of their international reach. The ability to offer clients a service that crosses jurisdictions is of increasing importance. Freshfields in particular impresses, with listings across Europe and the US, practitioners are listed from nine countries. Allen & Overy also performs well with experts identified in seven jurisdictions. This is matched by Loyens & Loeff, with a dominant position in the Netherlands, the firm also features lawyers in Europe, Asia and the US.
The figures from this year’s research show that US lawyers continue to dominate the market followed by their European counterparts. In the UK, the magic circle firms make their presence felt as they offer a global service, which is paramount for their international clients. At the same time as 2011 has seen an overall reduction in the number of lawyers we list, it will be interesting to track this practice area, which as a support function, is intrinsically linked to activity in other departments, while also noting its fundamental importance as a stand-alone service.