Roundtable: Corporate Tax 2011
The International Who’s Who of Corporate Tax Lawyers has brought together four of the leading practitioners in the world to discuss key issues facing lawyers today.
Participants
Alain Huyghe
Baker & McKenzie CVBA/SCRL
Belgium
Passarella Abogados
Argentina
TAX ENFORCEMENT
Who’s Who Legal: Lawyers we spoke to around the world noted that the tax enforcement regimes in their jurisdictions had remained aggressive throughout the past year, with emphasis on increased transparency and the elimination of loopholes. How have these trends affected corporate tax lawyers where you are? How willing are clients to challenge enforcement actions? How active are lawyers in advising clients on compliance strategies?
Ernest Mazansky: There is no doubt that the approach by National Treasury (which drives tax policy and drafts the legislation) and the South African Revenue Service (“the SARS”) (which is responsible for the administration of the tax laws and the collection of tax) have become more aggressive, both in the framing of legislation and in the administering thereof. With the economic downturn, and its consequent reduction in tax collections, there is increased pressure on the SARS to maintain collections so as to ensure that the budget deficit is kept to the absolute minimum, while still enabling the government to fund its programmes.
As part of the SARS’s management procedures, targets are set at the various branch offices for the collection of taxes, and, very controversially, bonuses are paid to SARS staff based on the performance of their teams, and offices, in comparison with the targets set. This has obviously led to a very aggressive approach in relation to findings arising out of tax audits (whether desk audits or site audits) and with a significant reluctance on behalf of SARS officials to concede points of law, as well as points of fact where these cannot be demonstrated conclusively with supporting documentation. As a result, they are all too ready to raise assessments and to defend vigorously arguments put forward responding to queries, or in response to objections lodged. In many cases they are unreasonable in their approach, and it is only following disallowance of the objection, and filing of an appeal to the Tax Court, where the case is then escalated to more senior officials, who do not participate in the bonus scheme, that one tends to find a more rational approach to some of these issues under dispute. What is more, a recent trend has been that penalties and interest are being factored into the targets for collections, so that whereas, in the past, the SARS was always slow to impose penalties (interest is automatic), the officials are now showing a tendency readily to impose fairly significant penalties, even in circumstances where there was clearly an innocent error or a bona fide dispute in the interpretation of the law.
It is inevitable in circumstances such as these that the number of disputes that give rise to objection and even appeal to the Tax Court are increasing. This is exacerbated by the so-called “pay now argue later” principle, in terms of which payment of assessed taxes might be deferred until the decision on the objection has been taken, but once the objection is disallowed and appeal is filed in the Tax Court, it is more difficult to get a postponement of the payment of the tax liability. These circumstances all encourage, understandably, a preparedness by clients to take the matter to law.
There are obviously different levels of compliance among taxpayers and different tax moralities, both among taxpayers and their advisers. I am fortunate to operate within a large law firm, whose client base comprises large corporates, where good corporate governance and corporate citizenship compel an attitude of responsibility towards the tax system and compliance therewith. That is not to say that clients are not prepared to stand up for their rights and challenge the SARS’s views. But it does mean that the client’s requirement of the adviser is assistance in ensuring compliance with the law, while at the same time relying on the adviser to steer the client through the complexities to ensure that the client does not pay more tax than the law requires. Put differently, the mandate is not so much “tell me how to save tax” but rather “advise me how to do things properly and efficiently and ensure that I do not fall into any tax traps”. Advising clients and doing tax planning in this environment is obviously much easier than might be the case in other environments, and by “easier” I mean that it is very rare that a client will have the (unreasonable) expectation that the adviser compromises his or her principles.
Oleh Marchenko: No doubt that Ukraine is moving in the same direction. I would dare say that there was not much of enforcement of fiscal laws in Ukraine before the recent changes in political powers. This makes change of approaches by the fiscal authorities towards stricter enforcement very noticeable and quite drastic. There is a growing level of tax and customs assessments and fiscal litigation in Ukraine. The fiscal authorities started targeting related-parties transactions, whereas transfer pricing enforcement did not exist until very recently. For many law firms specialising in corporate tax matters this has meant a clear shift from transactional tax structuring work to tax and customs controversies.
Leandro Passarella: Something similar is happening in Argentina, with its tax authorities being very aggressive in enforcing tax laws, which – by the way – may not substantially change in the near future. In addition, in some cases where the amount of the adjustment exceeds the thresholds set forth by Argentine tax criminal law, tax inspectors “wave” their legal obligation to press criminal charges, even when there is no clear evidence of fraud, as a way to persuade taxpayers to consent to the adjustment. This is sometimes an issue for large corporations, as well as for multinational corporations, where directors are liable for situations in which they may not have been directly involved. Consequently, when assessing the implementation of certain strategies with tax consequences, corporations and their directors usually analyse their exposure. That does not mean that corporations are willing to consent to any adjustments just to avoid problems, but they are considering increased confrontation with the tax authorities.
Alain Huyghe: The Belgian tax authorities have become more aggressive over the past year, in a number of areas. First, there has been a close monitoring by the Special Tax Investigation Office of abuses or perceived abuses of the notional interest deduction. In particular, the capitalisation of companies with little or no substance in order to benefit from the notional interest deduction has been challenged based on a (very) broad interpretation of the sham theory and of a specific anti-abuse provision regarding abnormal or benevolent benefits. This gives rise to increased disputes for the past, but, importantly, also to the increased wish of many big companies to no longer pursue aggressive tax structures that are likely to be challenged by the tax authorities even though they are technically correct.
Second, the Special Tax Investigation Office is also aggressively using information on unreported income from foreign bank accounts or from offshore structures that has been passed on by foreign tax authorities (eg, by the French tax authorities in the case of HSBC Switzerland or by the German tax authorities in the case LGT Liechtenstein). In such cases, the Special Tax Investigation Office will not only tax the taxpayers and levy substantial penalties but it may also lodge (or threaten to lodge) a criminal complaint against the taxpayer. In such cases, there are two types of taxpayers: those who settle the case in order to decrease the risk of a criminal complaint and those who vigorously defend their case on procedural grounds (eg, on the ground that the relevant data were illegally obtained by the foreign tax authorities and therefore also by the Belgian tax authorities.)
Third, the transfer pricing department that has been created some years ago remains active in auditing Belgian subsidiaries of multinational groups, but they often try to come to a settlement with the taxpayer in order to avoid long lasting litigations before the Tax Courts (which may also be explained by the fact that the tax authorities in principle have the burden of proof in transfer pricing matters). Those audits have substantially increased the awareness of Belgian companies for transfer pricing matters and increased compliance in this area and have led to an increase in taxpayers seeking transfer pricing rulings in order to obtain upfront certainty.
THE EXPANDING TAX BAR
WWL: In the context of such proactive tax enforcement, sources noted that clients more than ever see the advantage of handing work to private practice lawyers and many said that firms were expanding their tax teams. Is this true in your jurisdiction? How does the current level of work within your tax department compare with previous years?
Ernest Mazansky: I think it is true that, in comparison with times gone by, obtaining tax advice in relation to a major transaction or restructure is now standard. In times gone by the lawyer would be consulted mainly for the purpose of drafting the necessary agreement and other documentation, and ensuring compliance with corporate laws, stock exchange listings requirements, and so on. Today, with the complexity of the tax laws, which complexity increases annually, it is now recognised that no significant transaction, whether within the group or with third parties, can be undertaken without understanding the fiscal consequences. And very often, while the commercial objective is relatively straight forward, the complexity that is interwoven into the transaction is directly attributable to the complexities in the tax system, in other words, arrangements are made and steps taken in order to avoid unnecessary tax leakage arising from the transaction or restructure. Today, obtaining tax sign-off on a transaction is as standard as, for example, ensuring there is no breach with the competition law or other regulatory laws.
Up until about 10 years ago there were very few tax practitioners within the law firms, and the accounting firms dominated in this regard. Today that situation has changed dramatically. Although, in terms of volume, the accounting firms still dominate (but it must be remembered that a very large proportion of their tax-related work is linked to the audit process and compliance, as opposed to pure consulting and tax planning, though this is indeed significant) all of the large law firms today have significant tax practices that are actively involved in their firms’ deals, and also do consulting for clients who do not use the other services of the firm. And within the law firms the scope of practice is much narrower, being advisory and opinion work and tax litigation, with much less emphasis on the compliance aspects. It must be said, though, that unlike in other countries, only the large law firms have tax departments of any significance, and a few of the second-tier law firms have some tax expertise, but otherwise, in the small to medium area of the market, the accounting firms, whether small, medium or large, remain dominant.
It is also interesting to note that practitioners, whether lawyers or accountants, now find the idea of working in the legal environment, rather than an accounting environment, very attractive, first, because of what is perceived to be (correctly, in my view) a concentration on the more interesting elements of work with less of the humdrum aspects having to be dealt with; and, secondly, a lesser amount of risk mitigation procedures that have to be complied with in a law firm before the matter can commence, as compared with the requirements in the large accounting firms.
Oleh Marchenko: There is a clear shift from transactional tax structuring work to tax controversies in Ukraine. Though I would love to say something better it would be a great overstatement to say that tax teams in law firms are expanding or even close to reaching the same level of work in Ukraine as they had before 2008. This would not be true in respect of billable hours, not to mention revenues generated by tax practices.
Leandro Passarella: It is true that clients are handing more work to external tax counsel, and that implies an increase in the law firms’ workforce in general. The reason is twofold: They need to rely on the expertise of external lawyers (who are more exposed to a number of critical issues for different clients or industries), while they use their internal resources to comply for the regular day-to-day issues and the increased reporting and information requirements. Also, it’s been common these days to see regional tax managers appointed for large multinational corporations, who are based in either Argentina or Brazil (or other countries in the region), who look after the regional operations of those companies with the assistance of external tax counsel, with little involvement of the local subsidiary. This implies an increase in the tax work.
HIGH NET-WORTH INDIVIDUALS
WWL: According to some sources, more and more corporate tax lawyers are being engaged by high net-worth individuals and other private clients, with a number of overseas law firms setting up new offices or strengthening existing teams in jurisdictions such as Switzerland and Singapore to meet demand. To what extent is private client work a viable option for tax lawyers in the current climate?
Ernest Mazansky: Speaking for my firm, we are primarily a corporate law firm, and that is our emphasis. However, we do recognise that large corporates do not run by themselves, but are run by individuals, who, at the top, are high net-worth individuals, who require attention. And these individuals do get that attention from our firm. I would think that much the same could be said for all the large law firms. I doubt that any of the firms concentrate on high net-worth individuals, but there will always be one or two at partner or director level who will have this aspect as part of his or her practice, to a greater or lesser degree. Indeed, some of our high net-worth clients are bigger, and have more complex onshore and offshore structures, than many corporates!
That said, we do not actively go out and seek this work. But we will always accept appropriate assignments in this area. Moreover, our emphasis is not so much on the income tax aspects of the high net-worth individuals’ requirements, but rather more in relation to his or her estate planning and the structuring of his or her affairs, both within South Africa and abroad, to ensure asset protection and minimum tax leakage arising out of those structures.
Leandro Passarella: At our firm, we provide advice to both corporate and high net-worth individual taxpayers. However, while corporations require tax advice more regularly on different issues and different taxes, private clients are more concerned on planning their succession or their current passive investments more efficiently. Nonetheless, the current tax environment makes several individual taxpayers think about protecting their wealth from tax authorities, while complying with the tax laws.
Alain Huyghe: We are doing more and more work for high net worth individuals with assets in many different countries. Most often, we are not dealing with those individuals directly, but we are engaged by family offices or by foreign financial institutions or insurance companies to review whether the existing structures and estate tax planning techniques that they use for their high net worth individual clients are tax compliant and, if not, to make them compliant (which will often involve a tax regularisation) and propose tax compliant estate planning structures.
POLITICAL CHANGES
WWL: Many of the jurisdictions represented in this edition have either recently undergone or are looking forward to a national election, with many parties placing corporate tax reform high on their agendas. Have you seen or do you expect to see any legislative changes in your jurisdiction? How will such changes affect tax lawyers where you are?
Ernest Mazansky: South Africa is not facing an election for another two and a half years, so this is not an issue. In the South African context, though, tax reform is never an election issue - rather the expenditure side of the budget is more of an issue in relation to health, education and welfare. But that is not to say that corporate tax reform is not high on the National Treasury’s agenda. It has been many years since the annual amending bill has not contained significant and fundamental amendments, and often amendments to amendments, with the result that the Income Tax Act has become so complex and, in many respects, has “grown like Topsy”, such that it is becoming unwieldy, and, in certain circumstances, is discouraging transactions and creating uncertainty.
There is a programme to rewrite the Income Tax Act. The first major step will be taken this year with the passing of the Tax Administration Act, which will deal with all of the administrative matters in all the different pieces of fiscal legislation (other than the Customs and Excise Act), but there is a pressing need for the rest of the Act to be rewritten and reformatted, so as to make it more logical and cohesive. In the meantime, though, there continue to be significant amendments each year which, in many respects, significantly change the manner in which deals are done.
Obviously, in this context the role of tax advisers becomes ever more necessary.
Leandro Passarella: Argentina will have national elections at the end of October, and it appears that the current administration will be re-elected. However, none of the candidates (including the current president) has hinted any potential tax reforms (most likely because it would be a driver to lose votes). If there were any, they would address issues pertaining to the structure of the individual income tax, which has much more loopholes than the corporate income tax.
Alain Huyghe: Belgium had elections but the negotiations on the formation of a new government are still pending. It is expected that a new government will look for additional tax revenues to decrease the budget deficit. Certain proposals have already been circulated, but these are still preliminary. While most proposals will affect individuals, some will affect corporate taxpayers. For instance, it is proposed that the exemption of capital gains on shares, which currently only contains a subject-to-tax condition, will be subject to the same conditions as required for the Belgian 95 per cent dividend received deduction (ie, a minimum participation and a minimum holding period). Additionally, the minimum holding period to benefit from the Belgian 95 per cent dividend received deduction would be increased from one year to two years. Withholding tax on interest would be increased from 15 per cent to 20 per cent while withholding tax on certain dividends that can currently benefit from the reduced withholding tax rate of 15 per cent will be increased to 25 per cent. In many cases such an increase will, however, not have a real impact on foreign companies active in Belgium because of the exemptions available under the implementation legislation of the EU Parent Subsidiary Directive (which has been extended to parent companies located in treaty countries) and the EU Interest Royalty Directive and the exemptions or reduced rates available under most tax treaties. It is also proposed to lower the rate of the Belgian notional interest deduction (“NID”) from 3.425 per cent at present to 3 per cent. Moreover, it would no longer be possible to carry over any excess NID and certain “mandatory” equity elements would be excluded from the NID calculation base.
As any change in tax legislation, this will result in the need of unwinding or restructuring certain structures and therefore in additional work for tax advisers.