This article appears in the December edition of our International Corporate Structures Newsletter.
There’s no doubt about it: the Game of Corporates has never been more dangerous. Advancing armies of tax inspectors, misinformed journalists and opportunistic politicians are looking for an easy kill, and they can smell weakness. Like the White Walkers in Game of Thrones (and perhaps certain of your colleagues joining your Christmas lunch), they are a terrifying and formidable force.
Some indisputable facts:
- The recent ‘Paradise Papers’ scandal involving the theft of over 13.4 million confidential electronic documents relating to offshore investments, and the equally scandalous purchase and publication of the stolen records by supposedly reputable organisations such as Süddeutsche Zeitung and the BBC, shows that it is unsafe to rely on ideals of privacy or even confidentiality.
- Ignorance of the law has never been an excuse, but the exponential increase in the volume and complexity of tax regulation makes it almost impossible for experts, let alone laypeople, to keep up. As Sam Mitha CBE (formerly of HMRC’s Central Tax Policy Group) convincingly argued in a recent Tax Journal article, there are no votes for politicians in tax simplification, because it is easy for most voters to comply with their tax obligations. Not so for corporates. Even healthy processes like consultation can add to complexity, by identifying anomalies and suggesting exemptions.
- Of all the areas of tax compliance, transfer pricing is recognised as one of the most complex, because it involves reconciling the needs and demands of different tax administrations and supranational bodies such as the OECD. An adjustment at one end of a transaction will necessarily have an impact at the other end. Tax administrations recognize this, and are becoming increasingly aggressive in raising transfer pricing challenges.
- Few tax administrations choose to prioritise resources for arrangements such as Advance Pricing Agreements (APAs), which can provide more certainty for taxpayers. Canada, for example, concluded only 26 APAs in 2016. This was ahead of the UK, which agreed 19 in the year 2016/2017, and China, which signed 14 in 2016.
- The significance of intangible assets is increasing and, by definition, it is impossible to understand intangible assets without clarity on the legal rights and obligations involved. A report issued by the World Intellectual Property Organization (WIPO) on 20 November 2017 found that income from intangibles increased by 75% from 2000 to 2014 in real terms, amounting to USD 5.9 trillion in 2014. Dealing with these intangible assets appropriately represents a huge challenge for corporates, tax administrations and other interest groups.
We have chosen ‘Game of Thrones’ as the theme for this newsletter to symbolize the metaphoric perils that exist for all of us as professionals in the corporate world, arising out of the complex web of legal, regulatory, tax, commercial and governance issues – and the fact that none of us are safe unless we work with specialists in each of the disciplines involved, to create structures which meet the needs of all stakeholders.
My first experience of transfer pricing and the impact of legal issues was in the early 2000s, shortly after I had joined KPMG in London. I was asked to advise on the company law issues associated with a proposed APA which was likely to create ongoing losses for a particular subsidiary – could such an arrangement be properly approved by the subsidiary’s directors? In my previous nine years of legal practice, I had never considered such a question. I had mainly focused on M&A and commercial law advice for German and Swiss clients, and it had never occurred to me there could be such a strong connection between tax governance and legal structures for multinational groups. The more I worked alongside tax professionals on international structures, the more I became fascinated by the process – and with bridging the gap between the worlds of “law” and “tax”. It’s a passion that continues now – and hopefully we can continue to work together to survive, at least until Series 99.