Tax lawyers have been thrust into the spotlight by G20 action on avoidance
Maybe it is an effect of the heat-wave, but am I wrong in thinking that tax and tax lawyers have suddenly become sexy? The movement of tax and its lawyers, from the furthest back row in the chorus to centre stage, as the stars for whom the audience screams, has been building for some months. It has now peaked with the announcement by G20 governments that they will take radical steps to deal with significant tax avoidance by large multinationals.
This has happened because of two broad societal transitions. First, the virtual world and the internet giants that run it – such as Apple, Google and Amazon – have created a landscape where profits for services which exist only in the ether can be channelled and re-channelled through jurisdictions with the lowest taxes, regardless of where common sense tells us that the service is provided. We have seen this in the UK with the uproar over Google’s transactions, and in the US over Apple’s tax schemes.
Second, we in the west are growing poorer, as China and the other BRIC countries – Brazil, Russia and India – prosper. The economic crisis has left us drowning in debt and it is obvious that we need to recoup what we can. The avoidance of taxes by the internet giants and many others not only kills off locally based companies providing similar services – think of bookshops trying to compete with Amazon – but also depletes tax revenues. So, along comes the Organisation for Economic Co-operation and Development (OECD), called by its opponents the ‘rich men’s club’ (since it unites the largest economies), which has produced some cunning new plans.
A few days ago, the G20 adopted them. Lawyers know well that the OECD’s plans can be implemented effectively, because our anti-money laundering duties originated there. The future is laid out in one of its documents: the BEPS Action Plan, with BEPS standing for Base Erosion and Profit Shifting. (This plan has medical qualities, too; it helps resolve cricks in the neck, because the plan is printed at right angles to the normal page, making it almost impossible to read on a computer). I am not surprised that the newspapers gave little hint of its content, since it is complicated. I am sure that all tax lawyers, particularly those advising multinationals, have read it in order to jump out of the way of the engine coming down the tracks.
There are 15 BEPS actions, starting helpfully with ‘address the tax challenges of the digital economy’, and moving on through provisions on transfer pricing which a mere mortal like me can barely understand. But it has teeth, at least potentially. I will quote a few lines from some of the actions to give you a flavour. Under the digital economy, the governments will examine ‘the ability of a company to have a significant digital presence in the economy of another country without being liable to taxation due to the lack of nexus under current international rules, the attribution of value created from the generation of marketable location-relevant data through the use of digital products and services, the characterisation of income derived from new business models…’. And so on.
Under ‘neutralise the effects of hybrid mismatch arrangements’, the governments will ‘develop model treaty provisions and recommendations regarding the design of domestic rules to neutralise the effect (e.g. double non-taxation, double deduction, long-term deferral) of hybrid instruments and entities. This may include: (i) changes to the OECD Model Tax Convention to ensure that hybrid instruments and entities (as well as dual resident entities) are not used to obtain the benefits of treaties unduly …’. And so on.
Under ‘prevent treaty abuse’, the governments will undertake work ‘to clarify that tax treaties are not intended to be used to generate double non-taxation and to identify the tax policy considerations that, in general, countries should consider before deciding to enter into a tax treaty with another country.’ And finally the heading ‘require taxpayers to disclose their aggressive tax-planning arrangements’ requires no further description.
The tax lawyers now riding the wave as they remodel our modern world have their own hero. No, it is not Clifford Chance, which was recently revealed as being an adviser in a failed stamp duty land tax avoidance scheme. It is Osita Mba, a whistleblower lawyer for HM Revenue & Customs, who brought some of the UK’s tax avoidance problems to light by, among other things, telling two parliamentary committees (Public Accounts and Treasury Select) that HMRC’s then head of tax had shaken hands on a deal allowing Goldman Sachs to escape paying up to £20m in interest charges.
Is it too late for me to change specialisations and become a new ‘tax master of the universe’?
Jonathan Goldsmith is secretary general of the Council of Bars and Law Societies of Europe, which represents around a million European lawyers through its member bars and law societies. He blogs weekly for the Gazette on European affairs