International business lawyers must walk the tax minimization tightrope
The issue of aggressive tax minimization by transnational corporations is in the public spotlight. This blog argues that international business lawyers advising corporations on tax have a duty to temper their clients’ tax planning.
Following the shortfall in public finances in the EU in the wake of the global financial crisis, it has come to light that many well-known companies – such as Apple, Starbucks and Google – have paid almost no tax in recent years. Through media reporting, European citizens, politicians and pressure groups are now learning about the terms of extensive tax deals with national tax authorities.
Naturally people will look to their governments to stop letting multinational corporations get away with paying, in relative terms, extremely little tax. However, corporations can improve their record on their own accord as part of their responsibility to society. They are to be assisted in this effort by international business lawyers who advise the corporations on their tax strategies.
This blog argues that whilst the primary duty of business lawyers is to assist corporate clients to minimize their tax liabilities, they also have a duty to temper their client’s tax planning by having regard to the principles of good faith, honesty and transparency.
Careful with creative compliance
Many transnational companies adopt the approach of “creative compliance” towards their tax obligations. This means that they structure their business affairs and submit their taxation reports so as to comply with a literal and pedantic reading of tax legislation, even if this has the effect of undermining or frustrating the purpose of the legislation.
This approach, which tends to minimize tax liabilities in the short term, is arguably out of line with the public’s expectation that companies make a socially equitable contribution to government revenue through taxation. The risk of misinterpreting the legislation and thus facing the prospect of litigation or a fine may be a partial deterrent, but is secondary to socially responsible decision-making.
Hence, business lawyers should advise their clients to comply with their tax obligations in good faith, which means considering both the text and purpose of the law. This is not in conflict with the lawyer’s role, but rather a part of this role.
Tax strategy 2.0 requires honest tax advice
Business lawyers should also advise their clients to act honestly. Many high profile and scandalous tax minimization strategies are characterized by the use of disingenuous gimmicks and tricks – such as inappropriate transfer pricing, the use of complex corporate structures, and the use of international tax havens.
Whilst companies are entitled to make use of legitimate and genuine transactional and structuring opportunities that have tax benefits, tax minimization must not be the primary motivating purpose for these business decisions.
This means that business restructuring decisions should be made by reference to legitimate commercial or business criteria – such as corporate governance and limitation of liability – that are not related to tax minimization. The business lawyer should therefore ensure that the honesty and integrity of transactions are a key factor in tax planning decisions.
Always apply the Newspaper Test
Publicity has both transnational corporations and governments on the defensive. Many of the recent tax scandals – such as Starbucks and Apple, and Luxleak – were characterized by secrecy, a high level of complexity and a lack of transparency. It appears that the management of these companies made tax planning decisions on the assumption that they would never become public knowledge.
The revelations will raise the pressure on governments to stop offering, or agreeing to what people perceive as extreme tax deals. The Organization for Economic Co-operation and Development (OECD) warns that only a joint approach of all countries will compel national authorities to do so. But equally so, the ball is in the court of the corporations: they have a social responsibility to pay a fair amount of tax in the countries where they operate. Business lawyers have a role to help remind corporate management of this responsibility.
A way of making sure that tax planning is sound is to always apply the “newspaper test” – that is, that the corporations, and their business lawyers, consider the implications that would occur if their tax planning decisions were published on the front page of a major newspaper. By considering the risks involved in adverse negative publicity, loss of public trust and reputational damage, businesses are more likely to adopt moderate tax strategies.
In conclusion, aggressive tax planning as evidenced by investigative news media is not in line with the standards that society expects. Whilst the international business lawyer’s primary responsibility is to assist clients to minimize their tax bill, they should temper this approach by reference to the principles of good faith, honesty and transparency.
This requires the business lawyer to consider seriously the possibility of questioning the tax strategy of his client, or employer. This demands back-up within the organization, a look at the professional standards of the business lawyer, and, in a client relationship, the appliance of a CSR code of conduct as part of the agreement between the business lawyer and the company.