Hemmelrath: The days of aggressive tax structures have come to an end

Tax authorities in industrialised countries are no longer willing to accept tax structuring that reduces liability to single digit percentages, says Alexander Hemmelrath

Transcript

Professor Alexander Hemmelrath and Igsaan Varachia, Partners at Norton Rose Fulbright, discuss the latest trends in international taxation.

European CEO: Corporate tax is a controversial subject that divides opinion, but when companies avoid paying tax, are they doing anything illegal?

With me now is Professor Alexander Hemmelrath and Igsaan Varachia, Partners at Norton Rose Fulbright to find out.

Well Alexander, if I might start with you: Where does a company’s moral tax obligation lie? Is it to pay as much tax to government coffers, or is it to reduce the tax burden to capitalise on profits?

Alexander Hemmelrath: That really is a difficult question and I think there are at least two answers to that.

The moral obligation of a company is to pay those taxes that they are legally obliged to and to avoid any kind of structures, which are illegal or might be seen to be illegal.

On the other hand, the economic obligation of the management of a company is to save costs, and taxes are a kind of cost and, so far, management is obliged vis-a-vis shareholders, vis-a-vis employees, vis-a-vis the company as such, to find structures, which go as far as possible; if you use legal possibilities to decrease the tax load of a company.

European CEO: Alexander, tax loopholes were created to encourage large companies to come to countries, they’re hugely beneficial for the host’s economy, but do you think there should be better education of the public to realise this? So, they don’t demonise avoiders?

Igsaan Varachia: I think demonising is probably the right word. Simply because historically, what you have described as loopholes right now, started off as being incentives in countries in the EU, for instance in Ireland, in eastern Europe and so forth.

The basic idea was to attract companies to those jurisdictions to create jobs.

So yes, I do think that educating the public is one of the main tasks ahead of us right now. Because at the moment, the discussion we are having right now, really is heading towards demonising tax structures that are in place, and lower tax jurisdictions. That’s correct, yes.

European CEO: Well, surely closing loopholes is counterintuitive for a country because you’re just going to force large corporations to tax havens such as the Netherlands and Ireland. So what are the governments doing about this?

Alexander Hemmelrath: I think the only way to get around that situation is a joint approach. And, we see presently efforts within the EU; where finance ministers are negotiating with each other in order to find solutions, where they jointly approach the situation. And we have the initiative within the OECD called BEPS (Base Erosion and Profit Shifting), an initiative where 15 issues were defined, where countries together, and in this case, the industrialised countries should try to find common answers, in order to close loopholes. In order to make it no longer attractive for a company just to go from Ireland to Luxembourg, or from Luxembourg to the Netherlands, if the law is changed in one of these countries.

European CEO: Igsaan, What do you make of the of the OECD’s 15-point action plan, is it headed in the right direction?

Igsaan Varachia: I think as Alexander just mentioned right now, I think what is right about it, is that it is a joint approach. That it’s not single jurisdictions that have taken certain measures, which have proven more or less effective.

So I think the right thing about it is that it is a joint approach that is a coordinated approach. It probably will take quite some time but I think in the long run, it will proof to be largely effective.

I think you know the experience post-Lehman brothers; post-financial crisis, has been to draw emphasis together in certain tax jurisdictions. That there is a common interest to rise taxes efficiently and evenly and fairly. And I think that definitely heads in the right direction.

I mean obviously you know there are certain differences in jurisdiction there. There are obvious differences from Germany and so forth but I think it is all sort of converging to the right direction, yes.

European CEO: Alexander, it is said that countries are waking up to addressing unclear taxation policies. Would you agree? 

Alexander Hemmelrath: I agree, we’ve seen already over several years that tax authorities in the major countries are getting more and more aggressive, in order to make sure that they get their piece of tax cake, which is, let’s say, available on a worldwide basis.

And we have seen international groups of companies, which use tax structuring in order to get their worldwide tax rate down to six, seven, eight percent. And that is something I think the industrialised countries will no longer accept.

And so far, they’ve seen that structures, which were used in the past, left them with a smaller piece of what they could get in taxes and so far, I think we will see a changing environment during the next few years.

European CEO: And finally the market for decent tax consultation has become really competitive. How have you addressed this?

Igsaan Varachia: I think, you know, the answer to that is quite clear. If you look at the market today compared with 15, 20 years ago. The degree of specialisation is much higher, which you know, effectively means that there is no firm that does simply each and every thing. Rather firms pick out specialist areas on which they focus. And, as tax environments become more and more complicated, I think that that is the right approach. Alexander would you agree?

Alexander Hemmelrath: Yeah, I would agree and I will just add what is getting more and more important, is the question of trust. Trust between advisor, and the company, which is seeking advice.

At least, there are big companies and worldwide groups of companies do everything to avoid getting a negative press, because of too aggressive tax structures. They use those advisers whom they trust.

That they will only use legal structures and structures which cannot be challenged in a way that they get negative press, and that so far, I think the time when one could add additional points, in trying to sell aggressive tax structures, has come to an end.