Who would have thought tax lawyers would be the new superhero in today’s legal landscape, but increasingly they are, often swooping in to save clients from judgment in the global court of public opinion as well as saving them money. Many say one of the reasons tax lawyers have been propelled to centre stage is because there is so much tax competitiveness between countries today. Everybody wants a bigger share of the pie and the question is who should get to grab it first?
“The tax practice traditionally was one where the tax lawyers would work in tandem with the corporate partners but it was the corporate lawyers who had all the swagger and the tax lawyers were the geeks doing all of the paper work. But tax litigation has become a huge part of the business now,” says Al Meghji a partner in the 64-lawyer tax practice at Osler Hoskin & Harcourt LLP.
Meghji led the team that successfully represented GlaxoSmithKline two years ago at the Supreme Court of Canada in Canada v. GlaxoSmithKline Inc. — a monster transfer pricing battle between the pharmaceutical giant and the Canada Revenue Agency. Transfer pricing is the biggest area of tax litigation right now, says Meghji and modern tax litigation cases like Glaxo are high stakes. “There are all of these massive transfer pricing cases, massive GAAR [General Anti-Avoidance Rule] cases and the stakes are enormous. The general counsel and the CFOs take a direct interest because it can have very significant consequences for the financial well being of these companies. The size of the disputes and what’s at stake has dramatically grown.”
In the last three to five years, there has been a moral dimension injected into the dialogue about corporate tax — accusations of abusive tax avoidance can be kryptonite to a company’s brand. “Imagine you are a senior officer of a big corporation — you have to make judgment calls on what is acceptable tax avoidance and what is abusive tax avoidance. Nobody quarrels that tax avoidance is fine; you are allowed to engage in tax avoidance, but there is the idea that some of it is unacceptable,” says Meghji.
When it comes to fees, tax practices are not immune from the current pressure on costs but it may be easier for tax lawyers to demonstrate value to a client than in some other areas of law currently under pressure. It’s not uncommon for large cases to go to RFP. “A client once said to me over lunch, ‘You know Meghji, when you win, boy you are cheap, but when you lose you are ridiculously expensive.’ That’s true because if they win, it’s a big prize for them and they have saved a lot of aggravation. If they lose the consequences are serious and they have a legal bill on top of that.”
In the 18 years Ash Gupta has been practising tax law, he says tax practices have gone from compliance engines to deal architects. “That’s the role good tax advisers are playing,” says Gupta, a partner in the tax group at Gowling Lafleur Henderson LLP in Toronto. “When you talk about global tax solutions you’re always trying to skirt that edge of being efficient and creative without being aggressive.”
Gupta agrees that when it comes to the value clients place on the services of a tax lawyer it is easier for them to see what they are getting for their money. “I’m not sure we are at the point where we can name our price but it’s much easier today to demonstrate a value proposition to a client,” he says.
Good tax lawyers are becoming advisers with respect to risk management and not just on how to put together deals that achieve the desired goals but also how to keep people out of the news. “It’s a fine line and with any fine line you are getting paid for your judgment and not just your technical expertise anymore,” he says.
These days, on any file of any size, Gupta says tax is “front and centre” at the early planning stages of a transaction. “There is more deference, respect if you will. The ‘seen but not heard’ kind of days are gone and people are looking for tax to step up to the forefront and play a significant role in making the deal happen and putting it together.”
While Michael McLaren, a partner with Thorsteinssons LLP in Vancouver, agrees the public view of corporations and the payment of tax is in the limelight, he doesn’t see his role as having changed considerably. “I would certainly say that tax is more of a politician’s big ticket item now that the OECD [Organisation for Economic Co-operation and Development] has started to publish its first set of recommendations related to the [base erosion and profit shifting] project. These factors contribute to the internal decision-making process for sure, but I would not say that they really have swayed our role as tax lawyers,” he says.
McLaren says the tax lawyers at Thorsteinssons are involved in business decisions often before the corporate lawyers are even notified — regardless of whether the transaction is internal or a third-party acquisition in the public markets. “Our role is unique in that we deal with our clients on what is very frequently a daily basis. Our goal is to become a trusted adviser that is part of the integrated corporate team of these companies. We believe this provides us with a competitive edge since it is our view that it is only with this integration that a tax lawyer is able to provide sound legal advice,” says McLaren.
Changes in legislation have also greatly affected tax practices including tax shelter arrangements as well as transfer pricing, says Wilfrid Lefebvre, a senior partner in the tax practice of Norton Rose Fulbright Canada LLP in Montreal. “The administration is much more active, if not aggressive, on the part of the tax authorities and in Quebec we have the benefit of having two tax authorities to deal with.”
There has been an evolution, says Lefebvre, in that clients are much more knowledgeable in the area of tax. Boards of directors are more concerned about reputational risk. “There is almost a moral tone now put forward by politicians that everyone should pay their fair share,” he says.
When Roy Berg started practising 20 years ago, the global economy wasn’t as profound as it is now. “Things are more international in flavour and largely because of that we’ve seen the demand for international tax services really increase dramatically,” says Berg, director of U.S. tax law at Moodys Gartner Tax Law in Calgary. “A mom-and-pop bicycle shop can become an international concern with international tax issues as they bring in their component parts and when they go to sell them across borders.”
Berg tells the story of helping a client recently who raised a considerable amount of money to invest in income-producing residential real estate in the U.S., taking advantage of the then-high loonie, and depressed real estate market south of the border. “He got some tax advice in the U.S. because that’s where the capital was to be deployed and the advice he received was to structure the investment a certain way. Then he came to us to get a blessing of the structure and I just about spit out my coffee,” he recalls. “There’s usually a number of right ways to structure those investments and a bunch of wrong ways and he had done it the exact wrong way.”
Berg advised his client the advice he received in the U.S. side was good if he had only been a U.S. investor and not Canadian. “The resulting net effective tax rate to him and his investors in this investment was over 100 per cent on income. That means if he earned net $100 in rental income it would cost $102 in tax,” says Berg who worked some tax magic and got the 102-per-cent rate down to 40 in Alberta. “You have to tiptoe amongst lots of different tax laws to maximize profits and minimize expenses and that’s where we come in.”
The amount of money on the line in big tax cases has greatly increased — 15 years ago a tax case of $1 million was big, today $1-billion cases are not infrequent. And when it comes to break-the-bank tax matters and who they go to for advice, Lefebvre says clients are looking to specific lawyers for help — not necessarily their usual firm. “They will seek to deal with the person who they think is the best to deal with the issue, especially in transfer pricing cases,” he says.
Tax is also taking on a more central role from a planning perspective, says Claire Kennedy, a partner at Bennett Jones LLP. “We’re also seeing more tax disputes with higher dollar amounts associated with them and more tax controversy work, which extends from the administrative level managing the audits and dealing with appeals,” she says. “I can’t think of a recent experience where the tax person gets called in shortly before closing to bless something already baked. The tax people are a key part of the deal team from the genesis of the file.”
She agrees there are a few factors driving the shift. “In particular of late, with the OECD and G20 initiative on base erosion and profit shifting you’re seeing a heightened sensitivity to reputational risk in international tax planning and in the closely related area of transfer pricing.”
Kennedy says all of those factors bring recognition to the need for “bespoke tax planning” and a movement away from tax-savings products or traditional off-the-shelf planning.