I have just finished teaching my annual International Tax Law 3 MA course for students at the University of London. As always, my first question is “What are the essential credentials for an international tax consultant?” and invariably I receive the answer from the students “He or she has to have a good knowledge of international tax systems”. This article explains why the answer should be “He or she has to have a good understanding of business and the commercial requirements of Clients”.
Unfortunately, it is not until later in their course that they study anti-avoidance legislation in which ‘Transfer Pricing considerations’ is an important component. But it is really Transfer Pricing that students should start with, this being a functional analysis taken of a Client’s business to assess the risk and rewards that should be obtained by each entity within a corporate structure. This would teach students to think first of the business activities of the Client rather than think of how to minimise the tax costs for an organisation. In other words, the old adage rings true ‘don’t let the tax tail wag the commercial dog’.
Students ask me whether I have a modus operandum for dealing with structuring international businesses. It is difficult to standardise how one approaches Client problems, although there are in effect five stages one has to go through to arrive at the optimal solution for a client’s requirements.
Stage 1
The first requirement of the first stage must be to listen. It is always the Client who knows what he wants to achieve, although he may not be fully aware of how the structure or his personal requirements can progress to the desired end. But creating the structure without understanding what the Client wants is like baking a cake with the wrong ingredients. This is why I don’t believe that remotely obtained advice presented without the Client’s involvement can truly attain the commercial objectives that the Client wants.
I cannot stress this enough. Receiving instructions from a client which involves the tax laws of other jurisdictions and sending the instructions to a colleague in that jurisdiction is inevitably going to result in advice rendered which is technically correct but not totally relevant to the client’s needs. Detailed reports may be received which are expensive and delay honing the final plans to what is required.
Having listened to the Client, question the issues presented by the Client by drilling down into the business or personal problems as if you were preparing a transfer pricing memorandum in order to understand the processes of the business model, or indeed for personal issues as if you were a therapist trying to understand the social as well as economic issues involved. This process comprises the main part of a typical consultation of up to two hours’ duration.
It is only following this investigation that the consultant should create some initial ideas. I find a white board useful in this process as it has no pre-conceived constraints in the form of existing arrangements and one can clearly start from a clean slate. By proposing different entities, contractual arrangements, changes in personal or corporate domiciliations, etc. the consultant engages the Client’s commercial awareness and personal aspirations and ascertains whether his suggestions are possible within the Client’s overall ambitions. By using a white board, it is so easy to eliminate ideas which cannot achieve these objectives, eg proposed changes in shareholding where there is a pre-emption clause which prohibits this, or suggestions for external finance where certain security cannot be offered – or indeed any other ideas promulgated which the client cannot achieve. Eventually, the ideas reflected on the white board are those which can be commercially or personally achieved by the client.
This creative process clearly cannot be undertaken without having technical expertise. This does indeed require the consultant to have a general knowledge of tax systems in many jurisdictions, and I think it is useful if he or she has an expert knowledge of the tax system in one specific country. This requirement is not as daunting as it may seem, since such general knowledge may be confined to cross-border transactional activities for commercial businesses, or international migration and cross-border taxation of investment income for personal issues. Many books have been written on the tax systems in developed and developing countries around the world, not least my own International Tax Systems and Planning Techniques first published in 1983 and after 65 releases now to be found in an online version at www.itsapt.com. This is a website I have created which has over 300 relevant articles on international tax issues under the Knowledge section of the site.
Similar international tax concepts apply for most developed countries, so that besides a general knowledge of the tax systems themselves, the consultant needs to understand the provisions of double tax treaties entered into between these jurisdictions which may affect his or her proposals. Such an understanding will not be confined simply to the articles of a relevant treaty, but also to how these provisions are interpreted and relevant Court cases addressing these provisions. There are many excellent websites which have all of the double tax treaty networks analysed and summarised – I personally use www.ibfd.org – but care should be taken not to look at one particular article and assume this is applicable without reading the entire treaty. There may be a limitation of benefits provision elsewhere in the treaty or even a protocol entered into subsequently which may change the terms of a treaty.
The consultant also needs to understand anti-avoidance legislation of major developed countries which is not simply what is legal and what is not, but what will obtain the desired tax consequences for the Client without invoking investigations by Tax Administrations. Transfer Pricing is an element in the armoury of tax authorities which should always be borne in mind, but there are many others such as the attribution of foreign retained income back to the domestic beneficial owner or even a general anti-avoidance rule common in many countries nowadays. The last thing a Client will thank his adviser for is putting him into a structure which is ineffective, costly to dismantle and stressful in every way. This is why in the forty years that I have been practising as an international tax consultant I have never recommended ‘tax schemes’ for Clients. Even if the law appears to substantiate the scheme at the time, and even with tax counsel opinion confirming this, we have all witnessed legislation which effectively has a retrospective effect denying the tax benefits contemplated. Moreover, the required disclosure of these schemes nowadays is not something I would want to include in my own personal tax return!
The end of Stage 1 is when the client and the consultant finally agree on what is commercially or personally desirable and what has been developed by the consultant to create the appropriate legal structure with the minimum of overall tax costs. This is what I refer to as the blueprint since with the appropriate whiteboard, one is able to print out the drawings as developed and hand them to the client at the end of the initial consultation.
Stage 2
Having completed the process of creating and developing a structure which is deemed appropriate for the Client’s commercial requirements, the next stage is the verificationprocess. This demands a network of colleagues around the world in whom the consultant has a degree of trust who are able to review the blueprint and any questions that the consultant may have before finalising his advice. This is one of the most difficult parts of our work, and this is why networks have developed over the years. My own network comprises non-related professional advisors, some of whom I have known throughout my forty year career. It is difficult for younger practitioners to create such a network in the developing stages of their career, which is why I have created the ITSAPT organisation at www.itsapt.com as a community of professional advisors with the objective of ensuring that ‘ITSAPT Associates’ can assist each other around the world with Client issues.
During our consultation with the client, we will have identified tax, legal and other issues which we will need to confirm with experts in the relevant jurisdiction. They may be issues such as customs duties on importation of goods, VAT issues, transfer taxes and other indirect taxes with which we may not be totally familiar; personal migration requires relevant reporting requirements; commercial structures have a variety of forms; indeed, there will be an infinite number of issues which require the sort of technical expertise that it would be impossible for one person to have at his fingertips. This is why a network is so important to verify and comment on any proposals – not to render the initial advice which may not be appropriate to the client’s needs as discussed above, but to ensure that the final advice meets these requirements. I often think of myself more as a general practitioner with a specialised knowledge of cross-border commercial and personal issues coupled with an excellent community of like-minded professionals around the world who can assist my clients achieve what they want.
Stage 3
We are now able to finalise our advice with the appropriate input from our colleagues and this is therefore the reporting stage. The Report should be short enough to be fully comprehensible by the Clients whilst detailed enough to explain the complex issues that may be relevant to his existing professional advisors. Clearly sometimes this balance is difficult to achieve and is often facilitated by an Executive Summary at the beginning of the Report with the detailed tax issues being confined to Appendices, so that the main body of the Report can be followed by the Client as well.
What has surprised me throughout the years is how often Reports come without the visual aid of a structural diagram or diagrams, if relevant. It is so easy with Powerpoint to prepare such diagrams from the initial blueprint, as may have been amended throughout the verification process, and visual aids enable much quicker and easier understanding than detail on a page.
I am often asked whether a legal or accounting qualification is useful for training as an international tax consultant. My diplomatic answer is that both trainings are useful to the international tax consultant; law since it teaches the student to have lateral thinking and not to be confined to pre-conceived issues (such as a balance sheet for auditing), but accounting since it teaches numeracy and the ability to explain complex issues clearly with figures as visual aids. The lateral thinking is essential in Stage 1, the detailed analysis essential in Stage 3.
Stage 4
This entire process from Stages 1 to 3 should not take longer than a week following the first meeting with the Client, and this keeps the issues and problems fresh in one’s mind. The penultimate stage is reviewing the Report with the Client once he has had the opportunity of discussing this with his partners, colleagues and other professional advisors. At this review meeting, certain assumptions that may have been made throughout the process will be clarified but it would be unusual for there to be any major alterations to the proposed structure (assuming that the Client’s commercial requirements have been fully understood).
It is at this review stage that the consultant has the opportunity to develop a long lasting relationship with his or her client, assuming that the issues have been properly understood, since clients would hopefully be surprised at the speed with which the Report has been prepared and the degree of relevance the Report has to what is required by the Client. And it is long lasting relationships that consultants want to achieve, hence the need to ensure structures are not designed for short term efficiency only.
Stage 5
We can then proceed to the final implementation stage. I believe that it is essential for the international tax consultant to be involved in the implementation of his or her advice by ensuring that corporate entities are created in the appropriate manner, that legal documents are prepared which include the provisions required for the proper implementation of the Report, that financial objectives are properly met and that personal requirements relating to investment income and possible migration are also properly achieved.
Again, being part of a community of professional advisers is essential for the implementation process, since it is so important to deal with fellow professionals in whom the consultant has total trust. This is best engineered through regular meetings, perhaps at conferences where technical information can be shared at the same time as engendering long term personal relationships.
Perhaps these nine italicised processes in five stages form a modus operandum, but perhaps there is one other aspect which I haven’t covered and that is caring for your Client. This means having the appropriate integrity to deal with your Client fairly, to observe the transparency of international structures which is required in today’s world, and to undertake your responsibilities with professional diligence. It is the realisation that tax is only one ingredient, albeit a costly one, of the mixture of what makes a commercially successful cake that distinguishes the international tax consultant who cares for his Client and wants to participate in his unchallenged success.