SHIFTING SANDS: WHEN TAX PLANNING MORPHS INTO TAX AVOIDANCE
The press is rife with stories of companies and wealthy individuals engaging in transactions to minimise taxes, with media and public sentiment landing firmly on the side of the public fisc. Before the economic downturn, stories of corporations losing tax battles generally resided in the business pages and were primarily of interest to investors and other corporations using similar strategies.
But that has changed, and a dispute with tax authorities now bears the overtones of potential (or actual) public condemnation. Such public condemnation, in many cases, precedes government enforcement actions, such as in the case of leaked Luxembourg tax rulings or US congressional hearings on corporate tax saving strategies. Whistleblower actions, which can lead to a simultaneous onslaught of enforcement and media attention, are also on the rise.
Companies now find themselves facing scrutiny of transactions entered into five years earlier, or longer, that, at the time, were viewed as well within the bounds of reasonable tax planning. But as public sentiment has shifted, so too have the legal standards that apply to determine whether transactions are labelled abusive. In the United States, for example, recent court decisions have transformed the doctrine of economic substance, such that the mere awareness of tax benefits is now argued, by the government, to constitute improper tax motivation.
Further, US courts have become wary of arguments that taxpayers should be excused from penalties based on contemporaneous advice of counsel, finding that reliance on such advice was not reasonable. What is worse, many jurisdictions, both US and non-US, have begun to turn civil audits of tax minimisation strategies into criminal inquiries, further raising the stakes for potential legal and public relations liability.
Oct-Dec 2015 Issue
Ropes & Gray