Thought leadership from our experts

Practicing Tax Law in a Changing Legal Environment

Tax is an exciting and ever-changing area of the law and navigating the plethora of tax rules to achieve a favorable result for a client is very rewarding. Those who have a knack for problem solving and a desire to work in a rule based area of the law, which also requires creativity, practicality, and deep substantive knowledge, have a natural connection to tax law.

Tax is relevant for most transactions and tax attorneys typically get involved early on in the planning and structuring phase, because, as important as it is to understand the tax consequences of the overall transaction, it is equally important to identify any actions that, although thought of as an insignificant by some, may lead to unintended tax consequences.

A good tax attorney can evaluate a transaction or structure and analyze the tax consequences. That same tax attorney needs to help guide the client company into compliance and defend the tax treatment if challenged by the IRS. However, a really great tax attorney and a shrewd client are ones who seek to analyze proposed structures and transactions when still in the planning phase and ensure that the organization chart is structured and the transactions are conducted with tax savings and efficiencies in mind.

A tax attorney who assists a company in designing tax-efficient structures and transactions needs broad and detailed knowledge of the tax law, but even more important is creativity and in depth understanding of the overlay of corporate law, tax law in all of the relevant jurisdictions, and the business needs of the company. These attributes and skills are even more important in an international planning context.

One of the more interesting and exciting parts of practicing tax law is the rapid evolution of the law. Internal Revenue Code changes and new treasury regulations are frequently encountered, while some old regulations are replaced or at times overturned by the courts. Court cases are regularly heard in various jurisdictions that are important to tax practitioners. And the office of Chief Counsel and Internal Revenue Service regularly publish new rulings and memorandums interpreting the Code and regulations and expressing their position in gray areas of the law.

The quickly changing universe of tax law makes each analysis interesting and reminds us of the need to re-think previously analyzed structures as a scrutinized transaction that resulted in positive tax results in the past might give rise to new tax issues and certain negative tax results following a change in the law.

Although domestic corporate and international tax law is constantly evolving, the most significant change during at least the past decade has been the Organization for Economic Cooperation and Development's (OECD) issuance in 2015 of 15 final reports as a result of its project to combat tax base erosion and profit shifting (BEPS). The reports covered many important topics, such as tax documentation and reporting, transfer pricing, and establishing a taxable presence in a foreign country.

BEPS has led to many tax changes in many countries around the world. One recent and very significant example is the signing by 68 countries of the OECD's multilateral tax treaty to combat multinational companies' tax avoidance. This groundbreaking treaty allows the countries who signed on to adopt in their network of bilateral treaties any of the OECD's BEPS recommendations included in the multilateral tax treaty.

Importantly, all 68 countries have agreed to include the OECD's treaty's anti-treaty shopping provision, which is drastically different from the limitations on benefits (LOB) provision that is included in many U.S. tax treaties. The new provision allows the government to disallow a company the benefits of a tax treaty if it determines that the company's principal purpose of engaging in the transaction was tax avoidance. Individual countries must still ratify the OECD treaty before the provisions are implemented in bilateral treaties, which is expected to delay implementation until at least 2019. This change is expected to affect practically all multinational companies, making it a very important development.

Although the U.S. did not sign on to the OECD's multilateral tax treaty, the U.S. has implemented some of the BEPS measures outlined in the 2015 final reports. For example, the U.S. has released Treasury regulations requiring multinationals to comply with country-by-country (CbC) reporting. In addition, the U.S. has agreed to be part of OECD's pilot International Compliance Assurance Program (ICAP), which will assess multinational companies' international tax risk and is designed to prevent cross border tax disputes. Other countries, such as Germany and the U.K., have also expressed interest.

These changes are just the beginning of the implementation of BEPS across the world. The burden on multinational companies of understanding and complying with these and upcoming rules and regulations has been and is expected to be significant. Many previously vetted structures and transactions will need to be re-analyzed and revised to comply with these new international tax rules. Navigating clients through these and many other tax rules, while coming up with creative and practical solutions to unexpected issues and gaps in the guidance, will continue to be a challenging, yet a rewarding experience.