Crisis or opportunity

Tax payers’ money propping up our major banks qualfies was a moment in 2008 that most want to forget. When the UK government confirmed it had committed $64bn to a new rescue package, on Monday, October 13th, the global village took a deep breath, and prepared to watch events unfold for better or for worse.

But where there is risk, there is potential gain. Key sectors of the financial services industry are preparing to capatilise on attractive tax cuts intended to reignite national economies in the aftermath of October 13th. Salans is among the law firms well-placed to see its clients benefit as governments look for much-needed credit to swell their accounts.

“In an increasing competitive international market, tax is seen by many government authorities as a significant factor in attracting mobile inward investment to their jurisdiction,” says Karina Furga, who heads Salans’ Warsaw Tax Advisory Team in Poland.

“We anticipate that the use of fiscal policy by governmental authorities in this manner will continue. In countries where we are active and beyond, we are monitoring the development of the tax laws very closely.”

Salans was founded in Paris in 1978, and now has 20 offices worldwide in locations such as Prague, New York, Bucharest, Istanbul, Shanghai and London. Described as ‘truly international’, the company’s 750 lawyers represent what has become one of the world’s largest law firms, catering for every linguistic and legal tradition.

The business itself is without a dominant culture or language. It doesn’t even have a head office, and herein lies its unique advantage, particularly in the current Tax environment. Management is drawn from the global network of offices where the group managing partner is Polish, the COO is British and the CFO is French. This irony is not by mistake, but by design. 

Global network
A growing amount of work is referred across the offices. Business exported in this way amounted to $65m last year, with originating partners passing work onto fellow colleagues in neighbouring parts of the world. Revenue increased by 37 percent to $282m in 2007, partly thanks to new offices in Berlin and Budapest.

A mixture of transactional services in corporate and real estate complimented the Contentious (litigation/arbitration) and Restructuring (insolvency/bankruptcy/work-outs) Practices – but it is the tax advisory market that is leading much of the growth. “This gives us cyclical protection,” explains Ms Furga. “We have been particularly pleased that despite the worsening global, liquidity crisis work volumes have remained high as 2008 has progressed. 

“Despite the credit crunch we set ourselves a very demanding 2008 budget and are currently running 15 percent ahead of last year, which we are very proud of in the current environment. 

“We are, however, by no means complacent and are monitoring the continuing and deteriorating global economic situation carefully.

“We are clearly seeing one of the most significant global shocks to the financial system since the inter-war years.

“This is an enormous challenge and will require short∞term government intervention. Unlike in the 1930s, governments appear well aware of the measures that are needed to be taken to restore confidence and liquidity.”

Tax-efficient structures
Ms Furga and her team spend much of her time assisting in the implementation of tax-efficient structures for business activities in Poland and abroad, and they understand the unique opportunities that are emerging in her specialist field.

Poland’s Minister of Economy, Waldemar Pawlak, stated last spring that by 2009 he would craft the easiest country in Europe to run a business with new laws and regulations. He is not alone. Potentially significant changes are being proposed to the tax regimes in Holland, India, UK and Spain to list but a few.

Other countries moved some time ago to take the early initiative. The introduction of a participation exemption in Russia allowed Salans to develop a tax planning product aimed at tax-free repatriation of profits, previously unachievable. The scope for further opportunities in 2009 is significant, according to Ms Furga.

“Our approach goes beyond the immediate issues to proactively
seeking solutions to client needs,” she says. Our UK tax practice is currently looking very closely at the possible change of the holding companies’ tax regime in the UK, which could provide our clients with new fascinating opportunities. 

“Luxembourg tax reform is also a very positive development.” But are governments doing enough to steer their economies away from recession by simply assisting businesses with tax breaks?

Transparency and exchange
The Organisation for Economic Cooperation and Development is encouraging more countries to make significant moves toward full implementation of its standards concerning transparency and effective exchange of information in tax matters.

These changes are perhaps more important than planned tax incentives, which could soon litter the landscape like bags of wet peat on a scorched desert plain, because without transparency and exchange there is only suspicion, fear and weakness. Ms Furga believes liberalisation of the markets has had a largely positive effect on economic development, but she too backs more openness.

“Open and better-integrated financial markets have benefited individuals and companies by lowering the cost of capital and encouraging greater competition in the provision of financial services,” she says. “Open and efficient markets depend, ultimately however, on international co∞operation and respect for international standards. 

“Advances are being achieved in bringing greater transparency to financial centres around the world and we welcome this development. However, we think that more substantive progress needs to be made in initiatives to improve exchange of information provisions.”

The UK government is among those leading the field in a comprehensive root and branch review of the UK tax system, but lack of clarity over the process continues to hamper the process.

UK tax review
The review is focused on the UK tax treatment of foreign dividends, the scope of the UK’s controlled foreign company regime in taxing the profits of overseas subsidiaries of UK companies and the tax deductibility of interest expense.

The details of the proposed changes have been released on a piecemeal basis, creating much uncertainty and apprehension.

Ms Furga adds: “Our UK tax practice anticipates that in 2009 the UK government will formally announce the conclusion of its review and will provide complete and comprehensive details of the new fiscal regime that it is intending to introduce.

“If the UK government seizes the opportunity to introduce in to the UK tax system some of the ideas that it has been discussing informally with various interested bodies then this will represent a fundamental change in the UK tax system.

“This will result in the UK becoming a very attractive environment for the location of international business and holding companies. Top of our wish∞list for 2009 would be a desire that the UK government addresses the uncertainty that presently surrounds this issue.”

In an increasingly competitive and changing international market, Mr Brown’s rescue package could be a distant memory by Christmas. The use of fiscal policy by governmental authorities will continue to attract interest into the New Year and beyond.