(Who’s Who Legal) -- Corporate tax remains a key political issue internationally and, as such, continues to demand significant attention at boardroom level. Whereas tax work was traditionally an afterthought, popular sentiment fuelled by media scrutiny is now forcing executives to consider the implications and common perceptions of tax planning. With corporates looking beyond what is simply legal and contemplating how actions will be perceived, lawyers continue to play an active role in assisting corporates to understand and implement changes in a shifting regulatory environment.
Regulatory change continues to move at pace as countries look to align themselves with fellow signatories of the OECD’s Base Erosion and Profit Shifting (BEPS) framework. Since agreement was reached in October 2015, BEPS has continued to move at a fast, yet inconsistent, rate worldwide as participants look to harmonise tax regimes to present a united front to potential evaders. As one lawyer noted, “The pace of change in both international and domestic tax law is so quick, a large part of our practice is interpreting these new laws and making sure clients are up to speed on implementing legislation.” Ultimately, given the political and popular focus on tax legislation worldwide at the moment, legislative changes are often on the table adding an extra layer of complexity to the work of both lawyers and their clients. While the legislative changes are good for lawyers, they are not good for clients who must constantly review their tax structures and plan accordingly. Therefore, lawyers should remain vigilant and keep abreast of any changes affecting their clients so they can advise and restructure to ensure tax structures are compliant. In addition to this, regulatory authorities are focusing heavily on transfer mispricing or transfer pricing abuse. Lawyers repeatedly suggested that international tax planning and advisory work now forms an increasing amount of their time as they look to ensure that multinational clients understand what can and can’t be done, and adjust their practices accordingly.
Uncertainty and the Effects on Global Transactions
Political uncertainty on both sides of the Atlantic caused a slow end to 2016 in terms of M&A and capital markets transactions. As one lawyer put it, “Both Brexit and Trump’s election victory were seismic events that hit M&A activity and the capital markets hard.” The uncertainty surrounding the future of the UK’s position in Europe, as well as Trump’s plans for US taxation going forward, translated into fewer transactions at the end of the year as investors waited to see how events would play out in the coming months. Concomitantly, lawyers reported that the end of the year saw major restructurings and reorganisations taking up a significantly higher proportion of their time as corporates looked to their own operations and planned for future eventualities. In the US, the Trump administration’s lack of clarity on its tax programme also led to fewer transactions, with corporates adopting a cautious approach in anticipation of the new programme and its effects on their business. That being said, respondents seemed confident that the market would respond well in 2017. As one US lawyer maintained, “Although nobody is sure exactly how the coming tax reforms will look, investors are beginning to return to the table to conduct business.” This is particularly true for private equity houses who are “back out there looking for deals” as they have a large amount of capital that needs to be deployed. Ultimately, given the current state of liquidity in the market, M&A and capital markets transactions will continue to remain buoyant as corporates, institutional investors and private equity firms cannot afford to put too many deals on hold. While some will wait to see how the landscape looks further into the year, others will remain active and ensure that lawyers will still see a healthy stream of transactional work over the coming year.
Consolidation in the legal marketplace is a particularly prevalent trend noticed by a number of respondents. As one respondent noted, “Firms are ganging together to create critical mass to challenge international firms as there is intense competition to secure the best mandates.” One notable example is CMS Cameron McKenna’s merger with Nabarro and Olswang in May 2017. CMS, the international law and tax specialist firm, decided to go forward with the merger to push itself into the top five firms worldwide, with 4500 fee earners and over €1.2 billion in annual revenues. With possible future plans including a merger with a US-based firm, CMS’s strategic plans are illustrative of a global trend towards a tightening of the legal market and a tendency towards domination by a few colossal law firms.
Lawyers were also quick to mention that the increasingly competitive environment brought on by these consolidations is having a remarkable effect on mid-market players who lack the capacity to compete with international heavyweights. Coupled with this, US firms continue to make inroads into the European market, particularly in the London market. As US firms look set to continue to “take a piece of the cake”, mid-market players and even some magic circle firms are struggling to compete as they lack the ability to compete with these firms in the US. Ultimately, the squeezing of the market by major international firms and US market entrants looking to increase market shares is a worry for smaller firms who need to look to maintain strong relationships with international counterparts to ensure relevance in the market in the future.
Competition from the Big Four
The influence of the Big Four accounting firms continues to be felt by a number of law firms. The Big Four’s comprehensive tax offerings, including planning, advisory and auditing services, and international coverage makes them a prominent force in the tax space. That being said, some interviewees were also quick to mention that their large market share did not necessarily translate into direct competition as “they are inclined to do things a little differently than us and provide a different perspective”. Therefore, while the Big Four are undoubtedly a force in the global tax landscape, certain law firms maintain that sophisticated clients still engage the accountancy firms and law firms for their tax advice and will continue to do while the focus of advice remains sufficiently different.
That being said, while the likes of PricewaterhouseCoopers, Ernst & Young, Deloitte and KPMG boast a considerable number of listings in our research and continue to offer comprehensive advisory services, a number of respondents seemed concerned by the perception that the Big Four were looking to boost their capabilities in tax controversy work. Obviously, the increased focus on tax evasion and more aggressive enforcement worldwide has led to more disputes and it seems natural for the Big Four to look to enter the market to enhance their offerings. But this entrance will come at a price to law firms who have traditionally held the preserve of dealing with tax authorities. While some lawyers suggested that conflicts would hinder the chances of the accountancy firms, others were less optimistic and lawyers will therefore need to continue to monitor the situation to stay ahead of this trend and react accordingly should any inroads on their business come to light.
The fallout from BEPS’ action plan continues to weight heavily on the market as country-by-country reporting, a focus on transfer pricing and increasingly aggressive regulatory authorities shift the onus onto tax compliance, transparency and pre-empting tax disputes. Meanwhile, on the transactional side, political uncertainty did, for a time, alarm the corporate community worldwide and slow the flow of deals entering the market. However, given that the uncertainty surrounding both Brexit and the Trump administration’s attitude towards federal taxes still hangs over the market, investors cannot afford to wait for clarity. Ultimately, the tax market remains incredibly robust and, as transactions begin to take off again in 2017, we anticipate that lawyers face another busy year ahead.