In the space of a decade, international taxation rules and investment structuring have undergone major changes, both in Europe and internationally. The role of tax advisors has become significantly more complex, but at the same time their advice has become even more valuable.
As its role as an investment structuring hub has grown, so too has Luxembourg seen the development of tax advice expertise. Not, as some might infer, for dubious or questionable reasons, but simply due to the fact that just as the structuring of investments requires an appropriate legal framework, so too does it require the most precise knowledge relating to the tax treatment that will be applied. Given that these investments are, more often than not, intended for the long term, both promoters and investors need to ensure that investment structures are as sustainable as possible.
But is this still possible today when, following the 2008 global financial crisis, the international tax framework has been considerably transformed, in particular with BEPS having been rapidly adopted by the EU and its member states? Ensuring sustainability has become a critical challenge for advisors, especially as new measures are currently being prepared at a global level.
“It has now become a real challenge for tax advisors to provide predictability for their clients. This is all the more important as new measures are already being prepared at the global level to ensure that the largest multinational companies will pay their fair share of tax,” explains Patrick Mischo, Office Senior Partner, Allen & Overy Luxembourg. In his view, the role of the tax advisor today consists of helping tax managers of financial institutions and companies navigate a complex and continuously evolving tax landscape.
It has now become a real challenge for tax advisors to provide predictability for their clients.
For Vincent Lebrun, Alternatives Leader and Tax partner at PwC Luxembourg, we have now entered a “grey zone” in terms of taxation. “Twenty years ago, we were clearly talking about tax structuring,” he observes. “As a tax advisor, you could guarantee your client the rules would be black or white. But the implementation of new tax rules over the past ten years has led to complexity and uncertainty.”
At this point in time, the task of a tax advisor, above all else, is to provide tax predictability at all stages of the investment, from structuring to the exit phase, to the extent possible. Mischo echoes this sentiment, noting that it’s about providing as much certainty as possible relating both to the structure and life cycle of the investment.
Now that these new rules have been imposed, I sometimes have the impression that we have become tax risk managers or tax compliance managers.
Lebrun highlights that the new regulations implemented have caused a significant disruption on all levels, be it within Luxembourg, Europe or on the international stage. “Now that these new rules have been imposed, I sometimes have the impression that we have become tax risk managers or tax compliance managers.” He notes his role today is often limited to guiding his clients through these new rules, explaining their scope and making recommendations for choices, but ultimately leaving it up to them to decide what route to take.
In a changing environment, these advisors need to be able to find the most appropriate structure for an investment vehicle. “Investors are looking for tax stability, so it’s up to tax advisors to anticipate possible tax challenges and offer them the most secure structure,” says Lebrun. A task that remains complicated given the vagueness that still surrounds the new laws and their exact scope.
In addition to the fact that these new regulations have overturned currently applicable international tax practices, it is important to take into account their novelty and therefore the fact that they are often subject to various interpretations. “There is uncertainty at all levels, which has become the new normal in Europe and the world,” says Petya Dimitrova, International and Corporate Tax Partner at ATOZ Tax Advisers. She points out that in her role, she often has to offer her own interpretation of rules that are not always clear and for which there are no recommendations or case law. “These regulations were introduced too quickly at an EU level, without having considered all the possible implications. This is therefore an important task for tax advisors, who are becoming increasingly important in these complicated times.”
Companies must become more cautious and be prepared to provide adequate answers for tax authorities.
Among the new standards imposed, particularly by BEPS, those concerning the substance of the activity are of particular importance. They require tax advisors to ensure that their clients are both in line with this requirement and that the structure developed corresponds to the company’s activity. “Companies must become more cautious and be prepared to provide adequate answers for tax authorities,” insists Dimitrova. “We need to be able to work with our clients to provide solid documentation that can prove the structure is aligned with the operations. This is particularly important for companies with cross-border activities.”
Already heavily buffered in recent years by new EU directives, tax experts are expecting to see further regulatory salvos in the coming years. “You don’t need a crystal ball to see that new taxes will emerge in the context of the health crisis,” predicts Lebrun. It is clear that the EU has a fiscal agenda, but it remains to be seen whether these new measures will be as disruptive as the previous ones. This sentiment is echoed by Dimitrova, who believes that “the health crisis will likely push governments to try obtain new tax revenues.” The question then is how you generate these revenues; via increasing taxes on current activities or by attracting new activities?
Tax advisors are already carefully watching the recent proposals on an OECD and G20 level as they could again cause large upheavals from 2023 onwards.
Dimitrova, Lebrun and Mischo therefore agree on one central point: tax advisors are at the dawn of a new era. One that will require them to accompany their clients in an increasingly unpredictable environment where the rules are likely to frequently change. “The current complexity means that companies will increasingly need our expertise and in-depth advice on their operations and investments,” concludes Dimitrova.