"Although I may marry others, and marry often," says the heroine to her one true love, bosom heaving, "nothing can alter my eternal devotion to you."
Which makes perfect sense if you do international tax planning. Consider the following hypothetical:
Owing to certain recent migration trends in Europe, Gwendolyn and Cecily, real estate entrepreneurs, see a buy opportunity in cities on the continent. Gwendolyn and Cecily are US citizens and US residents, but hire a UK-based attorney, Algernon, FN to assist them in structuring the investment.
FN: Algernon, Gwendolyn and Cecily are characters in "The Importance of Being Earnest," a play written by 19th-century author Oscar Wilde. Wilde, a celebrated wit, once observed that "it is only by not paying one's bills that one can hope to live in the memory of the commercial class." We shall honor Wilde for his keen insight into the business mind by adapting his characters to a modern business case study.)
Algernon organizes a Cayman Islands-based limited partnership for his clients. The Cayman Islands-based partnership invests in real estate in various EU countries -- directly and through Belgium-based companies controlled by sometime business partners of the two ladies.
Gwendolyn and Cecily marvel at Algernon’s expertise in structuring the transaction. Algernon promises the two women that they will enjoy almost too good to be true tax treatment for their investment. By way of example, much of the women’s funds flow as loans between related parties, with the borrower able to deduct interest payments against taxes in a high tax jurisdiction and the lender taking those same interest payments into income in a low tax jurisdiction.
The business of the partnership falters. Algernon, a gentleman, introduces the ladies to another client, Lady Bracknell, a resident of a nation that has no tax treaty with the US. The good lady is in the business of investing flight capital of uncertain pedigree, and she welcomes the opportunity to provide Gwendolyn and Cecily with funds. Algie handles the paperwork, and, once again, dazzles with his aggressive multi-jurisdictional structuring.
Gwendolyn and Cecily prove no more skillful with Lady Bracknell's money than with their own, and the partnership falters again. Algernon, on the other hand, proves adept at earning a fee at every phase of this drama, as Lady Bracknell now retains him to restructure her interest in the venture to insure maximum tax advantage for the loss.
Cut! Do you see what's missing from this script?
"Yes, it's utterly trivial and pedestrian," you respond. "Gwendolyn and Cecily are lousy real estate entrepreneurs, Lady Bracknell is a poor judge of business talent, the money is gone, and Algernon is a parasitic lawyer. Sounds like a sequel to a B-school case study," you sniff. "What's missing is novelty."
True, but irrelevant. What's really missing is mention of the swarm of ethical and disclosure issues that burden Algernon’s wizardry.
And, ominously for all three clients, the potential jeopardy does not end with Algernon. If Algernon has made trouble for himself, there is a fair chance that he has made trouble for Gwendolyn, Cicely and Lady Bracknell as well.
Why?
Clients need to worry about the increasing – and the increasingly vague sweep of -- disclosure obligations imposed on tax advisors. Badly handled, Algernon’s representation of the three women could, independent of the quality of his advice, put their interests at risk
Regarding Algernon’s issues as a tax advisor, the lawyers among you will think first of the problem of representing two or more clients with adverse interests. And you will ponder, in addition, the trouble to be had if Algernon is accused of practicing law in jurisdictions in which he is not licensed.
There are longstanding statutory obligations, not least in the US and Britain, to disclose aggressive tax planning to revenue authorities. However, taxing authorities and other regulatory bodies have in recent years become even more aggressive in their rulemaking and enforcement efforts to force disclosure.
Three areas in particular stand out: more information sharing protocols; more precise definitions of abusive transactions; and professional and financial sanctions against advisors.
Regarding information sharing, recent tax and/or information sharing treaties between industrialized nations and relatively small actors, such as Macau and Zambia, show that the opportunity to interpose non-treaty nations in below-the-radar tax saving gambits is waning.
Regarding tax abuse definitions, the EU’s recently enacted “Anti-Tax Avoidance Directive” reflects a trend toward greater precision. Why is this important to Algernon? The more specific the rules, the clearer the obligation to report aggressive tax schemes, and the clearer the risk to advisors who ignore those disclosure rules.
Which brings us to the third point, professional and financial sanctions against tax advisors. The UK is considering imposing severe financial penalties (‘severe’ being defined as possibly six- and seven- figure fines) against tax schemers whose clients’ tax positions are successfully challenged.
The more establishment, mainstream the tax planner, the less he or she thinks that this last trend is a cause for concern. Note, however, that a proposed rule in the UK contemplates using professional conduct violations as a basis for imposing on UK-based professional planners both penalties and disclosure obligations.
And with the more robotic application of tax abuse rules -- that is, if it fits the definition, it’s abuse, whether or not the challenged structure is in wide use -- even the most responsible, upstanding tax planners can find themselves defending against an accusation of professional misconduct.
Significantly in this case, Algernon’s tax minimization techniques -- routing transactions through non-treaty nations, loans between related parties and the less than straightforward control arrangements -- are threshold indicators of tax abuse. As such, they heighten the risk, even if the actual transactions were not abusive, of Algernon being drawn into the line of fire of these proposed new rules.
If that happens to Algernon, even if arising from a matter unrelated to our three protagonists, then under the proposed British rule, an adverse outcome regarding professional conduct amy trigger disclosure obligations. Specifically, Her Majesty’s Revenue and Customs may, under the present version of the proposed rule, force Algernon to disclose client information about Gwendolyn, Cicely and Lady Bracknell, even if the alleged professional misconduct was unrelated to his representation of the three women.
Algernon might argue in defense, bosom heaving, that he owed eternal devotion to his clients, but under that proposed rule, his interest becomes adverse to that of his clients. Consequently, even if Algernon’s work for Gwendolyn, Cicely and Lady Bracknell was defensible, the trouble Algernon allowed himself to get into will have increased the risk that their business tax returns will be audited and challenged.
Sophisticated, high-wire international tax planning can pay, but it's seldom romantic, and it’s never funny – to the planners or to the clients -- when it draws trouble from the regulators.
Oscar Wilde anticipated this trend: In another of Wilde’s works, "A Woman of No Importance," one Lord Illington complains, "It is perfectly monstrous, the way people go about, nowadays, saying things against one behind one's back that are absolutely, entirely true."
David Borinsky 2017
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