MA Course
The right advice at the right time is what often makes an idea grow into a successful business empire. Roy Saunders brilliantly illustrated this maxim by delivering his International Tax Planning seminars at the IALS in the beginning of May. The first half of the four-day course focused on a certain Mr Holmes and his brainchild – Polycon Lens Company.
Mr Holmes, an industrious fellow, not unlike some modern Internet whiz kids, uses his training as an optometrist to make a break-through in acrylic lenses manufacturing. Not fearing foreign lands, Mr Holmes establishes his first company abroad and starts working to realise his ambition of penetrating the world of haute couture spectacles. The stars looking favourably on Mr Holmes' enterprise, he broadens his product range with telescopic lenses for the military. The company soon finds itself supplying lenses of both kinds to customers across the globe.
To push sales and meet rising demand Mr Holmes goes through the increasingly complex stages of business development. From having to run a small start-up our Midas soon finds himself juggling the newly-appointed board of directors, subsidiaries, representative offices, agents, storage facilities and distributors, all in different jurisdictions and speaking different languages. Enter Maurice Brightman – a cautious but brilliant international tax advisor – to save the day, who some may know from Roy's earlier book “The Principles of International Tax Planning.”
While Mr Holmes remains the powerhouse behind the company's development, Mr Brightman plans for the tax-efficient international development strategy. Amongst other things, he knows when there is a permanent establishment and what it entails, advises what kind of business entity to choose for a particular purpose or cautions against high debt-to-equity ratios for the fear of thin capitalisation provisions kicking in. Under Mr Brightman's careful guidance Polycon soon turns into a listed conglomerate with manufacturing and sales facilities around the world, boldly disposing of and acquiring new businesses and former customers and changing name in due process. Progressively, the group boasts its own in-house finance company, e-commerce subsidiary and real estate investment group. The sky is the limit, and the enterprise enters the ultra-modern renewable energy market through an off-shore private equity fund.
The course was delivered through a pre-distributed narrative, each of Mr Holmes's stages of development elucidated by additional slides that Roy supplied. The students were split into four groups of five or six. All were invited to assume the role of Mr Brightman and advise Mr Holmes on implications of each step he was taking. Acting as a mentor, Roy explained the premise and gave everyone time to discuss the consequences. Following lively negotiations that lasted from five to ten minutes, each group presented its view of the situation, which Roy summarised on the whiteboard and on which basis he delivered his vision of the advice.
The usefulness of the course was augmented by the audience it was delivered to. The class was mostly composed of professionals with work experience in different jurisdictions and in different areas of law and finances. One could meet an estate planner, a chartered accountant, a chartered tax advisor and a retired tax inspector, as well as lawyers qualified in many different states. Although the stages became increasingly difficult, it didn’t stop the barrage of ideas originating from each group’s brainstorming sessions. Every time the participants demonstrated the multitude of angles from which a problem could be approached. A bystander would notice the breadth of opinions and variety of commercial, legal, tax and financial issues that students raised.
Most discussions would start with consideration of the applicable universal international tax principles. These included treaty law and permanent establishment considerations, transfer pricing rules, CFC regulations, limitation of benefits and thin capitalisation requirements. The negotiations would then often unfold on the basis of a person's own practice. Different kinds of entities were considered, amongst them partnerships, joint ventures and Societas Europaea, as well as jurisdictions, such as Cyprus, Luxembourg, Hong Kong, Ireland and even Hungary. Use of losses would be discussed extensively, each providing deductibility justifications and grounds for the intra-group transfer from his or her own jurisdiction. For example, the significance of stewardship costs was analysed in depth and compared with non-management expenses.
Various tax incentives and exemptions were proposed, like, for example, Chinese tax holidays for manufacturers established in particular investment zones. European-minded mentioned Parent-Subsidiary and Merger Directives. UK-qualified – substantial shareholding exemption, demerger relief, as well as use of trading losses. Each time the impact of different taxes was assessed, the latter included corporate, capital gains, value added, stamp duty and land taxes. Associated costs, such as export and import duties and currency fluctuations were also taken into account. Non-tax issues included evaluation of different options for business acquisition, such as shares vs. assets disposals, or discussion of incentives for the board members.
The exercise was especially useful for students whose experience with international taxes was largely theoretical. First, it demonstrated close interrelation between different parts of academic courses and prompted the participants to consider several issues in unison. Second, Mr Holmes’s adventures closely resembled what one would be expected to meet in practice and invited to apply real-world analysis to the situation. This is when participation of those with several years in practice was invaluable. Not only did it keep everyone on their toes in order to keep up with the discussion, but also highlighted issues to note down and later use in practice.
During the next two days Roy kindly shared his own work experience by inviting students to consider an array of client structures that he encountered in practice. Like during previous seminars, Roy gave just enough information to initiate the discussion and a quarter of an hour later would invite the participants to share their views. It is probably fair to compare two parts of the course with gentle stretching followed by vigorous exercise. Not only did the students hardly have any hints as to how to approach each situation, the analysis had to be based on real-life facts, where laws of different jurisdictions had to be taken into account. The last cross-border transaction and, as expected, the most complex one, was used as a basis for the marked assignment, forming part of the course grade.
The uninitiated would hardly be excited by international taxes, and, arguably, the same is at least partially applicable to those who do them for a living. What Roy did one may easily call an achievement, for he made hours and days of the course fly by.
In addition to delivering the course, Roy shared useful practical tips on how to interview clients, what questions to ask foreign counsels when contemplating activity abroad and how to approach preparing comprehensive advice. At the end of each day every group was asked to distill its vision of international tax law in three words or concepts. My personal favourites are creativity, teamwork and lateral thinking.
Article written by Dmitry Zapol
