Out of the shadows

According to Sandy Bhogal, co-chair of Gibson Dunn’s global tax practice, ‘General counsel will probably be more involved in tax affairs now than they’ve ever been’. With this in mind, he identifies three major trends in corporate tax that will keep lawyers busy for the foreseeable future: the knock on impact of the pandemic to tax policy, the general trend towards international governmental co-operation initiatives and the increasingly sophisticated and prominent way in which tax is covered in the media, leading corporates to view tax as an ESG issue.

Prior to 2020, increased international mobility was one of the main drivers behind tax policy, but the arrival of Covid-19, impacted this, as well as putting palpable strain on tax collection around the world. As such, in the UK, the corporation tax rate will rise from 19% to 25% in 2023. There were a number of tax issues that arose from the pandemic; most notably that people were physically restricted by lockdown and the world was a less mobile place.

‘Any event that means that governments are collecting less taxes, means that tax rules change and not necessarily just the rules, but also the attitudes of the tax authorities,’ says Bhogal. ‘Most tax authorities, as collection agencies, have some flexibility, and they need it in times like these.’

To put the impact of this changing climate into context, Bhogal points to historically low interest rates and readily available finance, which is partly responsible for a large amount of activity in the commercial world. ‘Pretty much any time you do anything that’s commercially motivated, it has tax consequences. That sheer volume of activity and the constant international movement of capital puts tremendous stress on business models and also therefore, tax risk management. Everything you do these days – particularly if you conduct cross-border business but even if you’re not, and you’re a large domestic – involves having to make sure that you’re doing the right things at the right time to ensure compliance with the law.’

But it isn’t just the immediate effects of the pandemic shaping the weather in tax; there are more long-term structural and cultural developments. In recent years there has been much more international cooperation on corporate tax. As an example BEPS, the base erosion and profit-shifting initiative, is still very much on people’s minds because it was perceived as a concerted international effort to try and eliminate asymmetry in tax laws around the world. These ongoing international discussions constantly yield consequences for corporates, and of most interest at the moment are efforts to move towards some tangible recommendations that impact digital businesses. (See the recent OECD agreement and G20 announcement.)

Bhogal also sees other issues on the horizon. ‘There are international projects that are going to get moving soon. I think that the way people pay tax on a personal level will see a lot of changes in the months and years to come. For a long time, people have viewed their personal taxes and corporate taxes separately. But where you have, for example, high-net-worth individuals or asset managers, the interaction between their personal tax position and the business tax position has changed over time.’ In some ways, debate around the BEPS initiative reflect a broader cultural shift in the way tax interfaces with political discourse.

The greater good

‘In my lifetime as a tax lawyer, the last few years is probably where I’ve seen tax get the most attention outside of my own little world,’ says Bhogal. ‘There’s always been this connection between politics and taxation, it’s inevitable, but because talking about tax is something that now happens in the more mainstream press, some of it is ill-informed, but some of it is provoking hopefully healthy politics.’

This renewed public focus on tax clearly has implications for corporates. ‘Big businesses don’t just talk now about whether they’re compliant with the law. It’s: “this is our strategy for dealing with tax and is it an appropriate strategy?” There are ESG and PR considerations in terms of whether corporates are behaving appropriately, and it’s not necessarily all about saying, “as long as I’m doing it legally, I can structure my tax affairs as I see fit.” There’s now a wider risk management concern that applies.’

‘Big businesses don’t just talk about whether they’re compliant with the law. There’s now a wider risk management concern that applies.’
Sandy Bhogal, Gibson Dunn

All of these external pressures have resulted in the steady rise to prominence of the concept of ESG, and the most important current considerations for corporate tax are sustainability and governance. There is a moral barometer being applied to business these days about how they conduct their tax affairs. This has become a very nuanced and complicated subject, because if obeying the law is now no longer enough, then corporates are potentially in an uncomfortable position where they could potentially alienate investors, customers or internal stakeholders. For example, there may be key employees who don’t want to work for a business that does things in a particular way from a tax perspective. Therefore, it has become increasingly important to not only make sensible decisions about tax at a boardroom level, but also being able to present the decisions that you’ve made publicly in a way that is sensible and acceptable.

In the often-Byzantine world of tax, this can present risks. ‘If you’re doing something that is technically complicated, there’s always nuance to it, but nuance often doesn’t translate very well to a mass audience,’ observes Bhogal. ‘It’s just not the way human beings are. It’s not only what you do from a tax perspective, but how you present it. Your governance structures, your internal management, the relations with stakeholders, your recognition of risk management strategy are all crucial.’

Sustainability is the other important consideration and one that is becoming much more visible. Bhogal argues that ‘Tax is politically entwined. And the reason is that tax is often a tool that governments use to influence behaviour.’ As public attitudes evolve, certain businesses are now trying to transition out of things they have historically done because they’re not sustainable in a world that is moving on. Recent examples are a business that was once very fossil fuel-focused might now be more renewable energy-focused, or a business that invested a lot in tobacco might now be looking to diversify and invest in other areas.

‘The thing I always say to clients is that any time you change what you’re doing from how it’s been done before, you can instinctively know that there will be tax consequences. You might not immediately know what they are, and that’s maybe why you come to somebody like me. But your working assumption should be if you change anything, it will have a consequence for the tax perspective.’

As tax law is often drafted generically rather than tailored to specific situations, it is necessary to look at the circumstances of the client and then overlay the massive body of tax law, which is difficult and why it is necessary to analyse. ‘In an ESG context, that dictates a lot of the conversations we’re having with clients,’ says Bhogal. From a practical perspective, he observes: ‘When you’re having these conversations, as soon as it becomes strategically important, the seniority of the stakeholders you’re talking to within the client increases. I’ve been doing tax just over 20 years now and I would say in the last five years, I’ve spoken to more CEOs about tax than I ever have previously, because they’re that much more engaged in it. In years gone by, tax was just a number in the accounts and businesses left it to a specific group of people to manage. Now senior management are actively involved in key decisions in that area because they have to be; and ESG is one of those reasons.’

Looking ahead at the multitude of current challenges faced by businesses, Bhogal believes that clients really want certainty from tax authorities. Tax law is always going to be complex up to a point and, while you cannot eliminate the complexity, you can make it more certain and you can work so that everybody knows where they stand. This is important because that dialogue and clarity fosters healthy economic activity, which is ultimately what clients really want.

‘My clients care about paying tax, particularly at the corporate level. They just want to know how much they have to pay, and they want to be able to know how much they’re going to have to pay in the future because that allows them to forecast, which allows them to better plan things that businesses want to do. You could change tax policy for the better if you made changes with a longer-term vision and longer-term ambition in mind.’