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Supply Chain Tax Planning
The marketplace is putting increasing pressure on US-based and foreign-based multinationals to reduce their effective tax rates. In response to this pressure, many organizations have sought out value-enhancing ideas in order to better manage, and hopefully reduce, their US and foreign tax burden. This, in turn, has generated a market for tax-motivated structured transactions or "products."
A wide range of service providers, including large accounting firms, private consulting firms, law firms, and investment banks, have been marketing these products. A great number and variety of products, exhibiting varying degrees of soundness, are in the marketplace. One of the main challenges for the Chief Financial Officer or in-house tax professional, therefore, is to evaluate these products objectively, taking into account the particular needs of his or her organization and also the organization's appetite for risk.
In response to these market conditions, Baker & McKenzie has formed a group of lawyers from around the world to staff its Global Tax Minimization Initiative. In our role as trusted adviser to our clients, the Global Tax Minimization Initiative seeks to add value for our clients in any or all of the following three key areas.
Diagnoses & Problem-Solving Process
The most important objective in effective global tax minimization is to identify appropriately the main factors in the organization's structure that drive the effective tax rate. Improperly diagnosing the factors driving an organization's effective tax rate will often lead to short-term, rather than long-term, tax reduction, and may actually exacerbate the problem. That is why we spend time on the front-end, seeking to understand our client's business before we suggest a tax reduction technique to our clients. Although we have developed a database (described in more detail below) of tax reduction techniques in order to enhance our ability to serve our clients efficiently, the database serves merely as a tool that we use in the process of learning about our client's business and not as a menu of ideas among which the client must choose.
Evaluation Process
Probably the main advantage that we have over other service providers is our vast experience in evaluating tax-motivated products (especially international products). Five factors have coalesced to give us a competitive advantage in this regard.
- First, our independence and the trust we have gained with our clients allows us to evaluate products honestly and then communicate that advice in a forthright manner.
- Second, our experience in handling large tax controversies at the audit, appeals, and trial court levels, puts us in a unique position among service providers to accurately assess the merits of an idea. Very often, evaluations of tax-motivated transactions are based on unrealistic factual assumptions that cannot be proven or established in a legal forum. We ensure, based on our tax controversy and litigation experience, that our assessments are based on realistic factual assumptions.
- Third, with offices in each of the world's major money centers and clients in every major industry, we have had the opportunity to evaluate more ideas than most other service providers.
- Fourth, we have developed a database of global tax minimization ideas located on our intranet in order to help us efficiently represent our clients.
- Finally, as the world's only full-service global law firm, we are in a unique position to evaluate the practicality of tax reduction-ideas, taking into account commercial feasibility and the constraints of various types of law, such as corporate and intellectual property law.
Most tax reduction ideas are really variations of the same core technology. The global tax minimization database contains our internal assessment of a number of these core technologies including, but not limited to, the following techniques that attempt to:
- defer low-tax profit from US taxation (e.g., through contract manufacturing structures or by introducing leverage into high-tax jurisdictions)
- temporarily or permanently repatriate low-tax earnings without US taxation
- permit repatriation of high-tax profits to a US multinational despite the presence of an overall foreign loss
- provide tax-advantaged financing of US or foreign operations
- accelerate recognition of capital gains
- accelerate recognition of capital losses
More importantly, our database keeps a record of our actual experience in implementing each technology in specific foreign countries.
Implementation
Many ideas that appear promising on paper are often inapplicable in a particular country. For example, the use of commissionaires to reduce the foreign tax imposed on distribution activities in Europe has gained wide acceptance. This is not the case in many Asian countries. Knowing alternatives that have specific application in each jurisdiction is crucial to implementing any international tax reduction technique.
We have been implementing cross-border transactions, whether they be purely internal or between unrelated parties, for over fifty years. We believe our cross-border implementation experience is unparalleled among service providers. |