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The Executive Newsletter of TheOfficialBoard

Tax Haven and Tax Heaven

By Hervé Israël, Lovells

Tax lawyers like to think that in any law there are loopholes, and if these loopholes exist, it is because God created them.

22-sept-hisraelIn international taxation, tax havens are a major loophole for sheltering the assets of the wealthy. Tax havens are vilified as the scapegoat of the financial market collapse and the source of an underground economy threatening the world stability.  Most jurisdictions have taken legal steps to fight tax evasion by individuals or companies.

Yet, recently, countries that appear to be tax shelters have joined the European Union.  Ireland, Malta and Luxembourg are among the best locations in Europe for carrying out a business activity in a low tax environment.

Freedom of establishment is embedded in the founding principle of the European Union, making it hard to limit tax shelters. States have to allow their citizens and companies to carry out business in any other EU member state. And furthermore, most of the recent court decisions have ruled in favour of the tax payers, rather than the tax administrations.

The recent financial turmoil is changing the game. Banking secrecy has been challenged, and some states have been forced to sign exchange of information agreements or face sanctions. Most have complied. Whether blessed or excommunicated by the international community, tax shelters in places like Switzerland, the Channel Islands or Lichtenstein have been listed in different categories of white, gray, etc.

In the US, the paranoia is even more forceful, as shown by the number of laws challenging the use of tax shelters. A draft law called “Stop Tax Haven Abuse Act” was introduced before the Senate by President Obama before his election. This act calls for the establishment of a blacklist of offshore secrecy jurisdictions. An alternative proposal by Senator Baucus would establish a compulsory report of offshore accounts.

Is the use of tax shelters still recommended? Our politicians should keep in mind that there will always be people and companies who try to avoid paying high taxes. Ultimately, the simplest solution for a taxpayer may be to transfer their tax residency to a tax haven rather than transferring their wealth there. For the country of origin all tax opportunities would be lost. We are witnessing an increasing number of wealthy people considering this option.

The alternative for the governments of the civilized high tax countries would therefore be to become more tax friendly. One day they might even ask themselves, should we become a tax haven?

Hervé Israël is Partner at Lovells, in Direct Tax, Indirect Tax, Tax, Tax Disputes. Lovells is one of the largest international legal practices with offices in Europe, Asia and the United States.

Filed under: Conflict Resolution, The Most Read — @ 3:50 pm on September 22, 2009
 
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International Mobility Contracts

By Philippe Thomas, Lovells

30-aout-pthomas2More than 90% of new graduates believe that they will be exposed to more geographic mobility than their parents. In a global world, international mobility and employment across borders will continue to increase, and in many cases the applicable legal terms are still evolving.

A successful international assignment should be in line with good business strategy. Drafting the appropriate legal documentation will fix the terms and help anticipate some unexpected issues.

The first question is which legal entity employs the individual for his new, peculiar, career step. For several years, the trend has been to have local contracts with the local entity subject to local law. However this is not always the best solution. For both parties, it may raise uncertainty about the real identity of the employer when instructions come from the head office. Maintaining the original employment contract may be easier and more flexible.

Is the immigration documentation ready upon the day of arrival ? Who is taking care of the immigration issues for the employee’s family and will the spouse benefit from a work permit?

Which legal rules will govern the employment relationship? In case of a mix between the law of the country of origin and local law, which rules will apply to issues of work time and safety and can the parties agree about which court will have jurisdiction in the case of a dispute?

Pensions and Coverage: Will it be possible to continue contributions to the social security regime of the country of origin and who will bear the cost? If there is no longer a contribution to the pension scheme of the country of origin, but an affiliation to the local pension scheme, will it be taken into account by application of an international treaty?

Which tax regime will apply and will there be assistance to ensure that the employee will be tax compliant in the jurisdiction he will be working in as well as in his home jurisdiction?

Is the compensation structure cost effective (special attention to specific benefits such as housing allowance, hardship allowance…)?

Is there an international assignment policy?

Is there a minimum and a maximum duration for the assignment? What are the conditions for early termination of the assignment and repatriation? Will there be any follow-up after repatriation?

Philippe Thomas is Partner at Lovells, in Employment, Pensions, Employee Share Incentives Practice. He is also the Managing Director of the Paris Office. Lovells is one of the largest international legal practices with offices in Europe, Asia and the United States.

Filed under: Conflict Resolution — @ 1:00 am on August 29, 2009
 
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Personal Data Protection

By David Taylor, Lovells

7-juillet-david3The past decade has seen a huge increase in the processing of personal data, both in terms of volume and importance. Whether for the terms and conditions of a social networking website, for a new file implemented by a local government, or for a new data breach, data protection is necessary and ubiquitous.

Often, local subsidiaries believe that creating a file or implementing software to follow up on clients and prospects or to manage employees has nothing to do with data protection. But practices involving the processing of personal data have significant implications if the same entity decides to outsource resources to an affiliate at the other end of the planet.

The main issue with the protection of personal data in a global environment is the lack of an internationally applicable standard.

Even the most harmonized system has inherent disparities. The European Union’s directives on the protection of personal data have ensured a minimum level of harmonization, but their implementation by the 27 respective Member States has led to important disparities.

Compliance with one set of local laws or undertakings might not be sufficient. European legislation prohibits the transfer of personal data to countries which are regarded as affording inadequate levels of data protection unless certain conditions are met. Since the United States are considered to be in that category, the European Commission and the US Department of Commerce (DoC) have set up a “Safe Harbor” scheme whereby US companies can subscribe to a number of data protection obligations through the DoC and obtain certification allowing them to receive data from the EU.

In addition, once they are in good standing under the Safe Harbor scheme, data will only be lawfully transferred to them from the EU if the entity sending the data has complied with its own obligations under the laws of the country in which it is established.

What are the risks? In most European countries, data protection authorities have recently seen their prerogatives extended and their budgets and staff increased. This has resulted in more investigations and a surge of penalties being imposed on major corporations. In many countries, infringement of data protection legislation can be regarded as a criminal offence and lead to administrative penalties. Sanctions have, up to now, remained relatively low. However, the heat seems to be gradually increasing, as evidenced by the forthcoming trial of four Google executives before the Milano (Italy) criminal court charged with defamation and failure to exercise control over personal data.

Clearly, there is a growing legitimacy to the current hype around data protection.


David Taylor is Partner, Intellectual Property, Technology and Media at Lovells. Lovells is one of the largest international legal practices with offices in Europe, Asia and the United States


Filed under: Conflict Resolution, Managing IT — @ 10:31 pm on July 5, 2009
 
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Dawn Raids in Europe

By Peter Citron, Lovells

One of the key tools that the European Commission uses in its fight against cartels and other anticompetitive behaviour is a dawn raid, an unannounced on-the-spot investigation. There are some hard facts emerging from recent dawn raid practices which businesses should be aware of.

8-juin-dawnraid2

Wider use of dawn raids

In 2008, the Commission opened a sector inquiry into competition in the pharmaceuticals sector and dawn raided a number of pharmaceutical companies. This is the first time that the Commission has launched a sector inquiry by means of a dawn raid. The case illustrates the Commission’s determination to use its dawn raid powers increasingly widely.

IT Searches

Inspectors have the right to examine and copy documents stored on a computer system. The inspectors bring IT experts who can use forensic search techniques and can retrieve deleted documents. The documents do not have to be on the computer system on the premises. The Commission takes the line that they are entitled to review and copy all documents which are accessible from the premises, and this can include documents which are stored on a server outside the EU.

Privilege

The recent Akzo judgment has confirmed that communications with in-house lawyers can be reviewed and copied by inspectors in an EC investigation. Only communications with independent, external, European Economic Area-qualified lawyers are protected by legal professional privilege. So, for example, advice from a US qualified lawyer, which may be privileged under US rules, can be inspected and copied by Commission officials for use in their investigation.

Sealing

If a dawn raid lasts more than one day, it is standard practice for the Commission inspectors to seal rooms and filing cabinets. It is absolutely essential for companies to ensure that these seals are not broken or tampered with. In 2008, the Commission imposed a fine of Euro 38 million on E.ON Energie AG for breaking a seal fixed by the Commission during a dawn raid.

Obstruction

The Commission has a clear policy of punishing companies severely for obstructing investigations. In its first application of its new 2006 fining guidelines, the Commission imposed an increase of 30% to Sony’s fine for obstruction of the dawn raid. This was on the grounds that a Sony employee had refused to answer oral questions asked by the Commission’s inspectors and another employee was found to have shredded documents during the inspection.

Waiting for the company legal advisors

The presence of a legal advisor is not a legal condition for the validity of the inspection, and the inspection must not be unduly delayed or impeded by awaiting the arrival of legal advisors. Inspectors may be willing to wait a maximum of 15 minutes for legal advisors to arrive.

Home searches

The Commission has the power to raid private homes in addition to business premises. In May 2007 inspectors raided the home of a director in the marine hose cartel investigation, and another inspection at private premises took place in 2008.

Further guidance?

We have developed an e-learning course on how to deal with dawn raids for you and your teams in Europe. This is an interactive screen-based course which employs a series of role plays to deliver training to a number of staff within any organisation.

Peter Citron is Head of Practice Development and Knowhow for the Competition and EU law practice area of Lovells. Lovells is one of the largest international business legal practices with offices in Europe, Asia and the United States.

Filed under: Conflict Resolution, The Most Read — @ 11:38 pm on June 8, 2009
 
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In Arbitration We Trust

By Jean-Georges Betto, Lovells

It is commonplace to say that arbitration is the preferred mechanism to resolve international commercial disputes. The growing number and diversity of cases submitted to arbitration together with the use of arbitration clauses in the vast majority of international contracts are particularly convincing evidence of this current trend.

The reasons why international companies keep turning away from national court systems are equally well-known. Arbitration is the most appropriate mechanism of dispute resolution for complex international matters involving a high level of expertise and aspects of foreign law together with a large number of documents to be analysed and handled as exhibits in the course of the arbitration proceedings.

For the past few decades, arbitration has gained strength as a private system able to fulfil the parties’ expectations and needs and strike the most perfect combination between flexibility and efficiency in the resolution of disputes.

Arbitration has evolved and expanded. While it has always been praised for granting parties a great deal of autonomy in the administration of their cases, it is the recent phenomenon of institutionalisation which has contributed to making it so attractive and successful.

Indeed, major arbitration institutions such as the International Chamber of Commerce (ICC), the London Court of International Arbitration (LCIA), International Centre for Settlement of Investment Disputes (ICSID) or the American Arbitration Association (AAA), which handle thousands of new cases every year, have developed a sophisticated set of rules that guarantee a rational, fair and efficient treatment of international disputes. This has contributed to reinforce the confidence placed in the process, arbitration no longer being perceived as an obscure or dubious means of dispute settlement.

Despite this success, some practitioners have recently voiced concerns that arbitration may be on the decline. Among the reasons often cited to support these views are (i) the progressive disappearance of confidentiality motivated by an accrued transparency in cases involving important “public interest” and (ii) the length and rising costs associated to the proceedings, due to the use of increasingly complex procedures sometimes based on national court procedures (e.g. discovery process imported from US litigation model).

Arbitration today faces important challenges which deserve careful consideration. In particular, it is of fundamental importance that a creative approach to the needs of the parties is adopted by providing tailor-made and adapted dispute settlement tools, rather than following the path of imitating other domestic court systems.

The relative drawbacks do not provide sufficient grounds for pessimistic or absolute predictions about the future of arbitration. Rather, some recent moves provide encouraging signs of a strong dedication to still offer innovative and attractive solutions to international companies.

The recent release of reports and guidelines aiming at controlling time and costs and simplifying procedures (such as the 2007 Report of the Commission on Arbitration) are but a few examples of the strong commitment to constantly respond to the concerns of those that are involved in arbitration proceedings.

Jean-Georges Betto is Partner at Lovells. Lovells is one of the largest international business legal practices, with over three thousand people operating from 27 offices in Europe, Asia and the United States.


Filed under: Conflict Resolution — @ 6:00 pm on May 5, 2009
 
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