Friday 1 August 2014

Weekly Wrap Up: International Tax Regulation – A Law to be Inverted?

The Democrat Party’s recent proposal to restrict companies from moving abroad for tax inversion has continued to cause considerable concern amongst US companies this week. It has been proposed that companies should be banned from tax inversions in destinations where less than 50% of the company’s dealings change hands. Previously, inversions were banned where less than 20% of the company changed hands, which would place home companies in a  disadvantaged position when compared to their foreign competitors.

Whilst many could, and do, argue that this change of regulation will be a positive step towards supporting domestic business; the international business community would do well to take into consideration the important part that Foreign Direct Investment (FDI) has to play in the growth of many of our world’s economies, and in the US itself. In the light of this new regulation, we should ask: how could the US economy suffer if tax inversion is banned?

Legal infrastructure is extremely important to Foreign Direct Investment. Asian cities like Singapore and Hong Kong have had great success in attracting FDI among their Asian counterparts due to their their transparent tax and fair arbitration systems, the explanation of their almost legendary success stories.

US trade groups have traditionally had a strong influence over tax policies, thus resulting in a distorted corporate tax system. America has the highest corporate tax rate among the 34 richest members of the Organisation for Economic Co-operation and Development (OECD), yet it implements tax breaks for interested parties from machinery investment to the highly popular NASCAR race tracks. This not only disturbs the business ecosystem, but it also increases tax risks and legal costs. The current attempt to ban tax inversion might drive businesses further away from investing into the US.

Aggressive and non-transparent tax authorities are often a great deterrent for foreign investors. One recent example being India’s Tax Authority’s attempt to recollect £1.55 billion of “outstanding” tax from Vodafone for its takeover of Hong Kong-based Hutchison Whampoa’s Indian mobile unit in 2007. Whilst under the previous tax regime it was stated that Vodafone should be subjected to no tax liability as the £6.5 billion transaction took place between two overseas companies (the transactions were made through both companies’ subsidiaries in the Cayman Islands), the Authority argues that they had the jurisdiction to tax the companies in question because the transfer of stock involved an interest in the Indian company. Despite the Supreme Court’s judgement in favour of Vodafone, the Tax Authority has reattempted to over-rule the Supreme Court judgement and collect the tax. The action has posted strong threats to multinationals that have wanted to invest into India, thus further hindering an economy already suffering from stagnation of growth.

The recent spotlight being shone on the tax situation in the US creates a useful thinking opportunity about the UK tax position going forward. Arguably, the UK has a very strong legal infrastructure in place. Its access to international arbitration, adoption of Common law, and a relatively simple tax regime places it in a much more business friendly position when compared to other places in the World. It seems that US companies are increasingly choosing to turn away from their home country so as to focus on investing into regions with more transparent and simple tax regimes. The proposed US regulation has highlighted the tax issues that US businesses currently face, issues that must be addressed if that economy is going to retain its best companies, technologies and talent.

From a British perspective, however, this development of the US tax system could represent a great opportunity to the UK for Foreign Investments. By maintaining the transparency and simplicity of the UK tax system, London could position itself as an attractive location for foreign investment, and therefore look forward to a prosperous future a buoyant economy.

As always, Abchaps were busy meeting up with City advisers this week. At a lunch completely dedicated to the Social Stock Exchange, the future of impact investing was discussed and debated. A little later in the week Abchaps swapped credentials with Altitude Corporate Finance, discussing each other’s expertise in the green and life sciences spaces. In smaller groups, Abchaps continued to be busy catching up with one of the City’s most prestigious lawyers, Richard Jordan of K&L Gates, who recently returned from cycling to Paris on a Boris Bike, as well as nurturing our relationships with a number of key journalists.

Neil McPherson has been appointed as Managing Director of pensions trustee company Capital Cranfield. He will be joining from the Conference Board’s European Pensions Council where he is currently the Council Director.

Hill Hofstetter has appointed Simon Halberstam to be the head of the firm’s technology law practice in London. He was most recently head of IT law of Kingsley Napley.

Economic Refugee” - A person (or entity) who leaves their home country for a new country, in search of better prospects, opportunities and an improved working environment.

The Phoenix Fringe – Can’t make it up to Scotland for this summer’s Fringe Festival? Do not fear; the comics are also descending on London, with big names like Frankie Boyle, Al Murray and Ed Bryne all "doing their thing" on stage as well as some of the smaller names on the circuit.

Camden Beach – The sun is shining in London; those who can’t get away this summer but who may still be in need of some sand between their toes should head over to Camden, where a 900 sq metre beach has been constructed for Londoners who are confined to the concrete jungle this weekend. There will be great music to help sunbathers relax too!

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