ALB presents the inaugural guide to Asia’s leading tax practices
Asia’s tax law landscape has arguably never been as diverse. Never before has competition for a share of tax advisory work across the region been as hotly contested. Full-service international and domestic law firms and the fast-emerging cache of sophisticated boutique and specialist law firms are facing off for the same work – and often for the same clients.
But the advisory side of the practice area is arguably much more complex than any other. Apart from the competitive pressures described above, law firms who operate in this space also have the ‘Big Four’ accounting firms to contend with; and in some jurisdictions it is the likes of KPMG, Deloitte, Ernst & Young and PwC who cast the most conspicuous shadows over the service arena.
But the good news for the region’s tax lawyers is that the legal and advisory hierarchies are far from set in stone. In fact all types of work, and seemingly many clients, are up for grabs.
The financial crisis, coupled with the increasing pace of legislative change across the region and the continuing calls for countries to internationalise their tax regimes, are factors in this regard. At the same time, clients’ expectations are changing. In an environment where budgets for the procurement of external professional services have been cut at most companies, it comes as no surprise that most respondents indicated that they now are more likely to handle tax-related issues in-house than they were 18 months ago. But when they do need outside advice, in-house lawyers, department heads, executives and decision-makers at Asian companies are looking for lawyers to play a much broader role than just that of an advocate or adviser.
Those firms listed across the page are ALB’s leading tax law firms that have responded best to this change in client attitudes.
State of the market
Although the financial crisis effectively dried up available funding and was responsible for reducing transactional levels to modest rates when compared to those of 2006 and 2007, many of Asia’s companies weathered the economic storms of the past 18 months in a much better fashion than their counterparts in the US and Europe. Despite Asia being a relative safe haven during this period, many companies in the region turned their attention away from making acquisitions and towards getting their own house in order. For a great number this involved some level of corporate restructuring and a re-evaluation of their tax positions.
This upturn in restructuring came as something of a godsend for tax lawyers across Asia. Not only was the work on offer here commensurate to that which they had derived from the mega-M&A and capital markets deals, but in some cases was far outstripping it. But this type of work wasn’t the only thing keeping the region’s tax lawyers busy during the downturn. Just as companies have used the downturn to focus on coming out of the recession in a stronger position, so too have regulators across the region used this downtime to align their countries’ tax law regimes with international standards. It’s an opportunity to replenish their coffers with tax-derived revenues that they may have chosen to forego in calmer economic times. Whatever the rationale behind the regulatory changes we have witnessed over the last 18 months, tax lawyers have thrived.
The ambiguity that has accompanied tax law revisions in the PRC, income tax amendments in Indonesia, or tax increases in Japan and Korea has generated a flow of instructions for lawyers there, according to our survey respondents. The introduction and development of transfer pricing (TP) and advance pricing arrangements (APAs) in other jurisdictions has proved equally as fruitful. This is not to mention the marked increase in tax disputes work and litigation which respondents report is reaching record highs, and is only expected to increase in the year ahead.
What the clients want
Tax law is an area of practice that presents a unique set of challenges for all concerned – something that is borne out in ALB’s in-depth survey of in-house lawyers and tax professionals across the region. While a high number of in-house lawyers have noted that they are handling more work, they are still looking to outsource work in select areas, but are even more selective in respect of who they choose to use.
Law firms seeking to pick up a slice of this advisory work face more hurdles in tax law than in any other area of practice, not least of all because of the presence of accounting firms. In this regard, the usual stock-standard requirements that external lawyers be ‘close to the business’ and ‘commercially savvy’ are more prerequisites for working with law firms, as opposed to one of the ‘Big Four’.
However, cost flexibility was cited as the most pressing issue. “We really want law firms in this area to be offering something unique to us, to be able to come to us and show us how using them for tax advice is a better option that using an accounting firm,” said one respondent, who is the general counsel and tax department head at a Hong Kong-based company. “Being flexible on costs should not be the ace in your hand if you’re a law firm, nor should it be passed off as a charitable move… it’s compulsory when it comes to tax advice and I’m surprised by the number of law firms out there who stand their ground on costs issues and refuse to budge.”
Others also wanted their external legal advisors to leverage the experience within their respective firms more wisely. One survey respondent, who was previously head of a US law firm’s Asia tax practice, said “I’ve always thought that the advantage that law firms have over the Big Four is that they have access to resources that accountancy firms do not… here you can bring in your firm’s regulatory, capital markets, M&A and insurance experience to help shed light on a client’s problems and give them a really comprehensive picture of the problems confronting them. But I’m surprised by how often this is not done by law firms, the international players as well as the smaller firms around.”
This respondent goes on to note that structure and culture of some law firms often prevents this from happening. “At some law firms, and this was the case where I worked, the tax guys were keen to protect their clients from the banking & finance and corporate guys. Similarly the banking & finance and corporate teams were reluctant to get involved because there was little chance of any sustained work coming out of it for them… that’s the wrong attitude to have, given that the competition [the Big Four] are better in this area, and many others.”
A number of respondents also bemoaned what they felt was their external lawyers’ lack of understanding when it came to the very basics of their business. “I once used a lawyer who, while having a very good command of all the relevant laws, rulings and cases, had very little knowledge of the accounting methods, structures and operations of my company,” said one respondent.
“It is crucial that when we use external lawyers they are able to assess our tax issues at both a broad and specific level,” said another. “Tell me what I need to know about my legal requirements in this particular situation, but also how this connects to my operations in another part of the world or that of my subsidiaries across the border … this is how the law firms can offer us something that accounting firms cannot.”
Interestingly, seminars and briefings, informative newsletters and succinct regulatory updates were all considered by respondents to also fit into this category. “Some law firms do this really well,” said one in-house lawyer. “They realise that I’ll sometimes miss important developments, and will provide an update through one means or another. The really effective ones are those that are light on PR and heavy on facts while being succinct. If I receive something like this through email or seminars and it’s relevant to my business, there is a good chance I’ll pick up the phone and request further information.”
‘Big Four’ vs the law
The consensus, according to ALB’s research, is that accounting firms have a lead over law firms in a number of areas, the most important of which was noted as manpower. With the exception of some international law firms, the tax practice group at most domestic law firms across the region are dwarfed substantially by their counterparts at accountancy firms. “In some jurisdictions the resources at the disposal of Big Four accountancy firms – and some smaller ones – greatly outnumber that at law firms,” said one respondent. “While it would be wrong to say that this implies some qualitative difference between the two, it does account for a lot when we are looking at heavy-duty work in the area.”
The manpower advantage also gives accountancy firms an edge when it comes to specialisation. “A tax professional working at a Big Four firm will more often than not work as part of a group that specialises in a particular area of tax,” an in-house lawyer from Hong Kong notes. “The work they do here is very niche and tends to be very narrow. But at law firms, mostly owing to lack of resources, lawyers are often trained as tax generalists and will contribute their tax expertise as part of a project team where various legal and tax issues are presented… this puts law firms at a distinct disadvantage when specialist advice is required.”
|ALB is proud to present the inaugural guide to Asia’s leading tax practices. The results herein are the culmination of three months of extensive research with numerous in-house legal counsel, tax advisors, industry specialists and private-practice lawyers. Respondents were asked to nominate Asia’s leading tax law firms and lawyers based on their industry reputation and work. Submissions made as part of the ALB Law Awards series were also considered. As the survey failed to yield any meaningful results in Thailand, this jurisdiction is excluded from the results. Accountancy and auditing firms were not included as part of this survey.
This situation, of course, does give law firms the upper hand on mega-M&A, capital markets and project finance deals. According to in-house lawyers surveyed as part of this report, nine out of 10 said they would hire a law firm to advise on the tax implications of the deal, while only four out of 10 said they would hire an accounting firm to look into tax issues.
“On the big deals you need lawyers with corporate grounding providing tax advice,” said one respondent. “Ideally, one would like to have the lawyers and the accounting firms in the same room, working together.”
According to lawyers ALB interviewed as part of this survey, there is plenty of work to go around for tax firms and tax law firms. And while many see the two as directly competing with each other in some areas, in many others the two often already do cooperate. But it's really only the larger law firms – whose tax departments, in part, are fed by their corporate practice groups – who have this luxury. At the other end of the spectrum are the niche players who stand to lose more from an outright battle with the Big Four and others.
All of the firms listed as our leading tax firms in Asia for 2010 have had some level of success in staving off the challenge of the Big Four in their respective jurisdictions. All were mentioned by our survey respondents as examples of why law firms will once again become the dominant players in the area.
But there are other reasons why they were voted as the leading tax law practices in the region: these firms have best been able to turn clients’ changes in attitude to their advantage. In an environment where the routine work is no longer up for grabs and only the most complex or specialist work will be outsourced, it is those law firms who pitch their tax skills in these areas that will succeed. ALB