It’s said that nothing in life is certain except death and taxes. Yet in an increasingly fast-changing tax environment, even that adage may no longer hold true.

Tax lawyers operate in a dynamic space, their practice squeezed between changing government regulation on one side and the commercial realities on the other.

The need to negotiate these challenges has led tax practices to take some innovative approaches to service delivery.

Upping the ante

The tax regime in Australia is constantly changing, with practices racing to keep up to date with new legislation, according to Allens tax practice leader Martin Fry.

“The biggest challenge we’re facing at the moment is the quantity of tax reform that has been introduced just this year alone, and what we can expect by way of new law in the next 12 to 18 months,” he says.

“There is a lot of volume – it’s changing and the changes are quite far-reaching.”

Apart from domestic reform, there has also been an increasing emphasis on international tax enforcement, according to William Thompson, head of the tax practice at Minter Ellison.

“Particularly over the past two years we are doing a lot of work in that area [of international tax], especially with corporates in terms of managing their tax risk,” he says.

Mr Fry agrees, pointing to last October’s G20 summit as a catalyst for further enforcement. At the G20 in Brisbane in early October, member nations agreed to a two-year reform program to combat tax avoidance by major multinationals.

“Almost all of our clients are international clients and the whole international tax landscape since the G20 conference has ramped up significantly,” he says.

“It’s impacting on business practices across different jurisdictions by authorities working together, which is a development we have never seen before.”

The Australian Taxation Office (ATO) has also followed this trend, taking a more proactive approach to conflicts and seeking to resolve disputes at an early stage. Minter Ellison frequently acts for the ATO on a range of matters, according to Mr Thompson.

“This has been a big change at the ATO. It’s not so much a willingness to take matters to court – although in appropriate cases they will do that – but it’s the willingness of the ATO to engage much earlier now than it did in the past in understanding transactional issues and resolving disputes,” he says.

According to Mr Fry, the ATO has begun to focus on alternative dispute resolution, including mediation and arbitration.

“If an issue is proving difficult between the client and the tax office, the client is realising it’s best for everybody if it’s resolved in a consensual manner before it goes to court,” he says.

Nonetheless, the ATO is not afraid to litigate where necessary, he believes.

“The commissioner of taxation has indicated he is willing and prepared to bring matters to court,” he says.

As a consequence of these raised stakes, clients are increasingly requesting a risk assessment from their lawyers. This involves an evaluation of tax risks but also of the potential impact on reputation, the likelihood of success and an assessment of uncertainty.

“Usually you’re dealing with a situation where the law is uncertain or new – you’re seeking to help the client understand how we can quantify the uncertainty,” Mr Fry says.

Mr Thompson believes clients are looking to bring certainty to their transactions since “the earlier certainty can be obtained, the better”.

“Tax risk is one of the perils of doing business. Company management and boards of directors are very interested in managing that,” he says.

Changing tack

Increased regulation has clients consulting their lawyers more closely on taxation issues – and as clients expect more from their lawyers, firms are shaping their practices to adapt.

“It means practices are manning up,” Mr Fry says. “It means more funding for us so we have the capacity to manage that process.”

He believes tax practices are growing their staff counts and deepening their tax expertise.

“I don’t think there’s any doubt that tax practices are both growing, and looking to grow,” he says. “It can be quite a document-intensive process, so it’s necessary to have the right number of lawyers available to carry out the task.”

In particular, he believes firms are looking for lawyers who can keep up with the rapid pace of legislative reform.

“You need people to be right at the sharp end of the law because a lot of it is under review and has been amended,” he says.

Some firms have responded to the rise in tax dispute resolution by bringing expert litigators into the tax team. At Minter Ellison, the firm’s tax practice has a dedicated ‘tax controversy’ team, headed up by Carmen McElwain, Chris Kinsella and Peter Poulos.

“A specific benefit of that is all the experience in conducting those [litigious] cases – particularly around the evidence required – sits within our tax practice,” Mr Thompson says.

“So our tax advisory practice accumulates all the learnings we get on the tax litigation and disputes side, and we can bring that experience to the advice we’re giving to clients when they’re entering into transactions.”

The practice also has a number of accountants – a twist in the trend of major accounting firms bringing on legal teams.

“Accountants in the taxation practice give us the ability to perform tax computations for clients and to do tax consolidation and capitalisation calculations. We also have a tax filing and compliance arm to our practice as well,” Mr Thompson says.

Fight to the top

Major corporate clients and high-net worth individuals are highly sought-after as clients – and competition between firms is fierce.

In Mr Fry’s view, the rise in global enforcement has given global firms an edge. With offices throughout the AsiaPacific region, as well as an alliance with global giant Linklaters, Mr Fry believes Allens can draw on a large transnational knowledge base.

“If you want to be competitive in this space, you need the ability to bring both an Australian perspective and an international perspective,” he says.

On the other hand, Mr Thompson suggests Minter Ellison – a national firm with a presence in some overseas jurisdictions – has an edge due to its ‘independence’, both from tax advisories or other global law firm networks.

“Many of the issues under review for corporates will be matters on which other advisers have advised,” he says. “We bring an independent perspective to the assessment of the client risk.”

Another threat to firms is the entrance of accounting firms into the legal space, particularly in tax. Big four accounting player PwC recently announced plans to build a legal team of more than 100 lawyers and between 20 and 25 partners. In August, Deloitte became the first accounting firm to instruct a client in a High Court matter in a showdown between AusNet and the ATO.

CBA legal analyst Marc Totaro says while accounting firms are pushing into legal, law firms have been reluctant to push back.

“We’ve seen some pretty bold statements from a couple of the big accounting firms around how large they want their legal offering to be, but we’re not seeing the same responses from the top legal firms,” he says.

“They’re not talking around diversifying their core offerings as well, so I think there’s a real challenge there for the legal industry as the larger firms provide an additional source of competition.”

With its multidisciplinary practice, Minter Ellison could be an exception to this trend. Another example is the alliance between Herbert Smith Freehills and accounting practice Greenwoods. Yet Mr Thompson suggests law firms have been slow to jump on the bandwagon.

“For law firms, there are a number of barriers to entry,” he says. “We’ve been doing this for a number of years but it hasn’t been followed by other lawyers.”

Looking ahead

In coming months, tax practices are likely to see “more of the same”, according to Mr Thompson – meaning rapid change and high enforcement.

“I think there’s going to be a continuing focus by the ATO as the regulator on international profit-shifting type transactions,” he says.

“I think we’re going to see an ongoing focus from the private sector – both large corporates and high-net groups – on understanding their tax risk in their transactions and structures, and making sure they have the ability to respond to any issues.” Mr Fry suggests international enforcement will continue to be a major factor in the Australian system, while tax reform is likely to continue unabated.

In his experience, tax legislation is heavily dictated by the government of the day – but Prime Minister Turnbull has yet to show his hand.

“It goes in phases. During the Costello years, we had some significant reforms of corporate tax. Before that, in the Paul Keating years, we had significant reforms relating to dividends,” he says.

“We have to see what the Turnbull Government will do.”