Revenue’s tough stance on transfer pricing sparks lucrative new practice area for City leaders
A battle for talent is developing among the UK’s top firms as they strive to come up with new revenue streams in the wake of the economic meltdown.
Firms including Allen & Overy (A&O), CMS Cameron McKenna and Linklaters are actively seeking non-lawyer transfer pricing specialists to augment the services provided by their tax departments.
The trend reflects the reduction in traditional top-level tax advice, such as on cross-border M&A and complex financings.
It also reflects the leading firms’ desire to compete with the big four accountants for high-margin tax and economics advice.
“We need to adapt to the new environment and are considering ways to expand our offering,” said Vimal Tilakapala, who became co-head of A&O’s UK tax group at the start of September. Freshfields Bruckhaus Deringer stole a march in June when it became the first major UK firm to bring in a transfer pricing specialist, hiring former Grant Thornton partner Danny Beeton as a consultant.
London-based Freshfields tax partner Murray Clayson confirmed the plan was aimed partly at competing with the big four by offering tax and economics advice along with the legal aspects of “intangibles”, such as IP, patents and copyright.
“We want to offer the complete service and go head-to-head with our competitors for any transfer pricing work,” said Clayson. Transfer pricing is the pricing of assets transferred internally within an organisation. In a multinational business the price of those assets can be set by the company rather than the open market, raising a potential tax avoidance issue.
Under what is known as the ‘arm’s-length principle’ the price charged should be the same as if it were on the open market, or at ‘arm’s length’ from the company. “Working out what is or isn’t arm’s length is a major issue,” said Tilakapala. “Until now it’s almost exclusively been handled by accountants or specialist operations. Lawyers have tended to bring in specialists to advise or to refer to others. “We’re now questioning this model and have noted that Freshfields, for example, has recently brought some of this expertise in-house.”
In addition, many firms are trying to strengthen their contentious tax capabilities in response to a more aggressive line taken in recent months by HM Revenue & Customs (HMRC).
“We see our tax disputes practice as a growth area, as HMRC has become increasingly litigious and its policy seems to be to litigate where it may previously have chosen to settle,” said Tilakapala.
HMRC has signalled its intention to take a tougher line on companies that avoid tax via transfer pricing. It has also indicated an increased willingness to litigate where necessary.