The global tax planning debate: How relevant is it to cross border real estate investors?

The tax environment in Europe has changed radically over the past 2 years.  Previously the tax affairs of large organisations were of interest to a few non-government organisations (NGOs) and analysts. Now it’s become a matter of public interest with the press and politicians happy to call out the perceived amorality of companies conducting completely legal planning.

I’m now also seeing harder edged impacts from this as governments and international bodies introduce law changes targeting tax avoidance and local tax authorities take a more aggressive stance on enforcement with a particular focus on the use of offshore structures.

International real estate investors are exposed here given the relatively low amounts of tax they pay and their historic use of offshore structures and so called base erosion” planning such as high levels of internal debt.

There are three key challenges for international investors here:

  1. Are you comfortable that the approach taken on tax planning is consistent with your broader outlook on social responsibility and would be acceptable to key stakeholders?
  2. How sustainable are the tax structures you currently have in place?
  3. How well would you withstand a determined challenge from a tax authority on the effectiveness of any offshore tax structures?

I believe that the best response to these challenges involves:

  1. A clear appreciation of the tax risk environment at senior levels coupled with appropriate policies and governance arrangements to ensure proper alignment on tax planning. Choosing to pay more tax isn’t necessarily the answer but it’s important to appreciate the consequences of your actions.
  2. An assessment of where you currently stand in terms of the structures used and how well managed they are. Levels of risk will ultimately be dependent on the nature of investments made and the business model in place.  There is no one size fits all answer here.
  3. Having a framework of procedures, controls and reporting to support the management of tax structures and allow a robust defence on any tax authority challenge. . The enforcement activity in particular should be driving a heightened awareness of the need for a disciplined approach to managing structures.

How far are you willing to go to defend your organisations’ tax structure or that of your portfolio companies in the face of public criticism? How robustly could you deflect a tax authority audit of key investments? Share your thoughts below or, if you’d like to discuss an issue more confidentially, feel free to schedule a meeting.

Angus Johnston | Partner, Real Estate Tax Team
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