In a nutshell
“Tax touches virtually every aspect of the economy,” says Leslie Samuels, senior counsel at Cleary Gottlieb. Accordingly, tax law encompasses a variety of activities, from transactional support and structuring to tax planning and tax controversy.
Working alongside corporate lawyers, tax attorneys ensure that transactions are as tax-efficient as possible, whether they're centered on public or private M&A, capital markets, investment funds (private equity, REITs and mutual funds), joint ventures or partnerships. Tax planning advice requires familiarity with all relevant domestic and international laws, and it is essential to have an understanding of clients’ overall objectives and the structuring of their businesses.
Tax controversy is more of an independent category, covering a range of contentious tax issues. These include tax-based litigation, IRS examinations and tax shelter investigations. Disputes are usually resolved at the administrative level. Transfer pricing is also grouped with tax controversy.
What lawyers do
- Advise clients on the tax elements of transactions.
- Analyze cases and regulations to develop a real understanding of the tax implications of transaction structures. Findings are summarized as memoranda or given through direct counseling.
- Negotiate terms dealing with the tax aspects of transactions.
- Draft agreements, especially for M&A and joint ventures, which are particularly tax intensive. An important element is the drafting of tax disclosures.
- Liaise with other non-tax lawyers and clients to ensure the smooth running of transactions.
- If working in tax controversy, negotiate with the IRS, respond to IRS questions, and draft memoranda and briefs.
Realities of the job
- Tax lawyers need to keep up with all new developments in both the law and the economy as a whole. This is especially important for a young lawyer, who needs to build expertise. The law is always changing.
- By keeping up to date, tax lawyers can become real experts and even innovators within the legal landscape. With experience, they may be able to offer a solution to a tax issue that has previously been unsolvable. For example, the tax lawyer will produce a new financial instrument that becomes accepted by the market. This will sometimes prompt the government to review its regulations.
- It’s vital to have an affinity for reading case law and regulations, as this is how juniors will spend some of their time. They must be able to rationalize their findings and summarize them accurately.
- Tax lawyers must have full confidence in their advice. The research must be methodical and complete.
- In order to ensure that commercial transactions are as tax efficient as possible, tax practices work closely with corporate departments and understand the non-tax issues that drive transactions. A successful tax department can be a useful marketing tool for firms looking to attract new clients.
- Tax lawyers need to express themselves clearly and concisely. Solid technical knowledge is essential, as is the ability to explain technical information to non-experts.
- Excellent interpersonal skills are a must. Tax controversy can sometimes involve liaising with the IRS, and it is important that lawyers be upfront and straight-talking. They may also work with international clients, so cultural awareness is important.
- Lawyers have the chance to work on a variety of matters, including charity and pro bono. They are expected to comment on proposed regulations and may also give tutorials to colleagues and clients.
- Tax lawyers sometimes break up their career by spending time working for the government, notably the IRS.
Current issues & advice
- President Joe Biden’s tax initiatives aimed at the wealthiest Americans continues. At the end of 2021, tax for individuals with an income of $452,700 and over, and for married couples whose joint income is over $509,300, increased from 37% to 39.6%. In addition, capital gains tax increased for people earning over $1 million from 20% to 39.6%. Corporate tax also rose from 7% to 28%. In March of 2022, Biden proposed further taxes on America’s rich. The administration wants a 20% minimum tax on households worth more than $100 million. Biden stated that “in a typical year, billionaires…pay just 8% of their total realized and unrealized income in taxes,” while teachers and firefighters “can pay double that tax rate.”
- The new tax amendments coincide with tighter controls on profit shifting, and an end to tax breaks for environmentally polluting energy companies. This will be further offset by $1.2 new tax credits and benefits aimed at encouraging green energy tech, alongside expanding access to low-income housing and childcare.
- As part of Biden’s $1.9 trillion American Rescue Plan Act, households with an income of less than $25,000 are expected to see their income increase by more than 20% due to the new legislation.
- However, not all parts of the rescue plan affect big businesses. A new clause in the Act means that digital payments services such as PayPal or Venmo are required to report payments of more than $600 per year to the IRS. Often used as a means of payments for goods and services for small businesses, entrepreneurs and contractors, the new rule will see people who receive more than $600 a year via one of these digital payment services receive a 1099-K form in 2023. The form comes from the payment services being used and indicates what they’ve reported on the recipient’s behalf to the IRS.
- The Organization for Economic Co-operation and Development (OECD) has also proposed widespread reforms to international taxation. These include expanding the criteria for who has a taxable presence, setting minimum global taxation levels, and inventing a new class of factors and assets to expand who and what can be taxed. These are scheduled to come into effect from 2023. As part of the reforms, the OECD is focusing on raising tax revenue from digital businesses based on the location of users. There have been concerns that this unilateral tax would fall disproportionately on large US tech and internet firms.
- The OECD global tax is set for a global minimum rate of 15% this year. However, the US, which was instrumental in securing the OECD deal, is struggling to get the proposal through Congress. The EU meanwhile, is pushing ahead with the proposal, which received support from 137 countries. However, at the time of writing the way it rolls out is still unknown.
- IRS has made several adjustments for the 2022 tax year. These adjustments are made annually to avoid what’s known as ‘bracket creep.’ According to Annuity.org, bracket creep occurs when “taxpayers end up being taxed in higher brackets due to inflation as opposed to a real increase in income.” This year, due to record inflation, the inflation adjustments are bigger than usual, up by around 3% as compared to the c. 1% for the previous tax year.
- In 2020, the European Commission Executive Vice President Margrethe Vestager said the EU will continue with its new digital tax, despite the US’s effort to block it. The new tax is an attempt to prevent large tech companies from minimizing the tax they pay in Europe through various avoidance measures. Back in 2016, the European Commission ordered Apple to pay Ireland €13 billion in back-taxes, the largest corporate tax fine in history. Fast-forward to 2020, and the European General Court ruled in Apple’s favor, though the Commission will appeal the ruling, arguing that the court made “several errors of law” in its ruling.
- In 2022, the following countries – American Samoa, Fiji, Guam, Palau, Panama, Samoa, Trinidad and Tobago, US Virgin Islands and Vanuatu – were still on the EU’s “list of non-cooperative jurisdictions for tax purposes.” However, Oxfam has criticized the EU for failing to prevent tax havens. A press release by Oxfam in February 2022, makes note of the allegation in the Pandora Papers and leaks about billions of dollars of criminal assets in Swiss banks among others as failing to make “a dent in EU rules on havens. The updated list does not challenge the persistent weaknesses of the process which exempts EU tax havens, and leaves secrecy jurisdictions, like Switzerland and the US, and zero tax rate countries, like the Cayman Islands, off the hook.”
- Globally, there has been more cooperation regarding tax havens and information exchange to address the role of businesses in eroding countries’ tax bases. So far more than 100 jurisdictions have Foreign Account Tax Compliance Act agreements with the IRS, which has helped create greater lines of communication between the IRS and foreign financial firms. The IRS's offshore voluntary disclosure program allows overseas account holders to rectify any tax shortcomings, thus warding off the threat of penalty action.
What top tax lawyers advise
Leslie Samuels, senior counsel, Cleary Gottlieb: “It’s important to keep your eyes and ears open to make sure you understand everything about the transaction so your advice is the most effective it can be.”
“You don’t have to be a math genius to be a very successful tax lawyer. You’re dealing more with concepts. We don’t prepare tax returns, and we certainly don’t get busy before the tax filing dates.”
“To the extent that tax lawyers think they’re just servicing the corporate lawyers, it’s a total mistake. The work is so much broader than that.”
“Keeping up with developments is exciting and demanding. There’s so much you have to keep up with every day! But that’s how you become an expert, which is one of the attractive aspects to practicing tax law. You really can become the go-to person who knows everything about topic X.”
Basil Zirinis, partner, Sullivan & Cromwell:
“Because it's such a human area of the law, it can be extremely emotional. Do you leave assets outright? Do you trust your family? There is no right answer. When families are fighting they want you to help them settle it, but given the emotions and family history it can very difficult. It's not about 'right' or 'wrong' family members, it's just that there is often no clear or perfectly right answer.”
“Students should definitely take as many tax courses as they can in law school, including corporate tax. The more of a background they have in tax, the more helpful it will be.”
“The broader the courses you take, the better off you'll be. We do everything from corporate law to litigation in our practice – so the broadest possible academic experience is important.”
“An international perspective on the world in general is helpful, especially because the explosion of wealth is global. It's not just about the US and Europe any more. Wealth is increasingly mobile with China, Latin America, etc. all involved. That's where the most interesting work will ultimately be for young lawyers, so language skills are extremely important.”