The View From a Global Tax Chief: EY’s Kate Barton (Podcast)

Kate Barton has been navigating unprecedented changes in tax systems around the world since becoming EY’s global vice chair for tax and legal services in early 2018.

Trade wars and Brexit are roiling markets and expectations, and countries are scrambling for their share of corporate revenue while trying to transform their tax regimes for the digital-commerce age.

The OECD aims for consensus by 2020 on its project to modernize the tax system, but as Barton points out, “these are, in fact, guidelines, and then 140 countries have to read these and then legislate their own country legislation.” That’s interesting, she says, especially “in a world right now where we seem to be a little more nationalistic.”

Talking Tax host Amanda Iacone talked with Barton about all of that and more, including EY’s legal managed services business and diversity.

Listen to their conversation on the latest episode of Talking Tax.

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Transcript

Amanda: From Washington, this is Talking Tax. I’m your host, Amanda Iacone.

So what’s on the minds of Ernst and Young’s tax clients around the world? Oh you know…just Brexit, digital taxation, trade wars. This week I caught up with Kate Barton who is EY’s global vice chair for tax and legal services. We spoke about the rapid pace of tax law changes around the world and what it all means for the firm’s clients. We also spoke about the firm’s plans for its fast-growing legal managed services. And Kate talked about diversity at the firm and her approach to hiring and supporting women’s career goals.

I’d like to welcome Kate Barton, EY’s global vice chair for tax. Thanks for joining me today, Kate.

Kate: It’s wonderful to be with you, Amanda.

Amanda: How has your typical work day changed over the past year or so? There’s been a lot happening on the tax front. I just wonder, has the nature of your meetings changed? Has your travel schedule changed a lot? Are your clients demanding different things of you? If you look back over the last year or two, how has your day changed?

Kate: Sure. And some of this is because my role at EY has changed also. I used to run the America’s tax practice, which was a smaller business than what I’m running right now. Now I’m the global vice chair of tax for EY. So I really have as my responsibility over a $10 billion business, 57,000 people. So, you know, my role in geography has expanded. I’m finding that personally I’m spending a lot more time in airplanes going to big client pitches, pursuits. I’m helping our local practices around the world be joined up--executing on a single global tax strategy, which is so important. Our clients are really demanding that we serve them seamlessly all through the world. And that’s what they’re looking for.

You know, tax reform and all of the changes in the law creates a lot of uncertainty. And our clients want to meet with people that are in the know. They want to hear perspectives. They expect us to bring insights from other companies and comparable industries. And so the demand for our service is at really an all-time high. The future is bright for tax professionals, but it’s difficult for businesses to navigate through this geopolitical uncertainty. And they’re looking for folks they can trust just for comfort in some instances. You know, just help us understand you’re looking at this. So it’s an interesting time.

Amanda: What are your clients’ biggest concerns? I mean, is there one or two questions you’re getting over and over again that they’re really focused on or struggling with?

Kate: Well, there’s a lot right now that companies are focused on. I think they continue to look at the macroeconomic trend. Everybody wants to know everyone’s predictions. Is the U.S. economy going to go into a recession? What would cause that? What would happen if that happens, from a tax perspective? What’s going to happen in the 2020 election in the United States? That’s important. Everybody’s trying to predict how that might come out. And so that’s one. And then, you know, companies are operating globally.

So you’ve got the U.S., but everyone wants to understand the U.S.-China trade flow that has a big impact on both countries, economies, and really the global economy. And so is this deal going to go forward? Is it enough to declare a victory for both sides and hopefully deal with some of the deeper issues in the days to come.

People are asking us about Brexit. What’s happening there? They want to understand: does Jeremy Corbin have a chance to get into office? If so, what are his tax policies? And so many other countries around the world are having changes. We have major reform in Mexico. Pretty decent-sized reform in India. Other countries are looking at reforms on the tax side as well. So we just haven’t seen this kind of level of tax change in, really, my lifetime. I just don’t think we’ve ever seen the pace of legislative change.

Amanda: That’s really interesting. Any idea what’s driving that? I mean the pace of the change.

Kate: Yeah, I do. We did an interesting study at EY where one out of three elected officials have changed office in the last three years. So that’s kind of interesting. I don’t think that we’ve seen that many heads of a country—like the president, prime minister, or whoever is the elected official in the country—one out of three have changed. And one of the things that we’ve observed is the first thing they do is they go to their tax code for their country and they basically change it so that they can fulfill their campaign promises. And so it’s causing a lot of change.

Clearly the 2015 BEPS 1.0 has also been an initiative that many countries are trying to implement around the world. Because remember the OECD issues these papers and BEPS stands for base erosion and profit [shifting]. They issued a paper which was guidelines and, you know, 140 [countries] around the world are looking to adopt the rules that came out of BEPS 1.0. As you probably know, there’s another effort that’s looming right now where it’s more focused on the digital world, and that could cause more legislative changes in the days ahead.

Amanda: Well, since you mentioned it, let’s talk about the OECD’s project on digital taxation. The focus of that debate so far has really been on the tech giants like Google and Facebook and Amazon. But this could have impact on any multinational company, right? So what are your clients asking about in regards to that and what are their concerns at this point?

Kate: Right. Well what we’re calling BEPS 2.0 is the efforts that are underway. There’s a lot of work happening in Paris, but really around the globe. Because many companies are visiting the OECD and trying to get their voice heard as really the OECD takes a look at an issue of how do we tax companies—all companies—in a digital world that we live in. So they felt like great strides were made with BEPS 1.0, but we really need a honed-in project on the world of digital taxation as companies look to get their products, goods, and services into different markets. What should be the return for markets? Who should have the taxing rights is at issue. And then, if you do get the taxing rights, how much profit should be allocated to the marketing and tangibles? And really the distribution of one’s products or digital services?

So that’s kind of what’s at issue. And there’s two pillars. If you want to get a little more technical on BEPS 2.0. Pillar 1 really goes to who should have the taxing rights and then the transfer pricing or profit allocations associated with those taxing rights. And at the heart of it is they want to give more rights to the country that has the big consumer bases. And even if a company doesn’t have physical presence, they could arguably have an economic presence and be subject to tax in that country. And then what’s the right rate of return for that distribution activity? And then the second pillar is going to deal with global minimum taxes. You’ve probably heard that in the U.S. tax reform for corporations, there’s these concepts that really are global minimum taxes. They’re called GILTI and the BEAT tax. They kind of go hand in hand in a clever way.

And so those are being looked at globally, should there be a global mandate to sort of follow what happened in the United States. So those are the big issues. A lot of these, especially around the transfer pricing rules, are big departures from the arm’s-length standard. This would be quite a big change in the global standard of taxation. Much to watch and everybody has a point of view. The OECD is trying to sort through this and come up with a global standard. And so that’s where we’re all avidly looking at and very conscious of.

Amanda: Do you think that we’ll get any clarity from the OECD next year? I know they’re aiming for next year, but do you think we’ll actually see it?

Kate: Well, I feel like they’re working really hard. The white paper that came out on Pillar 1 was pretty thorough, and our clients are digesting that now. They’ve told us that sometime in November we’ll get the draft paper for Pillar 2. If that comes forward in that time frame, that would probably be enough time for them to hit each of their objectives. So they’re working against a timeline and they seem to be going very quickly.

I would just remind you, though, that these are in fact guidelines, and then 140 countries have to read these and then legislate their own country legislation that would mirror this. And that’s where I find it always interesting. In a world right now where we seem to be a little more nationalistic, it’s hard to imagine that everybody will interpret the same guidelines in the same way. So, again, that’s the issue with how this works. So it’ll be interesting to see what exactly happens.

Amanda: Well, you mentioned GILTI and BEAT. I wonder in terms of the U.S.’s 2017 tax reform law, what are the outstanding questions? What are your clients still wading through and how is that rippling through other countries?

Kate: I think our clients are still waiting for additional regulation packages to come out. There is still some unanswered questions. I mean, this law—the 2017 legislation—was probably the fastest drafted legislation we’ve seen in…ever. You know, I just don’t think we’ve seen something this complex rolled out that was drafted in such a short period of time. And normally legislation in the U.S. of this magnitude, what would have quickly followed was what we call a tax technical corrections bill. And it did not come out. I mean, it was because that needs bipartisan endorsement and that just was not available in the current situation that we’re living in. So really you had to rely on regulations and there are thousands and thousands of pages of regulations that have come out--a huge chunk in June, some in the latter part of the summer this year.

And we’re still waiting on some reg packages that are pretty important that are coming out. So we still really haven’t seen the full effect of U.S. tax reform because companies put on hold what they need to do to their supply chains to make sure that they’re fully complying, because they needed the regulations in order to act. I think there’s still much more to come in the United States and globally as a result. All these businesses for the most part are global in nature. So they need to flow this through in its entirety through their supply chain. More to come there. Other countries really like what happened in U.S. reform.

I was in India last week and they too have reduced their corporate tax rates sort of following the U.S. rates. So the U.S. rates dropped down, as you know, to 21% in India. They’ve gone with the 25% rate with the special regime for manufacturing in India. And so I think that’s interesting and that’s not dissimilar in a way to our FDII rules, which are foreign direct investment. And so that also gives them a tax break if you’re manufacturing in the U.S. and exporting. So I think there’s a lot of countries that are in fact looking at the U.S. reform as inspiration for their own countries’ tax codes.

Amanda: I want to talk about legal services. That’s the other part of the business you oversee, right? Legal services are a big area of growth for the firm, right? The large acquisition of Pangea3 in April, a legal managed service company. You acquired Riverview last year. I wonder if we can talk about how these companies fit into EY’s service offerings and just how big of a slice of the firm are these legal services at this point?

Kate: Well, our law strategy is very important to us. At the heart of EY, we’re all about serving our clients, and we want to do that on a global basis and make sure that they have seamless service around the world. EY is super consistent and they can expect a high quality service no matter where they are, no matter what country around the world. What we’re finding is a growing need by our multinational companies for global law services. We will do their complex tax planning and try to help them as they acquire new companies or divest of others and that they continue to transform their businesses which so many companies are currently doing. So our law services are very synergistic with the other services that we do at EY. We don’t provide law services in the United States. What we do do is law services outside the U.S. where they’re permissible.

Amanda: Well, you mentioned that you, EY, doesn’t provide the services here in the U.S. Would it ever? I mean, there are conversations here--certain states are talking about relaxing rules about who can own law firms or provide legal services. Is that, is that something that the firm would consider? Would you provide those types of services here?

Kate: At this time we’re really comfortable with our strategy, which is to provide law services outside the U.S. You know, that said, we constantly monitor the situation as you would expect a big firm like ours. We always look and I never say never, but I also am very focused on what we have at hand and on executing on our strategy.

Amanda: I want to talk a little bit more about diversity and staffing and careers. One of your priorities, you have said, is to support accountants as they navigate their careers. I wonder if you could talk about why that’s important to you and how you accomplish that?

Kate: Well, I wouldn’t be in my seat as the global vice chair of tax had I not had great mentors and also great sponsors. And so here at EY, we take a lot of time to make sure all of our people understand the difference between terrific mentorship, which is so important. You know, the people that coach you on a day-to-day basis, make sure that you’re constantly improving, getting better. It’s so important to a professional services provider. But you also need people from time to time that will sponsor you, take a chance on you to get a new level and new responsibilities so you can expand.

I’ve been given a lot of that over the years, both mentorship and sponsorship. I feel great commitment to pay it forward and to make sure that the next generation also gets that. And as a woman--a senior woman--in our firm and the business community, I feel a special responsibility to make sure that our women are coached and mentored and that they come along too. But clearly I’m want to make sure that all of our people at EY have that opportunity.

Amanda: Diversity of senior leadership in the profession is something that accounting has struggled with despite a lot of effort and time. There’s been a lot of strides. You’re an example of that. Kelly Grier, your EY [U.S.] chairwoman, is an example of that, but there’s also been setbacks, right? Most partners are still men.

EY this week just announced it was canceling a training program because it was offensive to women. So talk about what is the firm doing well to do what you had just talked about: sponsoring, coaching, mentoring, making those opportunities for women. And what are some areas where it could do better?

Kate: Sure. Our firm is all about our culture. We feel like our people culture is second to none. We do everything we can to keep that precious asset alive and well. We continue to focus at the ownership level, which at our firm is an equity partner. That is something we want to increase the ownership of EY with women. I’m really excited about the strides that we’ve made From my business--the tax service line, which is a big business within the EY, we have four business units in EY and I lead one of them. It’s fast growing. It’s a great practice where we’re leading the charge at EY in terms of female partnership, which is really important.

I feel like we’re doing that really well. The other service lines—our assurance business is doing terrific. Our advisory business and our transactions business are all very focused on getting more women to ownership. I’m pleased with the incoming classes when we start with our junior accountants or lawyers. When they come in to EY, 52% of them are female. They’re doing amazingly well in school.

We start off with great people and the trick is to continue to grow them and make sure that they have the best experiences and that they continue to rise up in EY. I think we’re very focused on that and I think that is going well.

Amanda: What percentage of the tax practice’s equity ownership partners are women at this point?

Kate: Globally, we’re at 33% of our partnership are women. Each year’s class that’s been added for the last three years has been 50% women. So it’s just a matter of time if we continue on this trajectory that we’ll continue to increase that as a percentage of the total. I’m excited about the trend line for the last three years and as we continue on to move on, I fully expect it’ll be a nice mix of both men and women owning EY in the days ahead.

Amanda: You’re a hiring manager. How do you approach your staff in filling positions? Are there challenges you’ve encountered in being on the opposite end of making those offers and finding the best people?

Kate: No, I really care about the merits and I want the best person for the best job. I also think I’m very schooled and making sure that if I have two candidates, I think sometimes people can make a woman wait longer. You know, because sometimes women don’t get promoted on their potential. They have to get promoted on their performance. We’ve all heard that, grown up with that. But I assess everyone’s strengths and in some instances this is where sponsorship matters—give the nod to someone who I think just has all the right attributes and we’ll stay close and coach and mentor them so that they can continue to grow into the role and I think that happens for men all the time. And I think we need to make sure it happens for our women as well. And so again, people took a chance on me. Was I ready for every one of the roles I got at EY? Absolutely not, but I learned quickly and had great mentorship and great sponsorship throughout the years. I was given that chance. Again, I’m very focused on paying that back.

Amanda: Thank you very much. Kate Barton, EY’s global vice chair for tax. Thanks for joining me, Kate. I really appreciate it.

Kate: Thank you, Amanda. Great to be with you. Take care now.

Amanda: That’s it for this week’s edition. From Washington, I’m Amanda Iacone.