Tax Justice Activists Should Manage Precedents Like Avoiders Do

The global tax justice and anticorruption communities demonstrated shock, surprise, and renewed determination last month in the wake of a recent “beneficial ownership transparency” decision of the European Union’s highest court. In the context of a directive requiring EU member states to adopt anti-money laundering laws, it invalidated a guarantee of public access to information about the true owners of legal entities.

The European Court of Justice decision, Sovim v. Luxembourg Business Registers, is limited to member nations of the EU. It doesn’t impact the authority of non-EU countries to mandate that beneficial ownership information—a cornerstone of tax justice and anticorruption initiatives—be made available to the press, civil society organizations, or the public at large.

Even in Europe, the case doesn’t appear to go as far as worriers first worried; some public access laws ought to be permissible if properly drafted. But Sovim does represent a significant setback for tax fairness, after the movement’s significant legislative achievements in recent years.

What Would Tax Avoiders Do?

Facing or fearing adverse judicial decisions during my long career as a US state corporate tax avoidance enabler, I learned, developed, and implemented a multifaceted strategy for reducing the likelihood of judicial precedents adverse to my clients’ interests.

Activists are also reconsidering their judicial strategy—both moving forward in the wake of Sovim and looking back at how they might have approached differently the risks of judicial misunderstanding.

The techniques sketched below are typically pursued by coalitions of similarly situated corporate tax avoiders—at times ad hoc, other times through standing councils and industry groups like the Council on State Taxation, Tax Executives Institute, or the Tax Foundation, which maintain constant collaboration. On occasion, a huge corporate tax avoider may act alone, perhaps because they’ve developed a proprietary tax avoidance strategy they’d prefer to secrete from their competitors.

The European Court of Justice skyscraper buildings beside the European Investment Bank East building, left, in Luxembourg, on March 15, 2021.

Photographer: Olivier Matthys/Bloomberg via Getty Images

Monitor Cases With Potential for Broad Negative Impact

Sophisticated corporate tax avoiders rarely get surprised by an appellate court decision adverse to the success of their avoidance activities because they track cases from the get-go. The Council on State Taxation’s annual meetings, for example, include sessions where corporate tax officers share hot developments at the private audit level, state by state.

The tax avoidance industry has built a robust knowledge sharing ecosystem—including the daily monitoring of judicial, legislative, and administrative rule-making developments. This includes fee-based tax reporting services, Big Four and AmLaw 100 firms’ curated analysis, and a plethora of “current developments” tax conferences.

Develop the Intellectual Infrastructure

Judicial theories typically develop organically on a case-by-case basis. This creates a serious risk for corporate tax avoiders that the litigation pursued by taxpayers with different interests—or with fewer resources to hire sophisticated counsel—may produce unfavorable legal precedents.

Large corporate interests may be unwilling to take this risk when they have millions or billions of US dollars at stake on a tax avoidance play. In advance of getting audited, they may manufacture supportive legal theories outside the judicial system in the hope that these may be treated by courts as if they were precedents.

Lawyers typically cite case law in their briefs before courts. But many courts welcome (and are persuaded by) citation to scholarly papers as well—particularly on novel issues where the law is underdeveloped. Corporate power players encourage academics to write scholarly papers and reports that develop supportive legal theories.

The power players in the corporate tax avoidance industry encourage wide sharing of these papers because of two goals: creating “authority” they can cite in briefs for their own cases, and facilitating widespread taxpayer citation of these authorities by giving all taxpayers access to the best arguments.

Select or Manufacture Optimal Test Cases

“Bad facts make bad law” is a complaint I often hear from former colleagues or competitors at the top tax avoidance defense law firms. Another complaint: “We’ll never win in [Jurisdiction A] until we can get good persuasive authority out of other jurisdictions that are more favorable to us.” If a legal precedent is to be favorable, the tax avoidance power players that can control the litigationwill have the highest likelihood of obtaining a positive result.

The largest multinational corporate tax avoiders have hundreds of legal entities in a variety of industries, operating in many jurisdictions. This means they may be able to survey their own affiliates’ tax audits and select for accelerated appeals those that operate in jurisdictions with more “pro-business” courts. They also can select those with particularly good facts—meaning a favorably viewed industry, a less obvious sham (lack of economic substance and non-tax business purpose), a reputation for good corporate citizenship, or a good ESG reputation.

Behind-the-Scenes ‘Support’ for Smaller Taxpayers

Even coalitions of the most powerful and sophisticated corporate tax avoiders can’t always get to court (and set a judicial precedent) first, before all the smaller, under-resourced, and poorly advised avoiders who may be litigating their own cases. But by monitoring the publication of administrative decisions and tracking court filings, they can try to intervene.

If the power players’ interests are aligned with the small players’ interests, they may offer to provide their own sophisticated counsel—with fees subsidized by the power-players—to increase the likelihood of better judicial outcomes.

Comment in Amicus Briefs

Many jurisdictions allow friend of the court, or amicus, briefs from interested persons who aren’t parties to the litigation, sharing their views on the facts and law that ought to govern the court’s analysis. The amicus opportunity usually is available at the federal or state high court level, and occasionally at mid-level appellate courts. Acceptance is typically at the court’s discretion.

Amicus briefs are typically a last-ditch strategy for tax avoidance power players who were unable to control what cases make it up to the appellate level. The actual avoider or litigant has total control of their own case, though they may invite and coordinate a series of amicus briefs. But this strategy at least enables power player tax avoiders to get their legal theories in front of the court.

Funding

Legal precedent management is an expensive business. If Sovim teaches us anything, it’s that civil society organizations need funding—and a lot of it—specifically earmarked for this essential aspect of their tax justice and anticorruption work. Public-spirited grant makers should take notice.

This is a regular column from public interest tax policy analyst Don Griswold, who’s also a senior fellow at the Digital Economist. Look for Griswold’s column on Bloomberg Tax, and follow him on LinkedIn.