Tax and lawyers: confidentiality vs transparency

The European Commission has just launched its consultation on the role of lawyers in tax planning, under the heading of ‘Disincentives for advisors and intermediaries for potentially aggressive tax planning schemes’.

From a lawyer’s point of view, it is dismaying that there is no mention of the importance of lawyer-client confidentiality. You will find that lawyers are just lumped in with other intermediaries: ‘consultants, lawyers, financial (investment) advisers, accountants, solicitors, insurance intermediaries, financial institutions, and company-formation agents known as Trust and Company Service Providers’ – as if solicitors are not lawyers, and as if a lawyer is no different to any other kind of consultant.

The word ‘confidentiality’ appears in the document only in the terms of a ‘confidentiality clause’, which is considered a bad thing from the point of view of transparency, and so identified as a generic hallmark of a promoted aggressive tax planning scheme.

The Organisation for Economic Cooperation and Development (OECD) was the original mover behind this initiative, with its Base Erosion and Profit Shifting (BEPS) Package 2015, which included Action 12 on Mandatory Disclosure Rules.

But at least BEPS Action 12 specifically mentioned lawyer-client confidentiality, and understood that it might lead to a lawyer not being able to disclose a scheme.

There is a whole paragraph (no. 70) in Action 12 devoted to how lawyers can claim legal professional privilege, but the European Commission has ignored it. I know that there was a meeting with commission officials before the consultation was launched, at which this matter was expressly brought to their attention. But they obviously regard it as unimportant, an obstacle to transparency. Their interpretation of the extent of lawyer-client confidentiality is therefore not the classic one shared by all European legal professions.

It is now incumbent on lawyers and their professional organisations to respond to the consultation, and to highlight the core principles of the legal profession.

This itself raises interesting questions about the way that the modern world is shaping, where the needs and capacities of machines begin to dictate policy. I wrote the other day about the danger that justice will accommodate itself to what machines can do rather than to what is just. And the same applies to consultations.

There is a warning at the beginning of the consultation – ‘In order to ensure a fair and transparent consultation process only responses received through our online questionnaire will be taken into account and included in the report summarising the responses.’ What that means is that it is easier to collate the replies received by machine, and so no resources will be devoted to actually reading responses which do not fit into the pre-set format.

The machine dictates.

And if there are no questions about lawyer-client confidentiality? How can a new concern be raised which has not been fed into the machine in the first place? The only answer in this case is either to fit our concerns into one of the very few free-text boxes permitted, such as at the end of question 5 on direct and indirect impacts of the new policy (the great bulk of the questionnaire is in a pre-set multiple choice format), or to take advantage of the ‘Additional information’ question right at the end, and upload a new paper.

Since lawyer-client confidentiality does not even merit a question, I have strong doubts about the impact of an additionally uploaded paper. And the fact that there is no specific question on it loads the consultation against our interests, because other people are not asked to comment on our concerns, and so be given the chance to support them. There is not even a mention of our concerns in the accompanying paper.

At the same time, the International Bar Association (IBA) has set up a joint taskforce with the OECD in the wake of the Panama Papers scandal, covering some of these same issues. Although its remit is broader than just tax avoidance, it will look at the roles and responsibilities of lawyers in this area, and what changes, if any, should be introduced to professional standards, for instance in combatting corruption, tax evasion money-laundering and terrorism financing.

I hope the IBA will make strong representations about the importance of our core principles, and in particular lawyer-client confidentiality.

As I have reported before, the European Parliament also has its own investigation on the Panama Papers. On 9 February next year, it will hold a meeting with the so-called intermediaries, that is lawyers, tax advisers, financial intermediaries and others, which will be another opportunity to make the same point.

I have not recited here the rationale behind lawyer-client confidentiality, because it is so well-known to the legal profession. But it is constantly under assault from policymakers who should know better, and needs defending.