Privilege, penalties and good faith across jurisdictions

A session report from the 24th Annual US and Europe Tax Practice Trends Conference in Munich

Thursday 11 April 2024

Co-Chairs

S Starling Marshall, Crowell & Moring, New York

Michel Collet, CMS Francis Lefebvre Avocats, Neuilly-sur-Seine

Speakers

Andrea D’Ettorre, Facchini Rossi Michelutti, Milan

Markus Ernst, Hengeler Mueller, Munich

Tom Greenaway, KPMG International, Boston

Sonja Schiller, Google, California*

Wojciech Marszałkowski, Wardyński & Partners, Warsaw

*Any views expressed are personal and not the views of their employer.

Reporter

Stefan Stellato, Hannes Snellman Attorneys, Helsinki

Introduction

The focus of the panel discussion was privilege, penalties and good faith across jurisdictions. The panel discussed a hypothetical tax enforcement lifecycle, client–attorney privilege protection, the interaction between civil and criminal law proceedings, as well as document retention rules.

Panel discussion

First, Michel Collet provided a brief introduction to the topic.

Tom Greenaway then spoke about practical considerations concerning client–attorney privilege and confidentiality for business clients. He mentioned that organisations should weigh the benefits of sharing information across the organisation against the interest of maintaining confidentiality. Greenaway also mentioned that it is obviously best to solve a tax investigation early, in which case there might not be a need to discuss what is covered by privilege and what is not. He also emphasised that companies should maintain a good relationship with the relevant regulatory authorities and avoid any unnecessary confrontations. Tax authorities have broad discretion and capacity to fight against the taxpayer.

Sonja Schiller then explained that privilege is broad in the United States (and in the United Kingdom). Privilege extends even to qualifying legal advice sought from or provided by in-house counsel. She explained that, in the context of advice related to tax return preparation, courts have taken divergent approaches with tests ranging from the most protective of privilege (‘because of’) to the least protective of privilege (‘primary purpose’). Courts may also give importance to whether the legal advice could have been provided by someone who is not covered by the attorney–client privilege in the absence of a Kovel arrangement, such as an accountant. She then handed over to Greenaway, who briefly touched on US statutory federal tax practitioner privilege.

Andrea D’Ettorre explained that Italy does not have the equivalent of the legal privilege that exists in common law jurisdictions, but rather a general duty of confidentiality or professional secrecy that lawyers owe to their clients. He explained that, when auditing a company, Italian authorities are allowed to make a full back-up of the company’s servers. From a practical perspective, privilege protection is not completely satisfactory and there are cases in which the authorities have used privileged documents in tax assessments. D’Ettorre recommended that companies are particularly clear in internal and external communication to render it more difficult for tax authorities to later misinterpret any wording to the taxpayer’s detriment. He concluded by mentioning that transferring documents to a server outside of Italy has had unintended positive consequences from an Italian privilege perspective.

Markus Ernst explained that in Germany privilege is somewhat similar to that in Italy and different from the US and UK common law jurisdictions. Ernst explained that companies have a legal obligation to collaborate with the tax authorities in tax audits, which is in line with the general obligations to file correct and complete tax returns, as well as to correct past errors. He then explained that the tax authorities commonly transfer cases for criminal investigation, which adds an additional twist to the proceedings. Even self-correction may trigger a criminal investigation. Ernst mentioned that legal opinions may be useful for companies. However, companies should pay attention to the scope and assumptions of such opinions because otherwise courts may take the legal opinion as a sign of wrongdoing. This was seen in the German cases on withholding taxation concerning cum-ex dividend arrangements. Finally, Ernst explained that the German constitutional court allowed the seizure of a law firm’s files in the case involving the infamous diesel emissions scandal.

Wojciech Marszałkowski explained that privilege is very briefly regulated under Polish law. Privilege extends to people assisting lawyers, such as assistants and translators. However, neither sharing of excessive information nor intent to violate laws or commit a criminal act are protected. The general impression is that the protection of legal privilege works well in practice. For example, courts generally accept lawyers’ refusals to provide documentation or testify based on legal privilege. He recommended that, in addition to legal opinions, broader defence files are prepared with additional sets of documentation, economic analysis and actual evidence of acting in good faith. Marszałkowski mentioned that a taxpayer may receive protection against criminal penalties if the scale of such taxpayer’s operations is so small that they would not be expected to obtain legal advice.

Collet explained that privilege in France is very broad and covers communication not only with the client, but also with other French attorneys vis-à-vis third parties, including tax authorities. However, when communicating between attorneys in different European jurisdictions, he recommended that it should be expressly mentioned that the communication is privileged. This is because the EU Code of Conduct for Lawyers assumes that communication between attorneys is not privileged. What is positive, though, is that French authorities should not ask to receive privileged information. He then explained that in the context of the EU Directive for Administrative Cooperation, No. 6 (Council Directive (EU) 2018/822 or DAC6 Directive) on mandatory reporting of certain tax planning arrangements, based on Court of Justice of the European Union (CJEU) case law, French attorneys must not disclose the arrangement to other intermediaries. Collet concluded by explaining that legal opinions do not have any formal value or binding force in French proceedings. However, in practice, attorneys may prepare summaries for the authorities’ benefit to avoid the disclosure of privileged materials. In case of seizure of privileged material by the tax authorities, the raid procedure would not be affected. However, the authorities would not be allowed to use it within the course of the audit/dispute.

Finally, panellists discussed document retention rules. Marshall explained that in the US, destroying a document may trigger an assumption that the destroyed document was negative for the taxpayer. She underlined the importance of applying document retention rules in a consistent manner. D’Ettorre explained that Italy does not have clear rules on document retention for lawyers. He also mentioned that destruction of a document may be an incentive for the Italian tax authorities to request information from other countries through exchange of information mechanisms. Schiller explained that multinational enterprises assess best practices based on a comprehensive review of the privilege rules in different jurisdictions, where communications are ongoing. Ernst underlined the importance of thinking one step further, in other words, not only about the quality of the legal advice, but also about what happens if the situation becomes contentious. Greenaway emphasised that maximising privilege protection should be balanced against the decrease in efficiency. Marszałkowski mentioned that good practice in Polish law firms is to destroy client documentation after the statute of limitations.

Conclusion and final remarks

The panel discussion gave the impression that privilege protection works relatively well in all the jurisdictions represented. Naturally, this is very important to protect the rule of law. The panel provided many practical tips on privilege. For example, to avoid giving more information than is necessary within the organisation, it is worth mentioning explicitly that something is privileged and that the communication is as clear as possible so that it cannot be misinterpreted. One should also consider whether the scope and assumptions of legal opinions could give the impression that the opinions have been tailored to achieve the desired result.