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Market Analysis: Taxation

Recent Trends

Generally we have seen the size of Tax Practices within Australian law firms consistently shrinking over the last few years. The previous two years alone have seen an 11% decrease in the number of Tax Partners in law firms around the country. The two key trends underlying this shrinkage can be attributed to movements to the Big 4 Accounting firms and a lack of succession planning by an existing ageing tax partner population. This shrinkage, by and large, has gone unnoticed. We believe that Tax and its partners (as a generalisation) have an image problem.

Exodus to Accounting Firms About one third of the decrease in practicing Tax Partners at law firms is purely due to them moving to the large accounting firms. Even on a conservative estimate, at least $13m in tax advice has left the Australian law firms, most of it landing at the Big 4 accounting firms.

All of the Big 4 accounting firms (PwC, Deloitte, KPMG and Ernst & Young) have been positioning themselves as multi-disciplinary practices and are doing more and more work in what would be classified as legal tax advisory. They have been attempting to foster an environment where lawyers can operate in a similar way to law firms, and we have seen a steady stream of success stories coming from lawyers able to move across and create solid practices within the accounting firms, while still maintaining privilege over their advice. Given the current economic climate, and with tax advice being a key business unit within the accounting firms, tax lawyers are appreciating the elevated position and feeling of “safety in numbers” that they get at the accounting firms.

Interestingly the Big 4 have not been solely adding partners to their Tax Advisory offering, but also building Tax Controversy or Litigation practices in direct competition to the law firms. This creates a real challenge for tax practices of law firms to maintain their relevance in the tax area.


The Australian Law Firm attitude to Tax

In general the attitude of Australian law firms to their tax practices has been one of an ancillary service area. One which does not generate its own work, but needs to be fed by the corporate orientated groups of the firm. So it becomes a “nice to have” as part of a full service offering, rather than an essential practice area capable of generating its own revenue and relationships.

Some smaller firms have also made a conscious decision to avoid setting up a tax practice, in order to allow them to refer work to the accounting firms, in the hope of receiving a stream of legal work referred back.

These attitudes have helped contribute to the decline of tax practices within law firms. It has not been a priority for law firm leadership to re-invigorate and invest in their tax practices through promotions or lateral hires. This has led to a real succession problem.

It is hard to fathom this approach as tax partners tend to punch above their weight when it comes to profit contribution. A few law firms have been notable exceptions in building their firms around tax advice, and there are numerous examples of strong tax practices being the driver of firm growth and innovation. We are even seeing some firms look to building tax accounting and compliance capability to allow them to compete with the Big 4 and ensure that existing clients remain with the firm. However this attitude is definitely not the norm within Australia.


International Perspective on Tax Practices

In other parts of the world tax practices within law firms are viewed very differently. Both in Europe and in Asia, the wide variety of different regional tax regimes has meant that major global corporations can plan whole deals, or indeed their own business structure, based around tax implications of one jurisdiction or another. This has led to the situation where tax divisions are considered a key practice area of many law firms. They end up being the lead relationship team on large global clients and net referrers of work to other practice groups within their firms. Global tax practices equate to around 7% of the firm’s partner numbers, whilst the Australian average is around 3%.


What does the future hold?

Given this international view on tax, we look forward to seeing the impact which the new wave of international law firms has on tax practices in Australia. The desire from Global Heads of Tax to build strong tax practices in Australia are set as medium term goals. How this is implemented by local leadership who may be blinkered through their experience with tax as an ancillary service will be interesting.

With Tax’s profile continuing to wane in the law firms, tax partners are in the process of considering their position and their value to the firm in which they reside. Firms are also in the process of deciding what to do with their tax practices: let them slowly decline in to oblivion and lose the work to the accounting firms or look to re-invigorate and properly invest in their practices.