Legal market overview in United States
The sweeping modifications to the IRS Code made by the Tax Cuts and Jobs Act in 2017 have undoubtedly made their mark on the US tax market. The lowering of corporate tax rates, in particular, among other reforms, has incentivized a new pattern of investment that will likely have profound implications for companies, particularly with respect to M&A. While the long-term impact of such changes will take time given the complexity of the Act, partners are reporting a significant uptick of high-net-worth individuals and smaller businesses incorporating or restructuring in order to benefit from the tax reliefs. Partners also report that the reforms led, and are leading to a large degree of cash repatriation from off-shore corporations and seeing an increase in dividends and share buybacks. A notable amount of repatriated capital is also being used to fund acquisitions, with far fewer tax inversion deals being undertaken. In particular, the additional liquidity has already fuelled a boost in acquisitions in the pharmaceutical and technology sectors, examples of which include Bristol Mayers Squibb’s acquisition of Celgene and the sale of Whole Foods to Amazon.
On the structuring side, partners report a slow-down in cross border M&A activity shortly following the Act, in part due to the continued amendments and guidance issued by the IRS, with partners kept busy advising on anticipatory future changes, their implementation and impact on future operations, thus creating an additional burden on non-US-headed multinational corporate groups investing in the US. The bulk of the planning work remains in portfolio restructuring, spin-offs and divestitures, which are now more attractive for sellers.
Non-profit organizations are proving a very for-profit market for law firms, most of which have specialized teams focused on little else. In recent years, the sector has witnessed transactions and consolidations of a scale and complexity that would make most M&A lawyers green with envy, especially in the healthcare space, which generates much of the big-ticket work. A notable example in 2018 was Fidelis Care’s $3.8bn takeover by Centene Corporation. This blurring of the lines between the for-profit and non-profit sectors also extends to joint venture projects, bringing an increasing amount of complexity to the tax-exempt nature of the client. Further, while tax is very much the bedrock of most of the teams in the non-profit rankings (most of the attorneys started out as tax specialists), employment law, M&A, governance and litigation have an increasingly important part to play. In the case of the latter two, the high-profile investigation and subsequent shutdown of the Trump Foundation in 2018 demonstrates exactly how bad things can get, particularly for controversial clients targeted by ambitious attorney generals.
In other areas, partners are seeing an increased workload off the back of the Opportunity Zone program, created to boost investment into low-income or distressed communities, with corporations and private individuals keen to benefit from the preferential capital gains treatment for investments in businesses and real estate in these areas.
In the international tax space, firms reported that the recently introduced Global Intangible Low-Taxed Income (GILTI) presented challenges for internationally operating clients. Under the GILTI measure, a US shareholder of any Controlled Foreign Corporation (CFC) is required to include its pro-rata share of GILTI in its annual reportable gross income.
Lawyers involved in the contentious tax space have noted a dual rule situation at play in tax litigation. Most litigation going through at all levels of tax courts in the US takes about ten years to get there. This means that the current cases before the courts are all governed by the old tax code, and we will not start to see cases governed by the new rules for quite some time.