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PUBLICATIONS / Newsletters / 2013 / Newsletter June

Enforcing Contracts In Countries That Exit The Euro.

Much has been said about the Euro in the media the last year, also in this newsletter. The situation is unstable. The outcome of this crisis and how this will relate to your business remains to be seen. But the risk that one of the countries leaves the Euro Zone needs to be considered.
In this article the risk is explained that you will face when engaging in contacts with countries that are at risk of leaving the Euro Zone. At the end there will also be some general pointers that you can use to minimize this risk.
There are three categories of legal risks to be considered:
1.    Redenomination risk
2.    Continuity of contract risk
3.    Other risks
1. Redenomination risk. Your contract in the old Euros or the new currency?
Basic contract drafting skills dictate to always take into account the possibility of the parties exiting the contract. The founding Euro Zone members assumed that the Euro would be an irreversible process, and there are no provisions for a member state to exit the Euro Zone or to be expelled from it.
Therefore, an exiting member state would most likely impose a new law, redenominating its own sovereign debt and the debt owed by its nationals in a new national currency. It can be expected this currency will lose its value fast. It would also likely impose exchange control restrictions prohibiting payments in Euro.
When the Euro will be replaced with a new currency, how will this relate to your contract?
  • Governing law and the jurisdiction chosen by the parties for the hearing of disputes.
    If a dispute arises with regards to the denomination of the contract, the outcome will depend highly on the jurisdiction in which the dispute will be resolved. When a dispute is adjudicated by the courts of an exiting state, the will most likely follow the new currency law.
  • Intention of the parties. Definition of Euro or place of payment.
    1. If in the contract the Euro is defined as the single currency introduced pursuant to the European Union treaties, an international court should conclude that the currency of payment will remain the Euro.
    2. If in the contract the Euro is defined as the currency of the exiting state, it will be concluded that the new currency will apply.
    3. When “Euro” is not defined other factors will be taken into account. In particular, place of payment. If place of payment is in the exiting country, payments will be made in the new national currency.
  • Conflict of law and public consideration.
    An international court will take into consideration the international laws and public policy. When a country exits the Euro but remains in the EU, a mandatory denomination bases on EU rules will take place when the obligations of the contract are being performed in the exiting state. Conversely, public policy may force the opposite when the exiting state has unilaterally withdrawn from the Euro Zone in breach of EU treaty obligations.
  • Exchange controls and practical difficulties on enforcement.
    Even though an international court may decide that a contract remains denominated in the Euro, IMF regulations (assuming the exiting country remains in the IMF) state that contracts will be unenforceable if caught by the exchange controls of the exiting state.
2. Continuity of contract risk. What is the effect on the contract itself?
The effect of a country exiting the Euro may have its influence on a contract itself. The contract may be “frustrated” in certain circumstances or the event may trigger possible provisions in the contract.
  1. Frustration of the contract.
    Because of the “continuity of contract” principle, the validity of contracts is not affected by the introduction of a new currency. Also, the disappearance of a Euro based price alone would not necessarily affect a contract, since in that case there be looked at a substitute new price source or reference rate.
    However, there can be circumstances as to which performance on a contract is frustrated. Especially when it may be impossible to pay during exchange controls.
  2. Potential contractual triggers.
    The results of the event may trigger other terms in a contract. Contracts that remain denominated in Euros, but paid in the new currency may trigger a default. Or exchange controls may trigger “illegality” or “force majeure” clause.
3. Other risks. Underlying values and issues on enforcement.
Contracts that are linked to Euro-based price sources could no longer be appropriate in the event of a country leaving the Euro. Here you can think about contracts linked to EURIBOR, derivative contracts or and FX reference rates.
Also, contracts that rely heavily on a cash flow that is being paid from the exiting country will be highly at risk.
National and international legislation override the terms and conditions of private contracts. Even when you have a solid contract or an international court ruling, it still might be difficult to actually enforce a Euro denominated contract in an exiting country. Courts in the exiting country might be obliged under local law to redenominate all contracts to the new local currency.
How to protect yourself from risk?
When you are doing business with a country of which you assume that there is a risk of it leaving the Euro, there are a number of steps you can take to lower the risk.
  1.  Agree that disputes will be settled in a court outside the jurisdiction. For example New York, DIFC or Singapore. Also, you could think about drafting the contract under a governing law (like English Law) other than that that of a Euro Zone country.
  2. Define the term Euro as the single central currency pursuant to the EU treaties.
  3. Payment should be done outside the at risk member state.
  4. Include terms permitting flexible termination and adjustment to Euro Zone exit.
  5. In case of an exit and the rising of a dispute, open a case first in a jurisdiction of your choosing. This may give you some leverage.
To summarize:
In the event of a country leaving the Euro Zone there will be some significant risks for those who are engaged in contracts with parties in the exiting country. There are a number of ways to minimize the risk that should be considered when engaging in contract, especially with regards to defining the Euro and the location of payment. However, there will always remain risks that could arise with public policy, international regulations and enforceability.
For more information check this Ashurst Report.

Apple: The Largest Tax Payer In The US

The American company Apple, currently considered the most valuable company in the world, uses a network of subsidiaries located in Ireland, in order to avoid paying U.S. income taxes on billions of dollars. Thus the conclusion of a report prepared by the Permanent Investigation Subcommittee of the U.S. Senate.
The way Apple is structured is perfectly legal and is being used by many other multinational companies, the legislatures were yet ‘surprised’ that for this purpose, Apple has created a ‘too complex network of companies.’
Apple chief executive Tim Cook will be explaining it to the Senate next week [May 28]. Cook will be accompanied by the CFO of Apple and they will attempt to explain the tax strategy of the company. Apple has already stated that no tax tricks are being used, but a network of companies that the company has created to reduce its tax liability. This led the legislators to question the effectiveness of the U.S. tax system.
According to the said report, out of Apple’s total cash of $ 145 billion, about $ 102 billion is held overseas. In 2011, the Irish subsidiary of Apple earned $ 22 billion, but the taxes paid amounted only ten million U.S. dollars. In that context, Senator John McCain pointed out that although Apple is the largest taxpayer in the U.S., it also belongs to the largest tax avoiders.
The tax strategy of Apple is the center of attention, especially at the time of feverish debate about whether and how to increase the revenues of the state budget. Many U.S. Democrats believe that the government is failing to collect billions, as many U.S. companies are hiding profits overseas and avoid paying taxes. Republicans demand reduction of the corporation tax rate to 35 percent and reduction of the tax burden on money that U.S. companies earn abroad. According to them, such measures would stimulate firms to invest at home.
Apple has made it clear that, given the current tax policy in the United States, it has no interest to transferring profits to the USA from abroad. The report stated that due to its strategy, Apple did not pay at least $ 3.5 billion in 2011 and nine billion dollars in the US last year. In 2011, the company paid in the U.S. $ 2.5 billion on taxes and last year six billion.
For its fiscal strategy Apple uses five companies in Ireland. These firms have the same address in Cork and the same board members. In Ireland, all five are entered in the Commercial Register but only two of them are subject to tax in Ireland.
Just like other multinationals (Microsoft, Hewlett-Packard,…) , Apple uses the difference between the tax laws in the USA and Ireland. In Ireland, the company pays tax in case the management and control is located there while under the U.S. law, the company is a taxpayer in the country where it was established. So Apple is not a tax resident in Ireland nor in the USA.
For that reason, a holding company of the Apple retail stores in Europe, did not pay corporate tax for at least five years.

Why Big companies Love Regulations

In the previous newsletters we discussed the new regulations politicians use to try and counter what they consider unfair tax advantages. At first this seems morally just. It is easily sold to the public. However, there are some unintended consequences to this line of thinking.
The small and medium sized owners that are internationally active are the ones who are mostly affected by this. More reporting. More legislation. More compliance. Writing hours. All the bureaucratic nonsense that suffocates the ordinary business owners, who usually completely lack affinity doing administration.
It costs them money. They have to hire accountants and advisors. All that to make sure they comply with all the regulations the bureaucrats come up with.
Another effect is that because there is so much tax and regulation in the West, ambitious and productive young people decide to move their business elsewhere. It also gets harder for foreign parties to engage in business in the West. All this reporting poses extra costs and risks. For example, some financial institutions simply decide not to provide their services to Westerners anymore.
When you are an American, you simply will have a hard time opening a bank account in a lot of places outside the US. We also experienced Swiss banks that will not take on Germans, French and Dutch clients.
This trend is ongoing. It is getting harder to engage in business for most international entrepreneurs. A lot of people think; this is not important for me. Only “rich” people and evil tax avoiders will be affected by this. But check it the next time you do groceries. Pure local products are almost nonexistent. All is imported by multinational companies. If this process is frustrated, prices will go up.
The intention was to have restrictions on big corporations. Are there any? Perhaps a little. But here is why they do not care.
It is not cheap setting up offshore structures. Getting tax advice. Setting up legal entities. Hiring office space. At least, for the vast majority of companies. But let’s look at it from a multinational perspective. A big billion dollar company. They do not care about tens of thousands of Euros in legal fees. They do not care about transferring some of their activities abroad. They do not care about hiring a few top lawyers at 500 Euro’s an hour.
They are happy to do so. Because they know most businesses cannot afford that. Small and medium sized competition? Easily weeded out. That is why with heavily regulated industries usually only a few players are left.
Their top lawyers are able to use every inch of the law to their advantage. They will even “lobby” for regulation to be implemented. The more regulation, the less competition, the better. So do not be fooled by the politicians and their hard talk. They might even be paid to do so.
All in all it is getting more difficult for small and medium sized business owners and individuals in the “free” and “capitalist” West. And nobody can really predict where it will end. Who knows what will be regulated in the future that will have unintended consequences.
Taking out undeclared cash on holiday? Please fill in form W-44 and provide a legalized utility bill. Buying a house in the south of Spain? Get approval of the foreign investment committee. Wiring money funds to your kid who is studying abroad? He better have receipts of all the drinks he buys!
To summarize. All these regulations do not have the intended effect. A few big corporations, banks, and bureaucrats are better off. Everybody else worse.

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