International Tax Review’s annual survey finds the big five continuing to dominate. But our results also find that corporate tax work is growing rapidly, and that there is plenty of room for all to prosper. Rosie Murray-West and Oliver Ralph ask why demand is expanding so quickly

If the European tax planning market was a cake shared between the various advisory firms, then we would expect to see the adviser's slices dwindling this year to accommodate newcomers such as Freshfields and Shearman & Sterling in Amsterdam, and Allen & Overy's ever-growing Paris office. But this has not been the case. All across Europe tax advisers say they have more to do, not less. "The paradox is that if you read the papers you think that the competition for work should be increasing, but the day to day reality is that we have never been busier," says Stef van Weeghel, of Stibbe Simont Monahan Duhot in the Netherlands.

The clue to the magical expanding cake lies in the responses to our survey of European tax advice this year. The survey found that 38% of corporate tax advisers said that their outsourcing is increasing. In most cases this is not at the expense of their in-house work, since 40% of respondents said their in-house departments were increasing as well. Why are companies feeling the need to do more and more tax work? Growing complexity of regulations is one reason given, as is the amount of merger and acquisition activity in the European market. But one overwhelming reason seems to be that there is a greater variety of tax advice available in more jurisdictions than ever before. Supply, in this case, is feeding demand. Is this a situation that can continue indefinitely, or will tax advice reach a critical mass?

The changes to the European tax scene this year have built on the alliances and mergers last year. The Linklaters alliance has grown, with the recent addition of Loesch & Wolter in Luxembourg, thanks to its merger with De Bandt, Van Hecke & Lagae. Freshfields has centred its tax operations around Amsterdam, with Roger Berner, former UK head of tax, moving there to head the new office. The Freshfields approach stresses a Europe-wide tax advice strategy which is also borne out by Clifford Chance's proposed merger with Pünder Volhard Weber & Axster in Germany and Faltz Kremer in Luxembourg. Meanwhile the accountancy firms are recruiting tax lawyers as fast as they can. KPMG has formed law firm KLegal in the UK, and there is still talk of the big five firms merging with law firms elsewhere in Europe.

The results of International Tax Review's sixth annual survey of Europe's leading tax advisers are compiled from questionnaires sent to around 5000 tax directors and CFOs at European multinationals and financial institutions. These contacts were asked to name the top four firms in their jurisdiction, the top three individuals and the top two firms in ten specialist areas.

This year, a number of changes were made to the questionnaires. To keep up with developing trends in tax advice, we added two new specialist areas to the questionnaire: e-commerce and offshore taxation.

We also added a third page to the questionnaire. Respondents were asked to give details of the number of firms they use for advice, the frequency with which they review these firms, the amount their company spends on tax advice each year and whether their in-house tax departments and their level of outsourcing are growing or shrinking.

Multinationals are facing increasing attention from the big five and others trying to sell a range of services and programmes. Respondents were asked to give opinions on the branding and marketing campaigns that are used by the big five and the law firms, and on the tax efficiency programmes that are presented to them by advisory firms.

Respondents were also asked to give opinions on the effects of the euro on their taxation and, the prospect of direct tax harmonization in the EU.

Finally, respondents were asked to recommend the compliance and planning software that they use. Many replied that they prefer to use their own systems, but commercially available software was also popular. The results reveal much about the state of the tax advice market in Europe. International Tax Review would like to thank all those who responded to the questionnaires, and congratulate those firms and individuals that have performed well.

But many of the gloomy predictions for the future of European firms not linked to the big players have not come to pass. French firm Gide Loyrette Nouel is still standing, despite the onslaught from its former ally Allen & Overy. Buruma Maris has chosen to merge in the Netherlands to form Houthoff Buruma, rather than succumb to the seduction of UK or US firms, following the loss of its tax department. There seems to be room, in the present climate, for stand-alone firms as well as alliances. David Ryser, at Swiss boutique firm Tax Partner AG, says that there is room for everyone because clients choose their advisers in different ways. "There are two different approaches to tax advice," he says. "One is to pick the best individuals and the other is to go for a global network." Van Weeghel, at Stibbe Simont, says at the moment it isn't possible to see whether independent firms will be able to remain so in the long run, but that the next recession may weed out weaker firms.

It seems that Europe is able to sustain an almost indefinite expansion in tax advice. One reason for this is the growing complexity of the tax laws across Europe. "It gets more complicated every year," says Eric Overgaard, a tax partner at Plesner & Grønborg in Denmark. New holding company rules in Denmark have produced an avalanche of enquiries from companies wishing to take advantage of the new rules, but, in practice, not many have done so. "We're not yet sure exactly how the authorities will look into matters," says Overgaard.

Switzerland has also seen a lot of changes to tax legislation. Ryser, at Tax Partner AG, says that legislation in Switzerland is getting much faster, and companies are struggling to keep up. "Before we were quite comfortable and slow, but now Switzerland is getting up to the speed of legal developments you find in other countries."

European integration has only added to the complexity. Only 25% of respondents to our survey said that they thought the Euro had had an impact on their tax advice, but EU tax laws have led to a wealth of new work for advisers. Manfred Günkel, from Deloitte & Touche in Munich, says : "There is an increased demand for advice in this area. Clients are becoming more and more aware of the possibility of challenging assessments and legislation in the ECJ." Philippe Malherbe, at Liederkerke Wolters, in Belgium, says that he is kept busy contesting cases all over Europe, particularly in the UK.

There's a growing perception that Europe will have to play a more important role in taxation," he says. Günkel, at Deloitte, believes that European tax harmonization will be implemented. "I can't believe that we can have a single market with tax system competition. In 10 years we will start to see the beginning of a uniform tax base, loss carryovers, cross-border definitions of income and possibly multinational tax treaties." The survey showed divided opinions of tax harmonization, with 58% thinking that it could be implemented, and 42% thinking it could not.

One of the reasons clients are so keen to seek advice on all this new legislation is that revenue authorities across Europe are clamping down on tax avoidance schemes. "Cross-border transactions are now subject to a lot more scrutiny, and we have to be more careful about support documentation for substantiating cross-border charges," says Fagan at Jefferson Smurfitt. Roger Pickles, tax manager from Chase Manhattan bank in the UK agrees: "We seem to get a lot more attention from the revenue than we did five years ago, but that's partly because our business has become more sophisticated." Outside advisers play a vital role in keeping the house in order for the revenue. "Often it's a kind of insurance policy," Pickles says. "We need the support for our files."

Denmark has set up an organization as part of the ministry of finance, which only looks at the affairs of large multinationals working in Denmark. "They have been much more aggressive in the last three or four years. Mind you I said that three or four years ago!" says Eric Overgaard from Plesner & Grønborg. Overgaard says tax enforcement is partly a political matter. "If you have a socialist government they force the staff in the tax department more than a right-wing government do."

Whilst government clampdowns, new and complex laws and European integration go someway towards explaining the tax advice boom, increased awareness in the marketplace of what's on offer, and more services being available, contribute to the phenomenon. Ryser, in Switzerland, says that politics and the press have a big part to play. "There's an increase in tax awareness among the smaller companies," he says. "This is an effect of better press coverage. Also, taxes are becoming a big election issue in Switzerland. All the parties are talking about taxes."

Global branding campaigns, particularly by the big five, have also raised awareness of tax planning issues. All five firms have launched new campaigns in the last year, with KPMG's campaign- "it's time for clarity" being mentioned particularly in the survey as a favourite. PricewaterhouseCoopers appears to have been less successful, with their branding campaign being mentioned several times as among the least impressive.

The accountancy firms' proactive approach towards selling tax products may also have had an impact on the increase in planning. Fifteen per cent of respondents who have been approached by the accounting firms with tailor-made products have taken them up and 18% of respondents who were approached with ready-made products accepted. Kelley, at De Bandt in Belgium, says that the accountants are very competitive amongst themselves when pitching for business. "They are aggressive," he says. "The degree of aggressiveness amongst themselves is quite frightening. No matter how much lawyers compete, at least they remain on good terms, with the accountants it's like a permanent war."

This aggressive approach towards winning clients reflects the fear in the market place that eventually the good times will run out. "Obviously at some point the market will become saturated," says Ryster of Tax Partner AG. Advisory firms accept that, they have to plan for a future when increased competition for business may lead to leaner times. And this means trying to stand out from the crowd by offering more services to clients than their competitors.

Many firms have reacted by forming Europe-wide, or even global alliances, of which Linklaters is often seen as the definitive example. Patrick Kelley, of DeBandt, Van Hecke Lagae & Loesch, the Belgium arm of the Linklaters Alliance, says that their relationship with foreign lawyers is crucial in gaining them high-end work. "Inevitably, when you have groups like Linklaters & Alliance, complex cross-border transactions gravitate towards them, and others will get the more routine work," he says. "It's not enough to have friends in other areas of the world any more, you have to have established relationships."

Other lawyers have rejected this policy of forming alliances to offer a supposedly seamless global service to their clients. Philippe Malherbe from Liedekerke Wolters Waelbroek & Kirkpatrick, also in Belgium, says that a lot of the really lucrative clients do not feel the need to rely on an international network of advisers. "Alliances are good for certain types of clients," he says. "The middle market likes to be able to call up a regular adviser, but the upper market is able to make decisions for itself."

Of course, the accountancy firms trade off their global networks more than the law firms when offering tax advice. Roger Pickles, Vice President of the tax department at Chase Manhattan Bank in the UK, says that their networks make a difference. "When you're doin a cross-border transaction, you're tempted to use the accountancy firms, " he says.

Van Weeghel, points out that even Linklaters cannot compete with the big five when it comes to global tax capability. "The accountancy firms have thousands of tax lawyers, and even the Linklaters Alliance will not have a very large number," he says. Liam Quirke, from Dublin law firm Matheson Ormsby Prentice says that although alliances are a good thing, they have to be used wisely. "It is important to realise that the network is a means to an end, not an end in itself."

Gerry Fagan, head of tax at Jefferson Smurfitt in Ireland agrees, pointing out that often the global networks of the accounting firms seem to be disparate units. "In terms of being organised and having a network, PricewaterhouseCoopers is better than most," he says. "You get the feeling that you are dealing with a practice in Europe rather than partners in a particular European country."

ther way to keep the work coming in is to price your firm's advice attractively. Pickles, at Chase Manhattan, says that tax advice is getting more expensive, and doesn't represent any better value for money.

The big five firms have come up with a way to price services attractively without losing their fees. Contingent pricing has spread to Europe from the US, and involves firms offering aggressive and radical tax planning strategies and taking a percentage of the money saved. David Ryser, at Tax Partner AG in Switzerland, says this is evidence of the accountancy firms' difficulties with making profit. "The big five all have the same trouble with audit margins being squeezed. They are trying to move into higher margin advice and trying to place products." But not all corporate advisers are convinced that the schemes are the way forward. Fagan, at Jefferson Smurfitt, says he's worried by the revenue's reaction to the schemes. "We have a fairly conservative attitude to tax matters and wouldn't go for aggressive proposals. We're here for the long-haul and need to get on with the tax people."

Ryser says that the pricing schemes will not be enough for the big five firms, and that they will be the first to feel any blow that comes when the market gets too full. "I think the accountants will have to give in more because of the pressure on hourly rates," he says. "Here we are more relaxed." Quirke, at Matheson Ormsby Prentice, also thinks that law firms are likely to overtake accountants when it comes to tax. His firm has just recruited a partner from KPMG (see Taxfax), and he says that the tide is turning in Ireland in favour of the law firms. Fagan, although he has always used Ernst & Young as an adviser, says that he would now be happy to use a lawyer. "If we considered changing now I don't think it would have to be an accounting firm, there was a time when that was true, but increasingly the law firms are competing."

Fagan is unusual in having continually used the same adviser (Jefferson Smurfitt used one of the ancestors of Ernst & Young when it began in 1934), because the survey shows that many companies frequently review their choice of adviser. Over half the respondents reviewed their choice of advisory firms once a year, while 20% reviewed their choice every six months. Only three percent waited five years before considering a change.

Given these figures, it is unsurprising that the firms in Europe are coming up with strategies to make them stand out from the crowd. It seems they cannot rely on client loyalty to keep their business, because clients demand more than a long-service record. Accessibility, corporate know-how and a knowledge of international markets came out as some of the qualities most valued by the corporate client.

While more and more companies are taking tax advice to deal with increased legislation, attacks by the revenue and EU-wide changes, it is clear that the advisers cannot rest on their laurels. With corporate tax planners reviewing their firms every six months to two years, offering something special becomes increasingly important in the choice of adviser. Van Weeghel from Stibbe Simont says: "there have never been more transactions than now. I know some of my clients employ different law firms and look at who is busy and who's available. But it's when the recession hits that we will see who will survive."