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Making good law16/11/2005. Source: SJ Berwin. Simon Witney 
The private equity world has felt the impact of badly written - or just incomplete - legislation recently, and perhaps nowhere more than in the field of tax, points out Simon Witney of SJ Berwin. European business has seen a huge volume of new law in recent years. Some of that is welcome - because it improves or simplifies the business environment - and some has caused real problems.
Of course, the content of the law itself is important, but sometimes the process of writing and implementing it is even more significant than what it says. The impact on business can be far greater if laws are badly drafted and hurriedly introduced, particularly where that leaves big gaps in the rules that a regulator or the courts will have to plug.
The private equity world has felt the impact of badly written (or just incomplete) legislation recently, and perhaps nowhere more than in the field of tax. Two recent "guidance" statements from national tax authorities have underlined the increasing importance of the regulator in making law - not because that is what the legislators intended, but because the law as passed would have unforeseen and unintended impacts, or because the law is ambiguous.
In the UK earlier this year, fundamental changes were made to the tax treatment of shareholder debt on a buy-out. These changes were introduced without advance warning, let alone consultation, and they threw a number of pending deals into disarray. The potentially disastrous impact of the change on carefully constructed funding structures was not, it seems, a concern for the tax authorities - that was a problem for businesses to resolve.
That the rules were unexpected - giving no chance to anticipate their impact - was only part of the problem. Even when they came out, it was not clear what they meant. Guidance from the UK's tax authority - more of which emerged (in draft form) last month - contains much of the real law that has to be studied to understand the full consequences. That being so, it is not acceptable that it is issued (by an unelected body) several months after the law took effect.
Similar problems arose when new rules on management equity were introduced to the UK a few years ago, and frantic lobbying led to detailed "memoranda of understanding", which are now as important as the text of the law itself. Unfortunately, this unsatisfactory approach to legislating seems to be current Government strategy, particular where it thinks there is a need to block avoidance or remove what it regards as unfair advantages.
But the problem is by no means confined to Britain. In Germany, tax law was in a state of disarray for some time, after radical tax changes hit the private equity world in unexpected ways. Most of these have now been resolved, but even now there are some unanswered questions.
Last month the German tax authorities published yet more guidance trying to clarify the impact of thin capitalisation rules - which are similar rules to those introduced in the UK to deny a tax deduction for certain types of shareholder debt. These are broadly helpful, but the weight of guidance is now very considerable, and there are many lessons to be learned from the way that these changes were conceived, drafted and implemented.
For many governments, the impact of law has been on the agenda. In the UK, "regulatory impact assessments" are now common - attempting a cost benefit analysis of new rules - and fast track procedures to simplify unnecessarily burdensome laws have been introduced. In Brussels this week there have been calls for business to get more involved in the law making process at an earlier stage, so that the impact can be more accurately assessed.
But there are still countless examples of new laws that - whatever the merits of the rules themselves - do considerably more damage than they need to because they are widely drawn, and hurriedly implemented.
The draft guidance issued by the UK tax authority during August on the transfer pricing rules is available by clicking here. The guidance issued by the German tax authority is available by clicking here.
Simon Witney
SJ Berwin is a pan-European law firm with a particular focus on private equity. It has offices in London, Frankfurt, Munich, Berlin, Madrid, Paris and Brussels. If you would like further information on our services to the private equity industry please contact Simon Witney in our London office 020 7533 2222 or visit our website at www.sjberwin.com
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