Between Scylla and Charybdis

What the Odyssey and tax planning have in common

I took my two eldest boys to see The Odyssey last weekend. I studied Ancient Greek at university (yes I know, very practical) so it was fairly familiar but about an hour into the film I realised this wasn’t just a poem about a man trying to get home but could also be a story of a business trying to build an offshore structure that actually works.

The destination was never the difficult part. He knows precisely what he is aiming at, he has every right to it, and it is a thoroughly sensible thing to want. What takes ten years is the route. Every leg of it is contested by something, the rules change between one island and the next, the advice he is given is frequently correct and occasionally fatal, and he arrives without a single member of the crew he set out with.

Any of this ringing a bell?

Let me say the important thing first, because the tax profession has developed a bad habit of announcing the end of cross-border structuring roughly twice a year since 2013. Odysseus gets there. Ithaca is still standing and it is still worth reaching. A well designed international structure still works, still creates genuine value, and can still be entirely legitimate and defensible. The point of the poem is not that he should have given up and stayed at Troy. The point is that the route has become considerably more crowded with monsters, and the monsters have got better at their jobs.

So, a field guide. For those who did not spend three years of their lives on Homer, I have explained the monsters as we go.

Polyphemus, or transfer pricing

Polyphemus is the big scary one-eyed Cyclops. He’s enormous, but a bit daft, he keeps sheep, and rolls a boulder across the mouth of the cave that no man can move. Odysseus and his crew walk in, and then cannot walk out.

To me, the Cyclops is the best possible description of transfer pricing and the reason is the eye.

One eye means limited depth perception. Polyphemus is not clever or subtle but he doesn’t need to be. Transfer pricing legislation is, in substance, one sentence: transactions between connected persons must be priced as they would have been between independent parties. That is the whole rule. It is not a labyrinth of provisions with definitions folded into definitions and exclusions to exemptions like the CFC rules, and if you set it beside the hybrid mismatch rules or Pillar Two it looks almost quaint.

But TP is the single largest obstacle standing between most groups and their profits. It is simple but it is enormous, which is a combination people consistently underestimate, because we are trained to expect that danger comes wrapped in complexity. This danger does not. It is one simple but not easy rule applied by an authority with the resources to sit in the doorway indefinitely, and the boulder is the part everybody forgets: you do not get to leave while the question is open. Audits run for years and during that period you can’t get out. The rule may be simple but the boulder is massive.

Odysseus tries two things, and the film passes over the first one, which is a pity, because for our purposes it is the more instructive of the two. In the poem he tells the Cyclops his name is Nobody, or Outis. So when Polyphemus is blinded in the night and roars for help, and the other Cyclopes gather outside the cave and ask who is hurting him, he shouts back that Nobody is hurting him, and they all shrug and go home. It’s a good trick, and it works because there is nobody keeping records.

That is precisely why it deserves a mention even though the film leaves it out. The Nobody trick is the whole history of aggressive international structuring in one gag, and it is the thing that has actually died. An entity that is from nowhere, staffed by no one, doing nothing identifiable for a very attractive margin used to be genuinely hard for a revenue authority to see, because each authority only had its own end of the transaction and no way to compare notes. Country-by-country reporting, master file and local file, the common reporting standard and exchange of information between tax authorities exist for the single purpose of making sure the neighbours now come to the door and check for themselves. The other Cyclopes talk to each other. Nobody does not work any more, and anyone still selling it to you is selling a Bronze Age product.

The trick that does work for TP as well as for Polyphemus is the second one, and the film keeps that. Odysseus and his men get out of the cave strapped to the undersides of the sheep, and the blinded Cyclops runs his hands over the back of each animal as it passes and feels nothing but wool. That is substance, and note what it is not. It is not a story about the sheep. It is the actual sheep. Real people making real decisions, functions that match the profits, risk sitting with an entity that could genuinely bear it, and documentation that says the same thing your operations say. If your wool is a brass plate and a nominee director who signed forty other things that week, the hand comes down on the back of that sheep and you will not enjoy what follows.

The bag of winds, or your own people undoing you

This one also did not make the film, which is a shame, because it is the most familiar episode of the lot.

Aeolus, keeper of the winds, does Odysseus an enormous favour: he ties all the unhelpful winds into a leather bag and gives him only the one that blows towards home. Odysseus sails for nine days, comes within actual sight of Ithaca, close enough to see men tending fires on the shore, and falls asleep. His crew, who have decided the bag must be treasure he is not sharing, open it. Every wind in the world comes out at once and blows them all the way back.

I have watched this happen more times than I can count. The structure is sound, the rulings are in, everything is documented, and then somebody does something efficient on a Thursday afternoon without telling anyone. A contract signed in the wrong country, an employee who relocated without the tax guys knowing, a loan quietly capitalised at year end. Home in sight, and straight back out to sea.

Odysseus does not get a second bag, either. Aeolus takes one look at him and concludes he is cursed.

The underworld, or reconstructing a position nobody alive remembers

Halfway through the voyage Odysseus is told he cannot get home until he has gone down to the land of the dead to consult the prophet Teiresias. He has to sail to the edge of the world, dig a pit, make sacrifices, and wait while the shades gather. They will not speak to him until he has given something up.

This is like the historic tax file, and if you have ever had to defend a fifteen year old structure you already know how the scene goes. The transaction was done in 2011. The partner who advised on it has retired. The finance director who signed it has emigrated. The board minute refers to an annexure that is not attached to anything. Somebody’s predecessor knew exactly why the intellectual property was moved and wrote it down in an email account that was decommissioned in a migration.

And you cannot argue the position without them. Not because the tax analysis is hard, but because a transfer pricing or general anti-avoidance enquiry turns on what the parties intended and understood at the time, and the people who intended and understood it are long gone. So you go down and you dig. Old board packs, archived servers, the auditors’ working papers, the retired FD who will take your call if you are polite about it.

Note that Odysseus has to sacrifice something before anyone will talk to him, and note that the shades who come first are not the ones he wants. That is also accurate. What surfaces first in a document trawl is invariably the unhelpful email.

The Sirens, or the structure that sounds too good

The Sirens sit on an island and sing, and the song is so beautiful that every sailor who hears it steers straight at them, and the shore is white with the bones of the ones who did.

The song is always lovely, and the lyrics do not change much. The Sirens tell you there is a nil effective rate, it’s fully compliant, they have a legal opinion, they’ve implemented fifty of these and never had a challenge.

I’ve worked in international tax for almost 30 years, and the world now is very different to how it was when I started; now my general position is that off-the-shelf tax structures simply no longer work, and if it sounds too good to be true it probably is.

And what do the Sirens do after you’ve been lured into their grip? Well they move on to the next victim and when an assessment lands three years later, they are not there. They have no ongoing relationship with you, no exposure to the outcome, and no interest in the defence, because they were paid on implementation and have moved along the coast to the next ship. The measure of an adviser is not how confident they sound at the pitch. It is whether they are still in the room when SARS asks the difficult question, and whether they will put in writing the parts of their own advice that are weak.

What is worth noticing about Odysseus is that he does not avoid hearing the song. He has himself lashed to the mast and stops his crew’s ears with wax, which is to say he builds a governance structure that makes it impossible to act on the song no matter how badly he wants to, and ensures the people steering cannot hear it at all. Listen to the pitch. Have it reviewed by somebody with no fee riding on the answer. If the promoter cannot explain to your board, in one paragraph, what the commercial rationale is other than the tax, you are already on the rocks and simply haven’t noticed yet.

Scylla and Charybdis, or the two ways to lose

A narrow strait with a monster on either side of your business boat. On one cliff sits Scylla, who has six heads on six long necks, and as the ship passes each head snatches one man off the deck. Beneath the other cliff is Charybdis, a giant whirlpool that three times a day sucks down the entire sea and everything floating on it, and there is no version of Charybdis that you survive.

Scylla has exactly the right number of heads: the principal purpose test, the general anti-avoidance rule, the hybrid mismatch rules, controlled foreign company inclusion, exit charges, and interest deductibility limitation. Each one takes a bite as you go past. None of them takes the whole ship.

Charybdis is the other failure mode, the one where your whole offshore structure is regarded as being effectively managed from Troy, where you’re trying to escape from and thus fully taxable there. It swallows the enterprise whole and the story is done, with a lot of extra costs and flotsam.

Circe’s instruction to Odysseus is the most unwelcome sentence in the poem and the truest thing in this newsletter: steer for Scylla. Better to lose six men than the ship, accept some friction and lose some benefits. Accept that a good structure still costs you something somewhere, and treat any plan that promises to cost you nothing anywhere as Charybdis in a very good suit. Clients hate this advice but Circe was right.

Calypso, or the dispute that never ends

Odysseus spends seven years on Calypso’s island. It is beautiful, he is not mistreated and gets to hang out with Charlize Theron. He simply cannot leave, and so nothing in his life moves forward at all. Homer’s picture of him is a man sitting on the beach staring at the sea.

Seven years is roughly what a properly entrenched tax dispute will take you, and the thing nobody warns you about is how boring it is, and unfortunately in real life Charlize is not there. It’s not dramatic, not even especially frightening after the first year. It’s just an unending sequence of requests for information, extensions, and letters that restate previous letters, conducted between people who have both stopped expecting anything to happen soon and it costs you a fortune in management time and advisory fees. It drains the will out of a finance function more effectively than any assessment. Meanwhile the transaction you actually wanted to do sits waiting for the dispute to clear, and the business gets on without it.

The tactical lesson is the same as the one Odysseus eventually learns, which is that nobody is coming to release you. He gets off the island because the gods intervene, which is not a strategy available to the rest of us. Ours is to resolve the thing while it is still small, and to accept an imperfect settlement in year two rather than a perfect vindication in year seven.

Penelope’s loom, or the OECD

Back home, Penelope is holding off a hall full of suitors by promising to choose one of them the moment she finishes weaving a burial shroud. She weaves it by day. Every night she quietly unpicks the day’s work. She keeps this going for three years and the suitors keep waiting, because the work is nearly finished. Twenty years, two Pillars, still weaving and unweaving.

The bow

Here is the nice part. Odysseus finally reaches Ithaca and nobody recognises him. He has the story, the scars and a full account of every one of the ten years but none of it settles the question. What settles it is the bow. It is his own bow, left behind when he sailed for Troy, and it is so stiff that not one of the suitors can bend it far enough to get the string on. He picks it up and strings it in a single movement, the way a musician strings an instrument, because he is the only man alive who can.

That is the substance test, and it has been the substance test for three thousand years. Not the paperwork, not the narrative, not the quality of the explanation. Whether the entity you say owns the value can actually do the thing that only the real owner could do.

Ithaca is still there. It is still worth the journey. Plan the route, keep your wool on, and whatever else you do, do not let anyone open the bag.