JERA is one of the largest energy companies in Japan but it is also a relatively new company established as a joint venture between Tokyo Electric Power and Chubu Electric Power.
Having a short history has in fact helped us to onboard legal technology. If our company had a history of a hundred years, it would be almost impossible to fundamentally change the way the legal group works because there would be so much tradition built up that the organisation would be very resistant to change. With a new business one finds that nothing is set in stone. We are also fortunate to receive strong support from our ICT group, which is leading the digital transformation of our company.
But even with a young company, doing something new and bringing in a big change is not easy. One must secure budget and buy-in from management. One must also acknowledge the fact that Japan is a very traditional culture when it comes to doing business. Historically, Japanese companies have relied on paper, ink and physical signatures or seals to confirm documents.
However, COVID-19 has forced companies to examine technological solutions and embrace non-traditional working practices. This may have opened their eyes to the possibilities that technology provides, which will lead to a corresponding increase in demand. We are now able to get corporate approval at all levels via electronic confirmations, and paperless working is moving ahead throughout the company.
We are currently introducing and deploying contractual review legal technology. We introduced two [tech providers] for contractual review purposes, one English and one Japanese. I find this necessary as a Japanese solution is needed for Japanese-language documents and an international provider is needed for English-language documents. Some international companies also claim that they have Japanese language adaptability, but the quality is limited because of the nature of AI. Unless they process a huge amount of data, the AI will not grow to a level of capability that satisfies us.
The next area we would like to incorporate legal tech into will be that of workflow management. At the moment, all of this work is undertaken manually; we pick up the phone or receive emails and the consultation starts. In the future we would like to introduce management software to assist this process.
While not all our legal staff are equally eager for legal tech, particularly if they feel learning a new way of doing things will be time consuming, the technology we have introduced so far has proved to be very successful.
We would like to be even more ambitious with the technology we introduce, but we have not got there yet. Take something like document management systems. Transitioning to this type of software is so complicated that we are not sure which supplier is the right fit for us, or whether any company is able to do what we need. We are watching and waiting for the market to evolve.
Naturally, given the company’s size, the legal group’s work is on a global scale, and we need to work with both Japanese and English language documents. The uniqueness of language is one factor as to why Japan does not have as advanced a legal tech sector as other mature economies such as the US or UK. Japan is to some extent isolated from the global market because of this. It is making some headway in catching up, especially due to the COVID situation, and will hopefully progress further.
I firmly believe that the trend of increased legal tech adoption in Japan will continue and we will see an increasing number of companies introducing some sort of legal tech, whether that is document management, contract review or higher-end AI solutions.
We are looking for improvements to our legal technology in most areas. Although I believe we are a bit ahead of the curve in terms of openness to technology adoption, our use of legal tech is limited to contractual review and the contractual review itself – we are talking about relatively standard documents.
If technology advances and other areas can be also processed by legal tech, then the accuracy and efficiency of our work will be significantly higher, which is why we are looking out for new products and evaluating them on an individual basis. Adopting advanced technology to assist the company is one of our top priorities over the foreseeable future.
It’s fair to say that legal operations in Australia has evolved differently to the US, where businesses typically have much larger legal functions with many more lawyers in the organisation. There’s quite a sophisticated supporting structure around all of that which has effectively been brought into the legal operations umbrella. Australia is a little different.
The Corporate Legal Operations Consortium (CLOC) in Australia evolved out of a desire to bring together a group of legal staff working at some of the larger companies who had an interest in sharing things that we were learning through our operational improvement initiatives. That included technology but it also included other less tech-focused initiatives aimed at just improving our efficiency and service delivery.
CLOC, particularly in the US, also has quite an extensive array of online resources and online collaboration tools, including some active chat forums where people ask information about what’s happening, and seek insights from other CLOC members that might help them with particular problems that they’re facing or issues they need to solve. In the last year or so, CLOC has also put in place a law firm membership so that external legal service providers can share what they’re doing from an operational improvement perspective.
Sheldon Renkema, general legal manager, Wesfarmers
Legal operational enhancement can be a real challenge if you’re starting entirely from the ground up. One of the great things about CLOC is that you can very easily learn from what others are doing, so that you’re not reinventing the wheel. You are learning from others’ experiences, which makes it a really good forum for embarking on that journey, connecting with people who’ve been through similar experiences and being able to benefit from their experience of the things that have gone well or not gone well in that context.
It’s very difficult to actually objectively assess whether what legal tech providers are saying their product or service delivers is actually what it delivers. Being able to leverage the experience of people who have used those products and services to see what the actual output is helpful.
In my own in-house legal department, we were using an array of technology from the very basic, starting out at the bottom end in terms of core functionality, things like an internal matter management system, which generates data about what the team is doing and feeds into reporting on what we’re up to. We also have a document management system as well, that allows for ready storage of documents.
We’ve built a number of these tools, for example, a self-serve non-disclosure agreement tool that allows people in our businesses – without having contact with a lawyer – to be able to generate and execute a compliant confidentiality agreement. There’s also marketing review tools and a contract review tool that we’ve built and are continuing to evolve. Our objective is to identify processes that our lawyers would otherwise do that are not particularly complex and not particularly strategically significant. And where we can, making use of a tool so that can be done within the business in a user-friendly way that manages the risk.
Going forward, we are exploring the use of more sophisticated tools, particularly more advanced document review technology. The idea is to do an 80/20 review of incoming contracts so that against some key parameters that we’ve identified so that it really helps the lawyers to narrow down their focus on what’s really important in terms of those contract reviews.
We are fortunate in our business that we are relatively free to look at using technology ourselves, although there is some formality in the process. We have to ensure the software we are interested in complies with our data security frameworks, so everything needs to be reviewed by our cybersecurity team to make sure that it is compliant with our standards. The other – perhaps obvious – issue is fitting it into our budget. Aside from these issues, though, there is a fair bit of freedom for us to explore and test different offerings.
I would make the observation that lawyers increasingly need to be at least attuned to technologies and what they do. There’s an open argument as to whether lawyers need to be capable in skills like coding et cetera, my view is that this is probably not necessary but that they at least they need to be familiar with the technologies that are available, and need to be comfortable living with these.
Lawyers who are beginning their careers now are going to be looking at a very different way of practicing in 10 or 20 years’ time, and they need to be adaptable to that. Some have said that what is really important for lawyers is perhaps not so much blackletter expertise but around building empathy and their soft skills development. I think there’s certainly some wisdom in that.
Legal technology is something we have been exploring long before COVID-19 arrived, but the current pandemic has certainly forced us to fast track projects that we had been planning for the future. I would not say that we are using sophisticated systems – in our market sector it is not necessary to be at the cutting edge – but we have found ourselves using much more technology.
At the beginning of this pandemic there were obstacles to overcome, because we just didn’t know what to expect. No one knew how long the ‘work from home’ situation would last, but I don’t think anyone expected it to last for so long.
As general counsel and compliance officer for the entire food group at Pilmico, I am essentially managing legal work throughout the region. This can be difficult, especially as I am dealing with a range of jurisdictions with different laws on a daily basis. There is no real legal or regulatory alignment across the ASEAN region, which is certainly an obstacle to introducing new tech-enabled processes.
Most legal tech innovations I have come across have originated in Singapore. This is of course partly the result of Singapore’s strong culture of innovation, and the generous funding available for such initiatives, but it also depends to some extent on the regulatory environment. For example, Singapore recognises e-signatures, while countries such as Indonesia do not. As such, a platform which is supposed to lighten the burden by implementing e-signatures is not much use to a business that has a pan-Asia Pacific footprint.
From an operational perspective, things can get even more tricky. Remote working has impacted our operations throughout the Asia Pacific region, which means we not only have to focus on tools that can help our employees at headquarters in Singapore, but for all our staff across various markets.
Over the past few months, technology-driven developments and initiatives designed to make working from home easier have been prioritised. We have rolled out a new console system within the team to help us manage legal files. This has been very useful in making sure we retain and track important documents. This system was initially going to be introduced in the second half of next year, but we fast-tracked the initiative to help assist the transition towards working from home.
The experience has helped me see that in many areas we were still working in a very traditional way. For example, I would review a Word document, send it via email to the other party for review before receiving a marked-up copy for further review. When you look at documents being reviewed in this way, you end up creating many drafts and different versions of one document.
Being forced to adopt new solutions has certainly shown me that it is not the only way to do things. Even something as simple as Google Docs can help solve this issue, but I am increasingly interested in exploring the more sophisticated solutions that are available, such as a one-stop-shop that assists with drafting, reviewing, signing and retaining documents, as well as assisting with contract templates.
The biggest impact technology has made during the lockdown is in terms of how we share information and knowledge. We are now using virtual meeting platforms on a daily basis, sometimes several times a day. I suppose that shows that, for many tasks, there is no substitute for personal contact. We still need to discuss and exchange ideas, but perhaps the way in which we deliver our services will continue to evolve. However, I would say that we now spend more time interacting with our colleagues outside Singapore than ever before. If anything, the inability to travel has brought the wider team closer together.
When I moved in-house around 20 years ago I knew I wanted to work in the IT industry. The pace of change made it the most exciting place for a lawyer to work, and I have been in the front row ever since. While many of the business technologies we use on a daily basis have evolved rapidly, the technologies enabling support functions have been much slower to take off. Until now.
Onboarding legal tech used to be a matter of trial and error. The technologies on offer felt like a solution looking for a problem, and while there was a lot of interest surrounding legal tech it was difficult to make a concrete use-case for what was available. In the last few years, new systems for contract management and document discovery have appeared on the market and are now extremely helpful for in-house legal teams.
These improvements have little to do with technological development – after all, similar systems have been available to businesses for many years – they result from the growing recognition in-house counsel are a viable market for software vendors’ products services. With the growing economic significance of in-house lawyers as a consumer group, the market has finally moved to develop solutions that meet our needs, which are very different to those of law firms.
For in-house lawyers technology has to be easy to use. It needs to work with other systems and align with existing work workflows, and it has to give functionalities that are fit for purpose. All this needs to be backed up by high-levels of support in terms of training and other assistance. In short, in-house lawyers are not looking for off-the-shelf solutions, we are looking outcome-oriented vendors who are able to work collaboratively to meet our needs.
This collaboration needs to begin at the concept and design stage of a piece of software. Knowing the pain points GCs face, or what does and does not work within a typical company environment would help a great deal in making a system that is fit for purpose. For GCs, the price of a system is not just the cost of the license fee. It is also the time spent customising the software, the effort that goes into implementing the software, and the change management and project management requirements that come with it. We have gone through this cycle many times in the past, so we are extremely aware of it.
At all large businesses the legal team works in an ecosystem. This means when we are purchasing external legal tech, we are looking for products that can scale out. Contract management tools, for instance, can be used for other things. That makes a huge difference in terms of bang for your buck. We are really looking to leverage company-wide platforms.
The other big development I have seen in the legal tech space is a growing awareness among GCs that they need to take control of their team’s transformation. Legal tech is not always about finding external solutions. Often, it is just as important to look within. Currently we are looking at leveraging company-wide platforms as a set of collaborative tools that we can use, ideally with no need to integrate any foreign software or systems into our own ecosystem. We are also leveraging enterprise systems and customising them for our requirements. These systems may not have been designed to meet our needs, but they can nevertheless be extremely useful. It is all about being creative and experimenting with the technology you have available to you.
In the same vein, we have also developed tools within our own function. For example, my in-house legal team created a contract risk scoring tool three years ago. We use it to provide a numerical risk rating to contracts, assessed against our internal legal risk policy and tolerances. We have also built in a traffic-light feature based on the ratings. The tool has since been incorporated into the region’s enterprise deal assessment system, which takes into account assessments from other functions as well.
With all these developments, the next few years look set to a transformational period for legal teams. Legal tech will not just change how fast we work, but what we work on. As technology matures, routine and repetitive work can effectively be automated. This frees up bandwidth for internal lawyers to do more complex work that requires creativity. It will allow us to spend much more time on things like negotiations, strategic planning and resolving complex matters. That is cause for optimism. Perhaps technology will help solve the modern in-house counsel’s struggle for sufficient bandwidth.
For GCs, technology is very much a love-hate relationship. We love using technology and are increasingly reliant on it, even though we hate to admit it. The pressure every business has been under to work remotely is showing us how much we rely on technology to operate, which was a trend that started long ago.
Within the legal function we are now using technology for everything from e-discovery to data mapping and analytics. Even beyond front-end legal work, we are using technology to update our insurance certification or take care of our invoicing and billing. Really, we could not operate as a function without this technology. The question, then, is not whether legal technology will become important – it is already essential to the way we operate – but how it will change what we do, and whether it will replace certain tasks. As far as I can see technology will not replace lawyers, but it will open up new ways of working and allow us to see things that were previously invisible.
Working within a rather lean legal team means that each person has to draw on whatever resources are available to maximise his or her benefit to the business. I am a certified data protection officer and sit as the designated privacy representative for the Asia region. I’m also a certified enterprise risk advisor, a certified business continuity manager, and have just sat the anti-bribery exams. Having that broad-based training is one way of maximising the range of matters I can cover. The other is using technology effectively.
I estimate that our use of technology allows each lawyer to double their workload, so this is not an inconsiderable benefit to the team. The other big benefit technology brings to our legal work is that it allows us to take a more systematic, joined-up approach to risk. The ability to search documents quickly and reliable is one of the best ways to identify and mitigate risk patterns in litigations, investigations, complaints and a many other areas.
This is a fast-moving area of legal tech and one where we really need to keep our eyes open. For example, investigations require detailed knowledge of the underlying facts, and increasingly sophisticated software is being developed all the time. As lawyers, we have to be very open-minded to the possibilities this software will unlock. We almost have to forget that we are lawyers for a moment and think of it as a data mapping task rather than a legal task.
To use legal tech effectively you cannot be afraid to fail. You have to explore new technologies, launch new programmes and initiatives, and start working in different ways, but you also have to know when to abandon software and strategies that are not effective. This requires a fundamental shift in thinking for most lawyers.
Open yourself to new ideas, trial new software and ways of completing legal tasks, but don’t be afraid to admit that something isn’t right for you. You have to be very careful, because not every technology will suit your use case. Try and test as much as possible before determining whether you can actually implement it for use in the long-term.
When it comes to identifying and procuring new technology, we are fortunate to have a supportive IT function. New software is purchased by IT at group level, but every decision follows close discussions with the various business units and support functions to make sure a product will do or can adapt to what we need it to do. My experience is that IT are always eager to explore new tech and are happy to find things that will make your life easier. Building that relationship with your IT people is essential to getting the right tools. But of course, as GC I also need to be involved in the process because only the front-line legal staff can truly stress-test a system.
While there have been big changes in the market for legal tech, most law firms remain quite conservative here and tend to focus on legal skill sets at the expense of other ways of working. However, there are signs of change. New business models that offer on-demand legal staff or a mix of outsourcing and technology-based solutions at competitive price points are becoming more accepted. Ten years ago no one thought it would work, particularly in this market. Now they are threatening the traditional firms. The lesson here is clear. Both in-house and private practice lawyers must be more receptive to new ways of defining products, markets and clients. Technology itself will not leave us behind, but our inability to adapt to its consequences certainly will.
As everyone knows, life after COVID-19 will not simple return to normal. New working arrangements are here to stay, and that means technology will become an increasingly important aspect of working life.
The number one goal of innovation in our legal team, in an organisation manufacturing basic commodities, is to be able to do more with less – to consistently deliver high quality outputs at lower cost, so we are contributing to improving our organisation’s profit. There’s always pressure to keep costs to the minimum, but there is also a particular risk in needing to do more and more in terms of meeting increasing compliance requirements whilst containing costs.
The second goal is to increase reliability. There are more regulatory requirements to deal with and more things being asked of us, and to do that confidently and efficiently we need to make sure that the information and the processes we’ve got to be able to do that are robust and reliable – so I know that when the CEO wants a piece of information I can produce it reasonably quickly, and we are providing various stakeholders with confidence about our organisation’s governance.
We’re in the early stages of looking to see what new legal technology is available that can successfully meet our needs. I’ve been an in-house lawyer for over 20 years now and am probably one of the longest serving in-house lawyers in Australia. I use a basic, but robust and reliable system which has served us well.
We use a SQL Server relational database for recording and linking all the information we use every day, such as information about matters we are working on, agreements, property details, intellectual property, company details, and external lawyers’ fees, but we are looking to upgrade from this. We have been looking at what there is on the market, and there have been some quite interesting developments in terms of matter management. Overall, our organisation does not have a consistent process for information management, leaving it to particular teams to make their own arrangements.
Marcus Clayton
We have had a lot of growth over the time I’ve been here and we’re a much bigger company now, with more operations, more people, and more issues that need to be resolved every day. We are in a period of rapid change for our organisation. One aspect of this is the organisation is about to embark on a digital transformation project planned to unlock value, including a focus on the benefits from automation and smart analysis of our financial and operating systems and processes. We’re also looking at how that works for us in the legal team, to bring it all together over the next probably six months, against the objectives of robustness and reliability that I mentioned before.
We are currently looking at NetDocuments, iManage and a couple of other leading information management systems and are also looking around for matter management systems. What did surprise us was that there was not really one overall, out of the box, comprehensive package available for the typical needs of an in-house counsel team like ours.
We try to keep things as simple as we can, and we prefer just to go out and get something that is going to do what we want off the shelf. Our needs will be similar to many other companies’ needs. Given that we already have a good simple set up, we don’t want to have something new that is of a proprietary nature and forces you to go down a route in doing things their way, that may not align with our preferences, and could provide less functionality than we’ve got at the moment.
A couple of high-level IT leaders I have worked with recently, inside and outside our organisation, have confirmed a contemporary approach is to use out of the box wherever you can. They also reinforced a strong preference for a cloud-based approach, rather than on premises facilities.
We have quite a free rein in terms of what technology we can onboard within the team. Of course, if it doesn’t work or deliver value, I carry the can for that. To learn about the value of the technology which is now available, we went out and got anecdotal evidence, did research, and then followed up with a few of the aggregator providers about what they would recommend. That led us to talking to some people, getting some demonstrations and forming our views.
I was surprised at the low estimates for setting up this system and migrating our data. I feared from previous experience that the actual costs could be greater than the optimistic forecasts, so in the budget I’ve put in a more realistic amount than has been suggested for a migration (which of course we will manage carefully). I’ve also said we want to do it in incremental stages, which helps us manage the transition risks.
We’re a small department, who operate in a company that has traditionally run everything very lean. That’s the environment I’ve been working in for a long time with colleagues in the legal team. We evaluate our technology intuitively and based on how much it is actually helping us to achieve our objectives. Having said that, we are building KPIs into our assessment process at the moment as part of our structured evaluation procedure.
When staying abreast of what legal technology is available, organisations such as ALITA are useful and easy to access to corroborate what we’re finding in other places, and help us to test things anecdotally against promotional material or the stated capabilities of the tech.
I’ve followed what’s going on in artificial intelligence relevant to our responsibilities, and I can see where it will have application, but in our case we are a heavy manufacturing industrial company which doesn’t have a lot of low-value, high volume legal work. We leverage our internal expertise with carefully selected external advisors who we are confident will apply themselves creatively and deliver value for us, and while I currently don’t see a big role for AI in our legal team on a regular basis, we’re continuing to monitor its progress. We have used AI in certain cases, for instance during some major litigation, and I was really impressed with the quality that came back from applying AI to our discovery records. Automation, AI, and machine learning are opportunities we are planning to exploit for our heavy manufacturing business, with an expectation of significant benefits, so we are on the look out for where these sort of opportunities might be there for the legal function also.
COVID-19 and its effects have of course had an influence on the way we are working at the moment. From March to July, everyone was working from home, and in July we cautiously moved back to offices, following a contingency plan which for us had a ‘team A’ and ‘team B’ that were in the office on alternating weeks.
We are operating throughout Australia, so we have had experience with the different situations in the different states. We’ve had experience with all the video conferencing facilities, and have had a major rollout of hardware and software to people who weren’t using stuff in a mobile way to the same extent as others. In our legal function we’re all equipped with laptops and iPads, and because (pre-COVID-19) we’re often all around the country, it wasn’t a great change for us. The relational database that I mentioned before has given us a really solid framework for our essential information, so that even though the team’s been at home for some time over lockdown, we’ve been able to continue all of that essential stuff without any glitches whatsoever.
Going forward, I think that technology will change the roles of in-house lawyers in a more subtle way than many are predicting. Some tech that we use, such as hearings via video conferences, can be used tactically, and you need to consider that before being pushed down a certain path – should you agree to videoconference or not agree? Are you giving up some advantage if witnesses are not being cross examined in person, or if your representatives are interacting with the court in different ways? This shows that technology needs to be adopted in a measured way, because there are just too many side issues that come up.
Our Annual General Meeting (AGM) was in May, so we had to deal with how we were going to do this in the middle of the pandemic, with the restrictions on meetings. This quickly exposed us to virtual AGMs, but these are still not that straightforward. We did a hybrid AGM, which went well apart from the fact that a third-party tech provider played the CEO’s speech before the Chairman’s speech. It was simple human error, despite numerous rehearsals undertaken and the procedures we had in place. Most viewers would not notice, but it just highlighted that there are risks in new technology. Next year, I think we’ll probably still do a hybrid AGM, but we will have learned the lessons, I don’t think we’ll move to a fully virtual AGM.
Young lawyers who will have to drive the profession’s use of technology forward should be clear about what they are trying to achieve from legal tech. That’s cost efficiencies, delivering valued outcomes, avoiding surprises, and having reliable information and systems and tools to be able to do the task that you’re responsible for dependably. Everything comes back to that, and that’s what we’re trying to do in order to deliver value for our shareholders. You need to have a mindset that is going to let you understand how you can use the technology and the potential developments to further what the organisation is trying to achieve. You can’t be divorced from the underlying nature of the business.
Digital transformation is a hot topic right now and DXC Technology is an industry leader in this field. We leverage technological innovations to deliver better business outcomes by driving new levels of performance, competitiveness and lower prices. Put simply, we work hard to make sure other businesses stay ahead of the curve when it comes to technology.
The legal team has embraced this approach. As [DXC general counsel] Bill Deckelman said, the digital innovation tools that our department has had access to since 2017, [when DXC was formed through a merger of the recently spun-off Hewlett Packard Enterprise’s Enterprise Service segment and Computer Sciences Corporation (CSC)], represent a unique opportunity to position our legal team as global thought leaders in legal digital transformation.
From the very start of our journey we aimed to do something different, partnering with UnitedLex to help restructure the global legal team. At the time, this was the largest-ever managed services transaction in the legal space. By bringing in new technologies we have developed a far more agile way of working that enables us to cover more ground than ever before. We have created a digital platform housing legal research, templates and advice. This allows us to provide a lawyers on demand service for a range of matters, from documentation to compliance, from litigations to procurement. Supplementing this, AI-based legal tools and machine learning allow us to better predict risks, understand customers’ problems and improve performance.
This technology has undoubtedly improved our efficiency. It can streamline templates and playbooks, assist with negotiations, help with training and rationalise workflows. It also allows each team member to properly track their work in real time so the management team is constantly aware of the progress being made on a matter. This means management can identify gaps in our coverage and move to respond to potential issues faster than ever before.
Ivy Wu
It has also helped us show management the value our team brings to the company. We can track the value of each matter we are supporting, whether that is by managing litigation risk or contributing to new business. The feedback from business has been very positive. They are able to see that the cost saved or value added by the legal department far exceeds our budget.
Technology reduces the barriers to collaboration across functions. It can be a useful way of working with various business units to identify pain points, opportunities and solutions. In fact, the new ways of working we have developed have been so successful that we plan to make remote working, at least to some degree, a permanent feature of the way we operate. Technology will not replace lawyers, but it will require a re-imagining of resources, both technical and personal. Legal work will place much more emphasis on the ability to collect, analyse and process relevant data.
The push to introduce new legal technologies is to be welcomed, but there is still a long way to go. Many of the new tools that have come to market are very complex, do not allow for optimisation, and requires a big time commitment on the part of GCs to fully learn its functionalities. Of course, the more time you have to spend learning a new system, the less effective it is as a cost-saving tool. Team members may also need to repeatedly log in, complete registration forms, or provide other information.
International legal service providers should also consider customising their products to work in Mandarin, or tailoring them to fit local cultural usage. China is a very large market, and enhanced support for our lawyers would be beneficial to both domestic businesses and multinational companies.
There is no doubt that legal technology has helped everyone in the market improve their performance. Most interesting has been the impact it has had on the judicial system. The ability to file lawsuits electronically or attend virtual hearings has proved very successful in China. This is a very important development, especially for employees of multinational companies who are not able to be physically present during the course of a matter. Other developments are even more surprising. While previously it was very time consuming to notarise electronic evidence, we are now able to apply blockchain technologies to preserve electronic evidence.
There are a lot of changes taking place. Our mission in the DXC legal department is to understand these changes, learn as much as possible about the technologies powering them and, most importantly, to be at the forefront of any future change.
This chapter will cover a general description of Panama, taking into consideration several positive and strategic complements that influence the services that may be promoted in different areas such as business, logistics, financial and maritime matters that are seen from a global perspective. In this sense, Panama, as a country with a privileged geographic position that allows it to take advantage of economic competition and worldwide opportunities, is one of the countries with the highest growth and enrichment potential, while offering important benefits for foreign investments.
Panama allows us to provide all the necessary legal services to provide security and tranquillity to a multinational company that decides to establish in our country. For this, aside from our geographical position that allows greater logistic opportunities, we must consider the laws and regulations that make Panama one of the best countries for investment and competitiveness, achieving better profits compared to other countries in the region.
Panama has special tax regimes with the objective of promoting productive activities in different areas of the country that help generate new jobs and economic growth by giving opportunities for the companies to start operations.
The Panama Pacific Special Economic Area, created by Law 41 of 20 July 2004, establishes a special legal, fiscal, customs, labor, immigration and business regime for the establishment and operation in the Area. This special Area aims to encourage and ensure the free flow and movement of goods, services, and capital, to attract and promote investment and jobs generation.
The companies located in the Panama Pacific Area have several tax benefits such as exemption from income tax on activities encouraged by law, exemption from remittances, interest, and business privilege for services abroad and capital gains, among many other benefits.
We also have Law 57 of 2018 of the Multinational Companies Headquarters (SEM for its acronym in Spanish) that allows a company to maintain its business offices in Panama to provide services to the headquarters and having benefits for both the companies and their executives who come to work in Panama:
Tax benefits for companies: reduced rate of income tax, exemption from payment of dividend tax on operation notices and; exemption from the payment of the dividend tax, the complementary tax and the branch tax, without distinction that they are from local, foreign or exempt sources, among other benefits.
Tax benefits for executives: by opting for the SEM (Migration) visa, they may obtain exemption from income tax, exemption from import tax for household goods and exemption from import tax on motor vehicles.
Taking into account the Panamanian migratory system, it is also relevant to point out that the SEM visa allows the headquarters to hire as many expats as necessary for the operation without limitation.Additionally, it allows the expat to obtain a residence permit for his or her dependents with unlimited renewals and eventually grants the principal a permanent permission to remain that leads to a Panamanian identification document.
As part of the situation that arises from the COVID-19 pandemic, the labor environment has been transformed with various regulations issued under the State of National Emergency decreed by the Executive Branch, covering working hours reduction, labor contract suspensions, among other measures that benefits the employee and helps the employer to reduce the economic impact of the pandemic.
Regarding home office working, Panama has a recently enacted Law No. 126 of February 18, 2020 that regulates the offsite working option, which includes provisions related to the responsibility of the employer for the health and safety of the employees working from home.The law establishes that teleworkers must be informed of the company’s policies regarding this matter and that a program to supervise and train personnel on health and safety matters must be adopted, as well as a manual of good environmental practices and general socialization.
In addition to the fiscal / tax measures that we have contemplated in previous paragraphs, other measures have also been issued to help alleviate the strong impact on the global economy due to of COVID-19, such as the following measures:
Decree that grants a term of 120 days, effective once the decree was published, for the payment of any tax to be paid to the General Directorate of Income, without causing interest, surcharges, or fines for late payments.
Deadlines are extended for the payment of taxes that are caused or must be paid during a period declared as a State of National Emergency, until 31 July 2020. Likewise, the payment of the Property Tax corresponding to the first four-month period of 2020. This, without entailing fines, interest, surcharges for late payment as well.
Deadlines are extended to file the Tax Returns for fiscal year 2019 until 31 July 2020.
Deadlines to submit the Transfer Price Report regarding the operations carried out with related parties during the 2019 fiscal period were extended until 30 September 2020.
Extension of one year of exemption for companies registered with the Micro, Small and Medium Enterprise Authority (AMPYME).
Extend the deadlines to present the Report of the special payroll 03 corresponding to the fiscal period 2019 until 31 July 2020.
Another important aspect of the Panamanian legal framework is Law 81 from 26 March 2019 regarding the protection of personal data. This law, to be implemented from March 2021, establishes principles, rights, obligations, and procedures that regulate the protection of personal data. Responsibilities for the infractions or faults and sanctions that may take place, among other provisions, are also included. It is very important for all companies established in Panama to make sure that their internal policy regarding this matter complies with the local law and in any case should adjust accordingly before the law comes into effect.
As to money laundering and terrorist financing, in the last 12 months Panama has adopted a series of laws, executive decrees, and other regulations that contribute to compliance with international standards, so it has strengthened it’s position as a safe and collaborative jurisdiction. In addition, it has improved its governmental administrative structure of both financial and non-financial obligated subjects to ensure full compliance of the money laundering and terrorist financing measures, including a legal mechanism to process tax evasion.
At EY Law Panama we can provide detailed legal guidance to help meet the needs that are required in general or more specific aspects of companies established or to be established in Panama, including those related to the consequences of COVID-19. Panama is a country full of opportunities where all the advantages and benefits given should be taken knowing that it provides for entrepreneurship and face the new global economy that we see every day with new challenges and complexities to achieve.
As the COVID-19 pandemic creates significant uncertainty and unique challenges in the global investment environment, its impact on Latin America presents several opportunities for private equity funds. In navigating the new investment landscape with respect to their Latin American investment programs, there are number of corporate, finance and tax issues PE funds should consider before proceeding with Latin American acquisitions or increasing investment in existing portfolio assets. This article discusses certain tax structuring, transfer pricing, and tax compliance considerations relevant for PE funds holding Latin American portfolio assets or expanding their investment in Latin America.
Tax Structuring Considerations
Acquisition of Distressed Latin American Companies
PE funds are seeking acquisitions of distressed Latin American companies or those requiring capital infusions to survive the economic downturn. For example, targets include, among others, family-held companies with shareholders seeking liquidity or diversification, companies unable to restructure their debt or continue with an existing IPO plan, and real estate holding companies with immediate cash needs but steady revenue flows.
In structuring acquisitions of Latin American targets, PE funds must identify the appropriate vehicles through which to invest. For example, a PE fund might analyze whether it should establish a tax treaty structure to effect an acquisition. In a private equity context, the primary tax consideration for most fund managers is taxation on exit (ie capital gains tax). For example, among others, Argentina, Brazil, Chile, Colombia and Mexico generally impose, with some exceptions, tax upon the sale of shares by nonresident investors. Accordingly, funds might establish a Spanish or Dutch investment structure because of Spain and the Netherlands’ significant tax treaty network in Latin America, or structures with transparent investment vehicles such as Canadian limited partnerships (eg Alberta or Ontario) and certain Luxembourg entities. Funds might also consider establishing local investment vehicles to mitigate taxation on exit, such as Brazilian Fundos de Investimento em Participações (FIPs), which can eliminate Brazilian capital gains tax on exit (although such structure has been scrutinized by the Brazilian tax authorities in recent years). Fund sponsors are rightly concerned that exit taxes in Latin America can reduce a fund’s IRR, especially if some taxes are not creditable against taxes of fund investors.
Tax due diligence is as important as ever. Among other things, deal teams should carefully examine items such as operating loss carryovers, permanent establishment risk for multinational targets, tax compliance, accrued and outstanding income, payroll, and VAT tax liabilities etc. Also, a target’s receipt of government subsidies, credits, or other assistance in response to the global pandemic could restrict its ability to pay dividends or even alter the timing of a future exit. If indeed a target has received such assistance, funds must consider whether the proposed acquisition will jeopardize continued assistance or if a sale or change of control will require immediate repayment of such assistance.
Debt Restructuring and Acquisition of Portfolio Company Debt
Dealing with portfolio company debt is another area that has recently received significant attention. In order to preserve cash to meet operational needs, leveraged portfolio companies have developed strategies for managing their debt service, including working with lenders to obtain a combination of additional borrowings, forbearance and standstill agreements, and debt covenant waivers.
In order to ease the process with lenders, some PE funds have chosen to request capital calls to fund their struggling portfolio companies, while others have lent to their Latin American portfolio companies. Other PE fund groups have instead opted to acquire their portfolio companies’ third party debt. In certain cases, funds seek to acquire the debt at a discounted price and sell it at a premium when market conditions improve, while in other cases, the motivation is simply to maintain some modicum of control over a portfolio company’s debt service. Some funds have considered raising credit funds and/or establishing a special structure for that purpose, such as an Irish intermediation structure.
PE funds must address the Latin American tax consequences arising from each alternative for both the fund and the portfolio company. Some key considerations include:
Cancellation of debt considerations. As part of a debt restructuring, portfolio companies must consider whether income or other taxes are imposed on any amount of cancelled debt.
Deductibility of interest payments. To the extent a PE fund lends to a portfolio company or acquires its third party debt, the fund should consider whether the interest paid by the portfolio company is a tax deductible expense, particularly if the fund and the portfolio company are considered to be related or if the fund is organized in a low-tax jurisdiction as determined by local law.
Withholding taxes. Withholding taxes imposed on interest payments must also be analyzed. Most Latin American jurisdictions, including Argentina, Colombia, and Mexico, impose withholding tax on interest paid to nonresident lenders. An income tax treaty may reduce the withholding tax rate for PE funds using a treaty platform for their Latin American investments. Spain and the Netherlands, for example, are jurisdictions commonly used by PE funds (and other investors) for investing in Latin America.
In addition to the considerations listed above, PE funds must also address transfer pricing concerns, particularly as it relates to whether the terms and conditions of related party debt is arm’s-length and otherwise compliant with local transfer pricing rules.
Transfer Pricing
Reviewing, updating and, if needed, revising transfer pricing arrangements is a method by which portfolio companies may preserve cash and otherwise manage tax positions. For instance, adherence to the arm’s-length principal, in conjunction with contractual provisions in intercompany agreements (e.g., force majeure), permits related parties to adjust their intercompany arrangements to reflect economic reality. For example, in the absence of an advantageous income tax treaty, many Latin American jurisdictions impose significant withholding taxes on service payments, royalties, and management/monitoring fees paid abroad. Analyzing existing arrangements may yield opportunities to mitigate or otherwise restructure the payments, resulting in potential tax savings.
In any case, as Latin American governments seek to raise revenue through taxes and increased tax audits, portfolio companies should ensure their transfer pricing documentation and cost-sharing policies are compliant with local country transfer pricing requirements and of course, reality. They should examine whether their transfer pricing has reacted to supply chain and operational changes brought on by the pandemic, and whether such changes require remedial changes to internal pricing of goods and services. While Chile, Colombia, and Mexico are the only Latin American members of the OECD, the domestic legislation of a number of Latin American jurisdictions contain many of the same or similar principles set forth in OECD transfer pricing guidance. For those Latin American jurisdictions that do not explicitly adopt OECD transfer pricing principles, such principles may serve as secondary or supplemental guidance in interpreting domestic transfer pricing legislation (eg Brazil).
In assessing transfer pricing risk, portfolio companies should examine their current intercompany transaction flow and supply chain and corresponding intercompany agreements. Mature portfolio companies with older transfer pricing policies may discover their intercompany transaction flow and supply chain has evolved over time, such that their intercompany agreements do not accurately reflect current reality. For example, the method of compensation (eg profit split, cost-plus etc) originally provided for in an agreement may no longer be appropriate. Similarly, an intercompany agreement may not describe services actually provided between related parties. Because it is common for government auditors to request intercompany agreements in connection with a transfer pricing audit, such auditors can seize on the fact that intercompany agreements are not being followed, are otherwise inconsistent with reality, or do not even exist.
Tax Compliance
As Latin American governments continue developing strategies for battling the pandemic, they are also developing strategies for an economic recovery. While the pandemic’s true cumulative economic impact is still very much unknown, past economic downturns show us that PE funds can expect to see increased audit activity within their portfolio of Latin American companies.
Accordingly, PE funds should work closely with the management of their Latin American portfolio companies to ensure they have a robust tax compliance program in place such that they are well positioned to defend against potential tax audits or avoid potential penalties of lax internal pricing and arm’s-length documentation. They should consider and reassess material uncertain tax positions that, if successfully challenged, could result in significant tax liability and substantial penalties.
Conclusion
The COVID-19 pandemic will continue to generate significant challenges for many Latin American businesses, some of which sought additional funding and credit facilities from their shareholders and lenders, while others concluded filing for reorganization or bankruptcy is their only viable alternative. PE sponsors with Latin American investment programs face substantial challenges, but many others find investment opportunities notwithstanding the current economic environment. Addressing tax structuring, transfer pricing, and tax compliance considerations in Latin America is an important part of overcoming inevitable obstacles and seizing on new investment opportunities.
Cuestamoras Salud is a pharmaceutical distribution company. We have a portfolio of distribution assets that not only cover pharmacy, but also medical equipment. We serve the two biggest markets in Costa Rica: the public market – which consists of hospitals, clinics and the whole public health sector –and the private sector, which also includes hospitals, clinics and pharmacy outlets. I have legal oversight for compliance functions, regulatory affairs and value protection (formally known as asset protection).
Since COVID-19 our workload has increased significantly, especially in the areas of regulatory compliance, contracts, customs and public health bidding. Public health bidding has been a huge area for us, and in recent times it has obviously increased. The pharmacy and health sector have to buy products from the market, during a time when everybody is trying to buy the same products. This has been a really big challenge for us.
However, the biggest challenge in the last few months has been uncertainty. This is a fairly new disease and there is little known statistically and scientifically about the virus. So there are a lot of questions to consider, in terms of how to act and how to react. I believe keeping calm during this time can be just as contagious as the virus.You need to make a proper assessment of all the information you have at hand and try to keep focused on goals. Our goals are keeping our employees safe, whilst continuing business operations.
One of our biggest regulatory hurdles has been getting the government to approve private testing. At first, health authorities in Costa Rica said no because they wanted to be in control of confirming who is a COVID patient and who is not. In order to get private testing approved we had to do some lobbying. We pressed the government with evidence of what had been happening Europe – in places such as Spain and Italy – to show that you need the private sector to help minimize and contain the spread of the virus alongside public officials.
Finally, authorities permitted private testing, providing the private sector with the tools to determine at an early stage who may be sick and who is not. From that we could determine who might need to be isolated. There was a business continuity incentive here, but it also had a public health component. It allowed us to stop and isolate a person, and ultimately minimise the spread of the virus within our warehouses.
With this we have moved forward on our proactive testing. This does not mean we are going to be testing everyone: we cannot test all 1900 of our personal. Instead we used statistical analysis and assessed the risk factor of employees. Data on where they live and how they travel to work were used to profile everyone in the company. This was done by experts in virology and statistical analysis. We had a separate team determining who was going to be tested based on their risk factor and exposure. In the end we did both reactive testing and proactive testing. Proactive testing is testing people who, though not showing systems may have a higher epidemiological risk. We have had proven results through this method.
From a legal standpoint, this testing involved a lot of negotiations. We had to negotiate with the service provider and our employees. The testing program was voluntary and as a result required consent from individuals. We also had to manage privacy issues surrounding access to and handling of employees’ private medical information.
Nevertheless, we obviously have inter-regulatory obligations with the government. When we determine through private testing that someone is positive with COVID, we need to inform the health authorities immediately. There is a lot going on.
Uplifting our digital capabilities on all fronts of the business has also been key. We have had to enhance our processes, and are currently going through a digital transformation right now. COVID has confirmed to us that this is the right way to go. We started the project at the end of the third quarter last year, but recent events made us move faster in order to take advantage of that opportunity.
The changing role of the workplace is also another area that needs to be defined. It is important to comply with a new normal. Working from home has shown there has been no impact on productivity in terms of results. If you are going to open your central offices, they have to serve a different purpose than what you are doing at home. The workplace has to become a beacon of corporate culture. That means developing and enforcing culture, so that people feel compelled to go to work.
We also need to facilitate interdisciplinary collaboration spaces, whilst keeping in mind all the regulations in terms of interactions. This is especially important when talking about innovation. We need to be able to provide space for creative opportunities, for the conversations you have with fellow colleagues in the hallways. Those spontaneous conversations that generate interesting ideas may be important for the company. That is one of the biggest burdens about working from home, you do not have those spontaneous opportunities to discuss anything with anyone else. Innovation does not happen when you plan it to happen. Going forward this is one of the things we are trying to deal with. We are working and trying to design what our idea of ‘offices of the future’ will be. This has enormous legal implications all-round.
Part of managing a crisis is providing emotional support to employees, and this has been a top priority. We set up a program within which our human resource team followed up with employees. This entailed picking up the phone and speaking to each and every member of staff who was working from home. It was important as a company to hear their worries and hear their concerns. Accordingly, we developed a program to address all the challenging aspects of working from home, from creating a proper physical space to task programming, organisation and leadership skills. By doing this we found our employees were more motivated. This is how we have managed to stay focused and deliver results.
Our mission is to keep access and supply of medications open for all. This is a goal that motivates our teams, because they understand the importance of what they are doing. Considering all challenges we have experienced during this pandemic, we have managed to maintain company results because of the effectiveness and productivity of our people.
