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In this Tax Stories episode I chat with Pekka who has spent more than 20 years with Sorainen law firm. After that he was the Managing Partner of EY Law Baltics for nearly 2 years. He has been my role-model and many others. I’d describe him more as an artist in his heart, a lawyer who speaks business language and a friend who understands people, knows how to pay attention & listen.

Making movies

We started the chat about Pekka’s hobby – making movies. In 2021 his movie was demonstrated in cinemas of Tallinn, which was a tribute to Charlie Chaplin’s the Kid, exactly 100 years after the original movie was released.

The Finland – Baltic common history

Pekka told a story about starting the law firm in Vilnius back in 1990s when a mafia type guy was working next doors. During summer time the windows were open and the lawyers could hear the guy giving orders to his subordinates. We also discussed the Finnish sauna tradition roots and the differences of Soviet occupation outcome after WWII – why the Baltics lost it’s independence, but the Finns didn’t. Despite the history Pekka sees the current Finnish investment regime fairly safe, so Finland joining NATO is more necessary for politicians that for businesses.

Lessons in life

Pekka’s father used to remind him that there are no shortcuts in life – those who work the most will succeed the most. For your book shelf Pekka recommends some nice titles as well:

  • 21 Lessons for the 21st Century – by Yuval Noah Harari. The book promises to give answers to questions relevant to many, some of them we discuss in this podcast as well, like where we have come from and where we are going, how do computers and robots change the meaning of being human; how do we deal with the epidemic of fake news; are nations and religions still relevant; what should we teach our children? Here the author invites us to consider values, meaning, and personal engagement in a world full of noise and uncertainty.
  • Homo Deus: A Brief History of Tomorrow – also by the same Yuval Noah Harari. Homo Deus explores the projects, dreams and nightmares that will shape the twenty-first century—from overcoming death to creating artificial life. It asks the fundamental questions: Where do we go from here? And how will we protect this fragile world from our own destructive powers?
  • Humankind: A Hopeful History – by Rutger Bregman. International bestseller Rutger Bregman provides new perspective on the past 200,000 years of human history, setting out to prove that we are hardwired for kindness, geared toward cooperation rather than competition, and more inclined to trust rather than distrust one another. If we believe in the reality of humanity’s kindness and altruism, it will form the foundation for achieving true change in society.

Pekka predicts a break-through of AI in tax & legal business as soon as translation engines are ready to take away language barriers, and we are not far from that already. For those who have not tried yet Pekka suggests to play with ChatGPT AI engine. For example, if one ask this GPT to come up with some caluses for a share purchase agreement, it comes up with a solid text.

Using the AI voice commands

As the next step Pekka predicts a better quality development of the voice commands. Thus, for example people might not always need to go to see a lawyer for more straight forward advice, but rather just talk to the AI engine. Pekka also painted a picture where each party of an agreement first talks to their AI engines and ask to draft the first version of the desired contract.

AI as a dispute resolution mechanism

The engine would also record and file the discussion, so in case of a dispute the parties may come back to revisit the intention of the parties, and maybe another engine might solve the dispute or at least be an initial pre-dispute stage. Also, if all such discussions of the legislator are recorded, it would be easier for everyone to interpret particular clauses of the law as well. Sounds like it could be an initial tax dispute resolution mechanism soon as well, subject to a possibility to appeal, of course.

Blockchains will come too

This will easily secure proof to the ownership of assets – e.g., the party to a share purchase contract will be able to check that the seller has the shares. The tax authorities will be able to check that the withholding tax has been paid on behalf of the owner of shares. Smart contracts (that are based on blockchain technology) do not move, because it’s not in the interest of bigger law firms to make it move. Also the tax authorities might be protective of their staff by being not that interested to replace people with smart contracts and blockchain in general.

Excise taxation

We discussed that some sort of excise tax (or tax breaks) on gadgets could facilitate people being more active in sports to protect their health. Also discussed the Finnish approach to alcohol trading (state monopoly) that it’s a sort of double taxation – the profits from the trading going to the state in addition to the excise tax.

Is the high taxation the key to prosperity?

Finland is highly successful country – income per capita is one of the highest in Europe, its exports is ~1/3 of GDP. It was surprising to hear that his jeans production business is actually not that heavily taxed despite Finland being a high taxation country, because lower salaries actually have low taxes in the progressive tax system. Pekka sees incentivizing new, exporting businesses as a better way to prosperity rather than heavy taxation.

Cum/ex tax fraud in Finland and elsewhere

Basically it means (a bit simplified) – if there is a withholding on dividends from Finland to a foreign shareholder, the shareholder sets up a corporate structure in countries where no withholding tax applies (for Finland – e.g. dividends paid to UK, IRL, FRA, UAE shareholder enjoy an exemption). Then the shareholder transfers (lends) the shares just for the moment of the dividend pay-out to that shell company, and a refund of the tax from the state is requested. The tax gain then is shared among the parties involved.

At the end of the podcast enjoy the Silent Night jazz/blues guitar version by Pekka!