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tax, avoidance, large accountancy firms

Tax avoidance: the role of large accountancy firms report published

6 February 2015

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The tax arrangements PwC promoted in Luxembourg bear all the characteristics of a mass-marketed tax avoidance scheme according to the Public Accounts Committee report published Friday 6 February 2015.

Chair's comments

"It is only right that companies pay their fair share of tax according to the profits they make from their economic activity in the countries in which they do business.

This is the second time we have had cause to examine the role of large accountancy firms in advising multinational companies on complex strategies and contrived structures which are designed for no purpose other than to avoid tax.

We believe that PricewaterhouseCoopers’s activities represent nothing short of the promotion of tax avoidance on an industrial scale.

Contrary to its denials, the tax arrangements PwC promotes, based on artificially diverting profits to Luxembourg through intra-company loans, bear all the characteristics of a mass-marketed tax avoidance scheme.

The effect has been to reduce the amount of corporation tax that some multinational companies pay in the countries in which they make their profits.

We consider that the evidence that PwC provided to us in January 2013 was misleading, in particular its assertions that "we are not in the business of selling schemes" and "we do not mass-market tax products, we do not produce tax products, we do not promote tax products".

In our view these are in fact marketed tax avoidance schemes and we are also sceptical that HMRC was kept fully informed of PwC’s activities. We believe there is no clarity about the boundary between acceptable tax planning and aggressive tax avoidance.

Multinational companies do not need to conduct any business of substance in the countries where they shift profits to in order to avoid tax.

For example, we took evidence from Shire Pharmaceuticals which has arranged its affairs so that interest payments on intra-company loans worth $10 billion reduce significantly its overall tax liabilities. The effect is to shift profits from other countries, where tax rates are higher, to Luxembourg. Shire paid tax of only 0.0156% on its profits to the Luxembourg tax authority.

The "substance" of Shire’s business in Luxembourg, used to justify these arrangements, consists of two people out of the 5,600 staff the company employs globally. Neither PwC nor Shire could demonstrate that the company’s presence in Luxembourg was designed to do anything other than avoid tax.

Many other major firms were named in the Luxembourg tax rulings published by the International Consortium of Investigative Journalists in November 2014, and our concerns go wider than the behaviour of PwC and Shire alone.

The fact that PwC’s promotion of these schemes is permitted by its own code of conduct is clear evidence that Government needs to take a more active role in regulating the tax industry, as it evidently cannot be trusted to regulate itself.

In particular, HM Revenue & Customs needs to do more to challenge the nature of the advice being given by accountancy firms to their clients, ensure that tax liabilities reflect the substance of where companies conduct their business, and introduce a new code of conduct for all tax advisers.

Unless HMRC takes urgent action, this irresponsible activity will go unchecked, causing harm to both the public finances and the reputations of the companies involved."

Margaret Hodge was speaking as the Committee published its 38th Report of this Session which – on the basis of evidence from Kevin Nicholson, Head of Tax, PricewaterhouseCoopers LLP (UK firm) and Fearghas Carruthers, Head of Tax, Shire Pharmaceuticals – examined Tax avoidance: the role of large accountancy firms.

Committee unconvinced by PwC

Large accountancy firms advise multinational companies on complex strategies and contrived structures which do not reflect the substance of their businesses and are instead designed to avoid tax. In light of the publication of leaked documents detailing some of the tax advice it has given to its multinational clients, we took evidence from PriceWaterhouseCoopers (PwC). PwC did not convince us that its widespread promotion of schemes to numerous clients, based on artificially diverting profits to Luxembourg through intra-company loans, constituted anything other than the promotion of tax avoidance on an industrial scale.

The fact that PwC’s promotion of these schemes is permitted by its own code of conduct is clear evidence that Government needs to take a more active role in regulating the tax industry, as it evidently cannot be trusted to regulate itself. In particular, HM Revenue & Customs (HMRC) needs to do more to challenge the nature of the advice being given by accountancy firms to their clients, ensure that tax liabilities reflect the substance of where companies conduct their business, and introduce a new code of conduct for all tax advisers. Unless HMRC takes urgent action, this irresponsible activity will go unchecked, causing harm to both the public finances and the reputations of the companies involved.

PwC negotiated rulings with Luxembourg

We have reported previously our long-standing concerns about multinational companies avoiding tax, the role played by tax advisers in promoting company structures designed to avoid tax, and the effectiveness of HMRC and HM Treasury in tackling these problems. We have published relevant reports in December 2012, April 2013 and June 2013. In evidence used for our April 2013 report, the Head of Tax at PwC had told us that "we are not in the business of selling schemes". In November 2014 the International Consortium of Investigative Journalists (ICIJ) published documents showing that PwC negotiated advance tax rulings for many hundreds of companies with the Luxembourg tax authorities. Media attention focussed on the complex financial strategies employed by a small number of companies on the advice of PwC.

The published documents appeared inconsistent with PwC’s previous evidence to us, as they suggested PwC had been promoting complex structures that are similar in nature to numerous clients. We therefore invited PwC’s Head of Tax to give further evidence, alongside the Director of Tax at Shire Pharmaceuticals, one of the firms on which media attention had focussed. Many other major firms were named in the Luxembourg tax rulings published by the ICIJ and our concerns go wider than the behaviour of PwC and Shire alone. Our conclusions and recommendations are therefore relevant to the tax advisory industry and its clients as a whole.

Conclusions and Recommendations

The tax arrangements PwC promoted in Luxembourg bear all the characteristics of a mass-marketed tax avoidance scheme. We consider that the evidence that PwC provided to us in January 2013 was misleading, in particular its assertions that “we are not in the business of selling schemes” and “we do not mass-market tax products, we do not produce tax products, we do not promote tax products”. In November 2014, journalists disclosed 548 letters between PwC and the Luxembourg tax authorities, relating to 343 of PwC’s multinational clients. The number of cases involved plainly demonstrates that PwC is effectively selling variations on a scheme to a large number of its clients.

The effect has been to reduce the amount of corporation tax that these multinational companies have to pay in the countries in which they are in fact operating. Whilst acknowledging that the schemes have common features, PwC tried to argue that they are in fact individual arrangements tailored to the needs of individual clients. In attempting to hide behind a definition of mass-marketed avoidance as being “all around secrecy, not wanting HMRC to know”, the companies and their advisers are choosing to adopt a very narrow and self-serving interpretation. In our view these are marketed tax avoidance schemes and we are also sceptical that HMRC was kept fully informed of PwC’s activities. We continue to believe there is no clarity about the boundary between acceptable tax planning and aggressive tax avoidance.

Recommendation: HMRC should set out how it plans to take a more active role in challenging the advice being given by accountancy firms to their multinational clients, with a particular view to the mass marketing of schemes designed to avoid tax.

Multinational companies do not need to conduct any business of substance in the countries where they shift profits to in order to avoid tax. Shire Pharmaceuticals has arranged its affairs so that interest payments on intra-company loans reduce significantly its overall tax liabilities. While Shire has external borrowings of around £800 million, it makes interest payments on intra-company loans worth $10 billion to a company it has established in Luxembourg.

The effect is to shift profits from other countries, where tax rates are higher, to Luxembourg. The "substance" of Shire’s business in Luxembourg, used to justify these arrangements, consists of two people out of the 5,600 staff the company employs globally. One of Shire’s two Luxembourg based staff also holds 41 directorships of other companies. Neither PwC nor Shire could demonstrate that the company’s presence in Luxembourg was designed to do anything other than avoid tax. We note that Shire paid tax of only 0.0156% on its profits to the Luxembourg tax authority.

Recommendation: In contributing to the OECD’s discussions aimed at reforming international tax law, HMRC should push for a more rigorous and meaningful definition of what substance means.

The tax industry has demonstrated very clearly that it cannot be trusted to regulate itself. Like the other big four accountancy firms, PwC provides tax advice to its clients in line with an internal Code of Conduct. PwC’s Code does little more than shroud the way PwC exploits flaws in international tax law to devise and offer aggressive tax avoidance schemes to its clients. PwC requires only one of three conditions in its Code of Conduct to apply for tax advice to be compliant.

This means that a scheme set up solely for tax avoidance, and with no other commercial purpose, can still comply with PwC’s Code provided one of the two other conditions in the code is met. The code does nothing to prevent PwC’s staff from selling schemes which are designed to create artificial company structures to avoid tax, deprive the Exchequer of money, and damage PwC’s reputation. That the Shire arrangement can still meet the conditions of PwC’s Code of Conduct is indisputable evidence that the code is not fit for purpose.

Recommendation: We believe strongly that the Government must act by introducing a code of conduct for all tax advisers, as we recommended in our April 2013 report. We further recommend that it should consult on how it should regulate the industry and enforce such a code, including through financial sanctions that could be imposed in the event of non-compliance.

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