In a 17-page report on tax avoidance and large accountancy firms, the PAC blasts the tax industry as being unable to regulate itself and calls on the government to introduce a code of conduct “for all tax advisers”.
The report embodies the media-led public outcry against international accountancy firms’ promotion of tax avoidance schemes, as caused by the revelation of the so-called Luxembourg-leaks in late 2014.
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
During that time, a leak of almost 28,000 documents – illustrating the involvement of more than 1,000 businesses – showed the scale of Luxembourg-based tax schemes. Almost all of the documents were on PwC headed paper.
“The tax industry has demonstrated very clearly that it cannot be trusted to regulate itself,” the PAC said in its report, explaining that PwC had done nothing to convince the committee that its “widespread promotion of schemes […] constituted anything other than the promotion of tax avoidance on an industrial scale”.
Margaret Hodge, Labour MP and chair of the PAC, said that contrary to PwC’s denials the schemes marketed by the firm in Luxembourg wholly resembled a mass-marketed scheme.
She said, “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.
“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 PAC cited the example of Shire Pharmaceuticals in particular, a business that – with the aid of PwC – had arranged tax payments on profits to Luxembourg of just 0.0156%.
By using a complex and sophisticated tax structure, Shire has ensured that interest payments on intra-company loans significantly reduce its tax liabilities. The business has external borrowings amounting to some £800m and makes interest payments on £10bn of intra-company loans.
While Shire employs 5,600 staff globally, the substance of its Luxembourg operation consists of two directors, one of whom holds directorships in 41 other businesses. Neither PwC nor Shire were able to satisfy the PAC that Shire’s presence in Luxembourg was anything other than a tax avoidance plan.
ICAEW chief executive Michael Izza said the report reinforced the need for policy makers to think about how tax works across multiple jurisdictions.
Tax advisers are a huge part of the global problem of tax dodging, which also costs developing countries billions of pounds a year
Izza said that the BEPS project – an OECD action plan designed to solve the problem of base erosion and multinational profit shifting – was “a fundamental part” of tackling avoidance.
“This report underscores the urgency to make progress here over and above the proposed introduction of the new diverted profits tax,” Izza said, adding that the profession had updated its code of conduct “in order to address public concerns and is committed to working with government to ensure the UK has a transparent and competitive tax system”.
Anti-tax avoidance campaigners, including Tax Research UK director Richard Murphy and ActionAid’s Barry Johnston, said the PAC’s report illustrated the need for regulators and the government to increase efforts in the fight against tax avoidance.
Johnston said, “The damning comments made by Margaret Hodge underline the shocking scale of tax avoidance, which is why we are calling for all the parties to commit to a tax dodging Bill within the first hundred days of the next parliament.
“Tax advisers are a huge part of the global problem of tax dodging, which also costs developing countries billions of pounds a year. The public is clear that tax avoidance, both in the UK and in developing countries where UK firms operate, is morally wrong.”
Murphy labelled accountancy firms as “the back-bone” of the tax avoidance industry.
“Tax avoidance could not happen without [accountancy firms],” he said. “They are the key suppliers of tax avoidance practices.”
Murphy called for the government to consider threatening wayward firms with revocation of auditing licences and also suggested having large plcs audited by the National Audit Office (NAO) instead.
“They claim to have changed their ways, but it’s very clear that they have not,” Murphy said. “If [firms] cannot toe the line, we will have to look at how we deal without them.
“They must either learn to stop imposing a cost on society, or they lose their licence to operate.”
A spokesperson for PwC said, “We stand by the evidence we gave the PAC and disagree with its conclusions about the work we do. But we recognise we need to do more to explain the positive role we play in the tax system and in helping businesses to operate successfully.
“We agree the tax system is too complex, as governments compete for investment and tax revenues. We take our responsibility to build trust in the tax system seriously and will continue to support reform.”
31 January 2013: Big Four tax heads are grilled by the PAC over tax avoidance; Nicholson asserts that PwC is “not in the business” of selling tax avoidance schemes
6 November 2014: Luxembourg tax avoidance documents are revealed, following an investigation by The Guardian and the International Consortium of Investigative Journalists (ICIJ).
28 November 2014: Kevin Nicholson is called before the PAC to present further evidence following the Lux-leaks scandal.
9 December 2014: During the session, MPs have heated exchanges with PwC and Shire Pharmaceuticals, one of many companies named in the leaked documents. The PAC accuses PwC of selling avoidance on an “industrial scale”.
6 February 2015: PAC publishes follow-up report on Luxembourg Leaks, accusing the firm of being misleading and the wider industry of being unable to regulate itself