11 Feb 2015 12:14pm

PAC report on PwC was a step too far

Nobody could deny that Margaret Hodge and the PAC have played a major role in putting tax avoidance on the public, and Parliamentary, agenda. But I question whether the most recent report of the PAC, on "Tax Avoidance: the role of large accountancy firms (follow up)" serves a useful purpose. Arguably, it also goes well beyond the scope of the PAC's role, which is to examine “the accounts showing the appropriation of the sums granted by Parliament to meet the public expenditure, and of such other accounts laid before Parliament as the committee may think fit”.

In November 2014, the International Consortium of Investigative Journalists (ICIJ) published a large number of documents showing that PwC negotiated advance tax rulings in Luxembourg for their clients. These documents are commonly referred to as the "LuxLeaks" documents, and do show that many large companies used complex financing structures involving Luxembourg companies. Some of those arrangements are already being investigated by the EU Competition Commission, to establish whether they constitute State Aid, and the OECD BEPS process is also looking more generally at whether financing structures which result in "double non-taxation" should be curbed.

It is difficult to see how HMRC could "more actively challenge" the advice given, where that advice is in accordance with current international laws.

The PAC's first complaint is that "the tax arrangements PwC promoted in Luxembourg bear all the characteristics of a mass-marketed tax avoidance scheme." This is in contrast to their evidence to the PAC in January 2013 that "we are not in the business of selling schemes." The debate here is mainly one of semantics: PwC's earlier evidence was in the context of mass-marketed schemes as defined by HMRC for the purposes of the DOTAS (Disclosure of Tax Avoidance Schemes) rules; PwC's role in obtaining Luxembourg tax rulings is arguably a different matter. The structures shown in the LuxLeaks documents are undeniably complex, and in many cases illustrate how Luxembourg set out to attract international financing business by offering favourable tax treatment: it is hardly surprising that many multinational companies responded to the incentives on offer. Politicians may reasonably want international tax rules to be tightened up, but this is a matter for Parliament - it is also difficult to see how HMRC could "more actively challenge" the advice given, where that advice is in accordance with current international laws.

Recently, disclosures under DOTAS by major firms have fallen, and there are clear signs that many large companies are paying much greater attention to the reputational risk of complex structures which could be labelled as "tax avoidance". Arguably, the PAC is therefore suggesting a solution to yesterday's problem.

The PAC goes on to complain that there is no "business of substance" in the countries where multinational companies "shift profits in order to avoid tax". There is a great deal of technical confusion in this assertion. Firstly, the structures examined are mainly financing structures. UK companies get a tax deduction for interest costs, provided they comply with the arm's length principle and with anti-avoidance rules such as the unallowable purpose test and the debt cap. It is difficult to see that an interest deduction results in profits being "diverted" from the UK, as the PAC appears to believe. Secondly, the international tax system broadly taxes interest income by reference to its source, rather than looking at the substance of its recipient. So a finance company resident in Luxembourg, with very little substance, would in principle be fully taxable on its interest income. Of course, if the arrangements are wholly artificial and abusive, the UK could deny Treaty relief, but EU cases such as Cadbury Schweppes (C-196/04) have confirmed that it is not necessary to have a full-scale bank in order to be taxable locally on finance income.

Finally, the PAC concludes that "the tax industry has demonstrated very clearly that it cannot be trusted to regulate itself", and recommends a code of conduct enforced by HMRC. As Patrick Stevens, tax policy director of the CIOT, has pointed out, there is already a code of conduct which is approved by HMRC and is regularly reviewed: it is hard to see what a new code could add, and it would also require HMRC to divert resources away from other activities which are likely to be more profitable – such as monitoring DOTAS disclosures, and strengthening the criteria for disclosure if necessary.

Let me make it clear that I fully support the OECD BEPS process, and agree that international rules need to be updated so that the tax system is fit for purpose in the 21st century. It is absolutely right that UK politicians, of all parties, should contribute to this process, and should seek to ensure that the economic profits which a company makes in the UK are taxed here. But this is a highly technical area, and I think the PAC is hindering and not helping progress by this report.

Heather Self is a partner at law firm Pinsent Masons with almost 30 years of experience in tax


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