The Public Accounts Committee accuses PricewaterhouseCoopers (PwC) of promoting tax avoidance “on an industrial scale”. It says the London-based multinational professional services network has helped hundreds of companies cut their corporation tax by setting up bases in Luxembourg.
The Committee says PwC promoted tax arrangements that bear all the characteristics of a mass-marketed tax avoidance scheme.
It claims it was misled by PwC in January 2013 when the company asserted “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”.
“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,” said Margaret Hodge MP. (Image: margaret-hodge.co.uk/)
The Committee mentions the 548 letters disclosed by journalists in November 2014 between PwC and the tax authorities in Luxembourg, relating to 343 of its clients, all of them multinational companies. “The number of cases involved plainly demonstrates that PwC is effectively selling variations on a scheme to a large number of its clients,” it said.
The result of PwC’s activities has been to reduce how much corporation tax these multinationals have to pay in the nations in which they, in fact, operate. PwC tries to argue that the schemes it sets up with companies are individual arrangements tailored to each one’s needs, but the Committee points out that they all have common features.
“In attempting to hide behind a definition of mass-marketed avoidance as being ‘all around secrecy, not wanting HMRC (HM Revenue and Customs) 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.”
The Committee recommends that HMRC should set out how it plans to become more active in challenging the advice accountancy firms like PwC give to their multinational clients “with a particular view to the mass marketing of schemes designed to avoid tax.”
Committee cites Shire Pharmaceuticals as an example
Shire Pharmaceuticals has been set up so that interest payments made on loans from one of the company’s business units to another of its own units significantly reduce its overall tax liabilities.
Shire’s external borrowings total about £800 million, compared to £10 billions’ worth of loans from a company it established in Luxembourg. Shire pays interest on the money it borrowed from this company.
The effect is to shift Shires profits from other countries, where corporation tax rates are higher, to Luxembourg. The company Shire set up in Luxembourg, the one it borrowed £10 billion from, consists of just two employees, compared to the 5,400 it employs worldwide.
“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,” the Committee wrote.
Margaret Hodge, chairwoman of the Public Accounts Committee, 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.”
“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.”
PwC disagrees with the Committee
In a statement today, PwC said it stood by the evidence it gave the Public Accounts Committee and disagreed with its conclusions.
“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.”
Citation: “Tax avoidance: the role of large accountancy firms (follow–up),” House of Commons Committee of Public Accounts (Public Accounts Committee).
Members include: Rt Hon Margaret Hodge (Labour, Barking) (Chair); Stephen Phillips QC (Conservative, Sleaford and North Hykeham); Stephen Hammond (Conservative, Wimbledon); Rt Hon Dame Anne McGuire (Labour, Stirling); Nick Smith (Labour, Blaenau Gwent); Mr Stewart Jackson (Conservative, Peterborough); Mr Richard Bacon (Conservative, South Norfolk); Mr David Burrowes (Conservative, Enfield, Southgate); Meg Hillier (Labour, Hackney South and Shoreditch); John Pugh (Liberal Democrats. Southport); Guto Bebb (Conservative, Aberconwy); Chris Heaton-Harris (Conservative, Daventry); Austin Mitchell (Labour, Great Grimsby); Andrea Leadsom (Conservative, South Northamptonshire).
Tax avoidance refers to all legal methods used to reduce the tax liabilities of an individual or company. Tax evasion, on the other hand, is illegal.