U.K. Accuses PwC of Promoting Tax Avoidance Schemes on Massive Scale

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Feb. 6 — The U.K. Public Accounts Committee (PAC) has accused accounting firm PricewaterhouseCoopers LLP of promoting tax avoidance on an “industrial scale.”

In a report published Feb. 6, the committee said the firm has helped hundreds of clients cut their corporate tax bills by promoting tax arrangements built on bases set up in Luxembourg.

The PAC received statements from PwC on its tax practices in January 2013 and April 2013 in which the firm claimed it was “not in the business of selling schemes” and does “not mass-market tax products” or produce or promote tax products.

Since then, the International Consortium of Investigative Journalists published documents in November 2014 that revealed “PwC negotiated advance tax rulings for many hundreds of companies with the Luxembourg tax authorities. Media attention focused on the complex financial strategies employed by a small number of companies on the advice of PwC.”

According to the PAC, the published documents appeared to be inconsistent with PwC's previous evidence because the documents suggest PwC had been “promoting complex structures that are similar in nature to numerous clients.” As such, the PAC invited PwC's head of tax, Kevin Nicholson, and Fearghas Carruthers, head of tax at Shire Pharmaceuticals—one of the firms highlighted by the ICIJ's investigations—to discuss, in “evidence sessions,” tax avoidance with regard to the role of large accountancy firms.

‘Artificially Diverting Profits.'

PAC Chairman Margaret Hodge said this is the second time the committee has 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.”

According to PAC findings, Hodge said the committee believes the PwC'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 corporate tax that some multinational companies pay in the countries in which they make their profits,” Hodge said. “We consider that the evidence that PwC provided to us in January 2013 was misleading,” she added.

PwC said in a Feb. 6 statement that it stands by the testimony it has given to the committee, and disagrees with its conclusions about the work it undertakes. It added that the U.K.’s tax system is “too complex, as governments compete for investment and tax revenues.”

Shire Pharmaceuticals, Luxembourg

One company cited by the committee to have diverted profits to Luxembourg with PwC's help was Shire Pharmaceuticals. According to the report, it paid just 0.0156 percent of its profits to the local tax authority.

“Shire Pharmaceuticals has arranged its affairs so that interest payments on intra-company loans reduce significantly its overall tax liabilities.” Shire has external borrowings of around 800 million pounds ($1.2 billion) and it makes interest payments on intra-company loans worth $10 billion to a company it has established in Luxembourg,” according to the PAC.

“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,” the PAC said.

According to the committee, these practices represent marketed tax avoidance schemes, and it said it is “skeptical” that Her Majesty's Revenue and Customs 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.”

The PAC said it is now down to HMRC 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.”

The committee warned that 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.”

‘Diverted Profits Tax.'

The U.K. government is in the process of introducing a “diverted profits tax” to counter the use of aggressive tax planning techniques to divert profits away from the U.K. to low tax jurisdictions.

Meanwhile, in a separate effort, the European Parliament Feb. 5 agreed to set up a special committee to investigate the sweetheart tax rulings multinational companies received from Luxembourg and other European member states.

The PAC announcement and report is at http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/news/report-tax-avoidance-the-role-of-large-accountancy-firms-follow-up/.