critical perspectives on international business The tax avoidance industry: accountancy firms on the make Prem Sikka Hugh Willmott Article information: To cite this document: Prem Sikka Hugh Willmott , (2013),"The tax avoidance industry: accountancy firms on the make", critical perspectives on international business, Vol. 9 Iss 4 pp. 415 - 443 Permanent link to this document: http://dx.doi.org/10.1108/cpoib-06-2013-0019 Downloaded on: 03 January 2015, At: 12:02 (PT) T) P References: this document contains references to 70 other documents. 15 ( To copy this document: [email protected] 0 y 2 The fulltext of this document has been downloaded 980 times since 2013* ar u n Users who downloaded this article also downloaded: a J 3 0 Jeffrey Simser, (2008),"Tax evasion and avoidance typologies", Journal of Money Laundering Control, Vol. 11 Iss 2 pp. 2 0 123-134 http://dx.doi.org/10.1108/13685200810867456 2: 1 At Gilbert Lenssen, David Bevan, Joan Fontrodona, Lutz Preuss, (2010),"Tax avoidance and corporate social responsibility: V you can't do both, or can you?", Corporate Governance: The international journal of business in society, Vol. 10 Iss 4 pp. E G 365-374 http://dx.doi.org/10.1108/14720701011069605 E N E Xudong Chen, Na Hu, Xue Wang, Xiaofei Tang, (2014),"Tax avoidance and firm value: evidence from China", Nankai H Business Review International, Vol. 5 Iss 1 pp. 25-42 http://dx.doi.org/10.1108/NBRI-10-2013-0037 T F O Y T SI R Access to this document was granted through an Emerald subscription provided by 291017 [] E V NI For Authors U N If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service O RI information about how to choose which publication to write for and submission guidelines are available for all. 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Thecurrentissueandfulltextarchiveofthisjournalisavailableat www.emeraldinsight.com/1742-2043.htm The tax avoidance industry: The tax avoidance accountancy firms on the make industry Prem Sikka Centre for Global Accountability, University of Essex, Colchester, UK 415 Hugh Willmott Cardiff Business School, Cardiff University, Cardiff, UK T) P 5 ( Abstract 1 0 2 Purpose–Thepaperaimstoexaminetheinvolvementofglobalaccountancyfirmsindevisingand y ar sellingtaxavoidanceschemeseuphemisticallymarketedas“taxplanning”. u an Design/methodology/approach–Thestudydrawsuponarangeofsecondarysources,including J 3 legalcasesandgovernmentreports,todemonstratehow“taxplanning”involves“wilfulblindness”to 0 2 complicityindubiousandsometimesfraudulentactivity. 0 2: Findings–Thestudyrevealsindetailtheconstructionandpromotionofelaboratetaxavoidance 1 At schemes by big accounting firms. It casts doubt upon the “business culture” that has become V establishedinthesefirms. E G Researchlimitations/implications–Thestudyreliesuponsecondarysources.Subjecttogaining NE adequate access to the big accounting firms, research based upon close-up investigation of “tax E planning”wouldfurtherilluminatesuchpractices. H T Practical implications–The study shows how normalised and institutionalised “tax planning” OF schemeshavebecomeinthebigfouraccountingfirms.Itsuggeststhatsuchschemesrequirecloser Y scrutinyifpaymentsoftaxaretobemadeasintended,andtherebyprovidetherevenuesrequiredto T SI maintainpublicservicessuchaseducation,healthandpensions. ER Socialimplications–Thestudyinformsadebateaboutthepaymentoftaxesandtheroleofbig V accountingfirmsincreatingaggressivetaxavoidanceschemes.Itquestionstheappropriatenessand UNI adequacy of private regulation of these firms and so contributes to a public debate on the tax N contributionofcomparativelypowerfulandprivilegedparties. O RI Originality/value–Thestudy“blowsthewhistle”ontheroleofbigaccountingfirmsindevising U schemesthatreducethe“taxtake”onbusinessandtherebyreducestherevenuesrequiredtoprovide G N- andmaintainpublicservices. BE KeywordsTaxavoidance,Bigaccountancyfirms,Financialcrisis,Agency-structuredualism, y Institutionallogics b ed PapertypeResearchpaper d a o nl w Introduction o D Inadiscussion of thefinancialcrisis of 2007 onwards andexplanations of it, Perrow (2010) argues that “there is a danger that deliberate actions of executives will be attributed to institutional and cultural conditions” (p. 313). He acknowledges that “ideologiesandnormsmotivatebehaviours”butchallengestheviewthatactionssuch aslobbyingforreducedregulationcanbeadequatelyexplainedasanexpressionof“a sincere belief that existing regulations interfere with a free market” (Perrow, 2010, criticalperspectivesoninternational p.314).Instead,hearguesthatsuchapparentlysincereexpressionsofbeliefareoften business Vol.9No.4,2013 pp.415-443 The authors are grateful to the Editors of the special edition for their patience, advice and qEmeraldGroupPublishingLimited 1742-2043 support. DOI10.1108/cpoib-06-2013-0019 CPOIB knowing(thatis,cynicalorself-serving)justificationsof“institutionalentrepreneurs” 9,4 (Greenwood and Suddaby, 2006) who embrace ideologies to “promote their interests” (Perrow, 2010, p. 314). Such actors, Perrow contends, are not the “victims” of market ideologies.Rather,hesubmits,they“havefosteredandconstructedtheseideologies,or at least chose to embrace them, to serve their own interests, which include wealth, prestige, and the exercise of power over others” (Perrow, 2010, p. 314). 416 Inthispaper,ourfocusisthefinancialsectorand,incommonwithGreenwoodand Suddaby’s(2006)study,ourattentionisdirectedtothebiggestglobalaccountancyfirms. Commentinguponsomeofthe“entrepreneurial”activitiesofthesefirms,Perrow(2010) T) observesthat“theyknewwhattheyweredoingwasfraudulent”(p.314).Healsonotes 5 (P thatGreenwoodandSuddaby’sstudyexcludesconsiderationof“theefforttoestablish 1 such [‘alternative logics’] which he associates with firms becoming more ‘open’ to the 0 2 y alternative logics pressed upon them by their large corporate clients” (Perrow, 2010, uar p.314).Anexampleoftheapplicationofsocalled“alternativelogics”istheconstruction n Ja ofelaboratetaxavoidanceschemesbybigaccountingfirms(SikkaandHampton,2005), 3 0 although,inthiscase,thecreationandpromotionofsuchschemeshasbecomesodeeply 2 2:0 entrenchedwithinthebigfirmsastonormaliseits“alternative”status. At 1 In“Thepriceofoffshorerevisited”,Henry(2012)drewattentionto$21trillion(£13 V trillion)hoardedbywealthyelitesinsecretiveoffshorejurisdictions toavoidtaxes in GE their home countries. It explained that the offshore hoard is “protected by a NE highly-paid, industrious bevy of professional enablers in the private banking, legal, E accounting, and investment industries...” (Henry, 2012, p. 9, emphasis added). The H T recognition of this “industriousness” echoes Perrow’s (2010) insistence that “interests F O andpower”,andnotonly“institutionalandculturaltraditions”(Perrow,2010,p.311), Y T areinvolved.Thepursuitofwealth,prestigeandtheexerciseofpowerbyconcocting RSI taxavoidanceschemeshaveconsequencesforothers,intheformofalackofresources E V for expenditure on public goods to enhance or preserve hardwon social rights. NI Where tax loopholes are ineffectively closed or authorities lack the resources to U N challenge tax avoidance schemes, the burden falls upon those who cannot escape O RI paying taxes, or it results in the erosion of public services, often through backdoor U privatisation facilitated by the very accounting firms that confect tax avoidance G N- schemes. Following the post-1970s rise of neoliberalism and the accompanying E B pressures to introduce light(er)-touch regulation, the state has been rolled back and y b hollowed out to fuel the growth of multinational corporations and accelerate the d e accumulationofprivatewealth.Inthisprocess,powersandresourceslosttothestate d a o and people have been transferred to the private sector, including the big firms of nl w accountants. Along with bankers and lawyers, the partners of the big accountancy o D firmshavebecomenewmastersoftheuniverse – amasterythatismanifestinteralia in their advisory activities with respect to tax avoidance as well as diverse forms of privatisation (Sikka, 2008). As key players of the construction of post-1970s neo-liberalism, the Big Four accounting firms (PricewaterhouseCoopers, Deloitte and Touche, KPMG and Ernst & Young) have been major beneficiaries of financial expansion. They are all multinationalandhavedevisedownershipstructurestofrustratescrutinyoftheirown affairs (Sikka, 2002), but play a central role in the construction and operation of regulatory arrangements for corporations and financial markets through governance arrangements, such as those relating to accounting and auditing (Arnold, 2009). As advisorstogovernments,thebigaccountancyfirmsareeffectivelythestandardsetters The tax who develop ways of maximizing corporate earnings and profit related executive avoidance rewardsbysellingcreativetaxavoidanceschemes.Suchschemeserodetherevenues industry required for public investment, social interests and long term survival, and fail to develop a more accountable architecture of corporate governance (Humphrey et al., 2009). TheBigFouraccountingfirmsarecentraltotheglobaltaxavoidancetradewhich 417 may have been responsible for the death of some 5.6 million children (Christian Aid, 2008).Employeesandpartnersoftheaccountingfirmsdonotdirectlykillpeople but T) they form part of a “financial mafia” that routinely participates in equally deadly P activitiesbyerodingpublicrevenuesthatdeprivepeopleofjobs,healthcare,education, 15 ( pensions, security and public goods or facilitate a race-to-the-bottom in which public 0 y 2 services become degraded. Lord Haskel, a former Chief Executive of Perrotts Group ar plc, told the UK Houseof Lordsthat: u n a 3 J Therearearmiesofbankers,lawyersandaccountantswhoensurethateventhoughtheletter 2 0 ofthelawisrespected,increasinglyimmoralwaysarefoundofpervertingthespiritofthe 2:0 lawtoensurethattaxisavoided.Tohideitstruepurpose,thetaxavoidanceindustryadopts At 1 thelanguageofrealbusiness,sotechnicalinnovationandreinventingyourbusinessmodel V donotmeanfindingnewproducts,servicesandmarkets,andnewwaysofsupplyingthem. E No,theymeanregisteringyourbusinessinataxhavenandbecominganondomtoavoidtax G E whilestillenjoyingthe,admittedlydecreasing,benefitsandserviceswhichmakethiscountry N E thecivilisedplacethatitis(Hansard,2011). H F T IntheUSA,theSenatePermanentSubcommitteeonInvestigationshasexaminedthe O development,marketingandimplementationofabusivetaxsheltersmarketedbythe Y T Big Four accountancy firms (US Senate Permanent Subcommittee on Investigations, RSI 2003, 2005) and found that they created a complex architecture of transactions to E V enablecorporationsandrichindividualstoobtaintaxbenefitsthatwere(probably)not NI directly intended by those responsible for passing the relevant legislation. In U N introducinganewBilltocombatorganisedtaxavoidancetheSubcommitteeChairman, O RI Senator Carl Levin, added that: U G ...manyabusivetaxsheltersarenotdreamedupbythetaxpayerswhousethem.Instead, EN- mostaredevisedbytaxprofessionals,suchasaccountants[...]wefoundalargenumberof B taxadvisorscookinguponecomplexschemeafteranother,packagingthemupasgenerictax y b products with boiler-plate legal and tax opinion letters, and then undertaking elaborate d de marketing schemes to peddle these products to literally thousands of persons across the a o country.Inreturn,thesetaxshelterpromotersweregettinghundredsofmillionsofdollarsin nl w fees,whiledivertingbillionsofdollarsintaxrevenuesfromtheU.S.Treasuryeachyear(US o D Senate,2009). The UK tax authorities have referred to Ernst & Young as “probably the most aggressive, creative, abusive provider” of avoidance schemes (The Guardian, 2009a) and courts have ruled that a PricewaterhouseCoopers (PwC) scheme was a “circular, self-cancelling scheme designed with no purpose other than to avoid tax” (Daily Telegraph,2012b).InthewordsofaformerCommissioneroftheUSInternalRevenue Service (IRS): “Companies (and wealthy individuals) pay handsomely for tax professionalsnotjusttofindthelines,buttopushthemeveroutward”(Everson,2011). The Commissioner then adds that a low point came when the IRS discovered that a senior tax partner at KPMG had written to those in charge of tax practice and CPOIB instructedthemto“makea‘business/strategicdecision’toignoreaparticularsetofIRS 9,4 disclosure rules. The reasoning was that the IRS was unlikely to discover the underlying transactions and that even if it did, any penalties assessed could be absorbed as acost of doing business” (Everson,2011). Asthefinancialandpoliticalcloutofbigaccountancyfirmshasincreased(seebelow), democracy,lawandwelfarewithregardtotheir(ever-widening)spheresofactivityhave 418 beencompromisedandweakened,notleastasaconsequenceofthecosyandmutually advantageousrelationshipsfosteredbetweenseniorpartnersofthebigfirms,politicians andcivilservants.Wereturntothis“conspiracy”ofelitesintheDiscussionsectionofthe T) paper.Asaconsequenceoftheneo-liberaleconomicexperimentoverwhichtheseelites 5 (P havepresided,therehasbeenlessofapromisedtrickle-downofwealthtopullthemost 1 disadvantaged out of poverty than there has been a flood of untaxed wealth offshore. 0 2 y Living standards have been eroded and hardwon social rights – pensions, education, uar healthcare – havebeentrimmedinpartasaconsequenceofthetaxavoidanceschemes n Ja adoptedbymultinationalcorporationsaswellaswealthyelites. 3 0 Thispaperconsistsoffourfurthersections.Inthefirstsection,wetakeacloserlook 2 2:0 atthebiggest,mostglobalandinfluentialoftheaccountancyfirms.Wethenidentifythe At 1 impactoftaxavoidanceonstaterevenuesandtheroleoftheBigFouraccountingfirms V in eroding them. The second section provides brief examples of some of the tax GE avoidanceschemesdevelopedandmarketedbythesefirms.Inmanycasestheschemes E N arenotdevisedinresponsetospecificdemandsfromclients,butarecreatedtomeetthe E demandsoftheneoliberalsysteminwhichprivateinterestsareroutinelyprioritisedover H F T widersocialinterests.Thethirdsectionarguesthatthenormalisationoftaxavoidanceis O deeplyembeddedwithinthebusinessmodelsofbigaccountingfirmsandisshelteredby Y T asymbioticrelationshipwithpoliticalelites.Inthefourthandfinalsection,wereturnto SI R Perrow’sthesisonthefinancialcrisisandcommentupontherelevanceofourpaperto E V understandingcomplexitiesofstructureandagentialresponsibilities. NI U N O RI Multinational accounting firms, avaricious clients and lost tax revenues U The state-guaranteed monopoly of external auditing, in the UK and elsewhere, G N- providesaspringboardforthegrowthandinfluenceofaccountingfirms.Itgivesthem E B easy access to corporate clients and the sale of lucrative non-auditing services, by including tax avoidance. Despite the banking crash and the ensuing economic d e recession,theannualrevenuesoftheBigFourfirmshavecontinuedtoswell(TableI) d a o and currently stand at approximately $US110bn, bigger than the GDP of many nl w countries, and dwarf the revenues of their nearestrivals. o D The Big Four operate from hundreds of countries and cities, including over 80 officesinoffshoretaxhavens(MailonSunday,2011)thatdonotlevyincome/corporate taxesorrequirecompaniestofileauditedaccounts.Around$US12bn(£7.9bn)oftheir global fees comes from UK operations, which includes £6.1bn from consultancy services,includingsaleoftaxavoidanceschemes(FinancialReportingCouncil,2013). The firms do not reveal the revenues generated through the sale of tax avoidance schemes, but a2005 internal study (The Guardian, 2009a)by the UK’s tax authority, HerMajesty’sRevenueandCustoms(HMRC),concludedthattheBigFouraccounting firms generated around £1bn in fees each year from “commercial tax planning” and “artificial avoidance schemes”. The tax Firm Globalfees($US,billions) Employees Countries Offices avoidance PricewaterhouseCoopers 31.5 180,529 158 776 industry Deloitte&Touche 31.3 193,000 153 670 Ernst&Young 24.4 167,000 140 695 KPMG 23.0 152,000 156 717 BDO 6.0 54,933 138 1,204 419 GrantThornton 3.8 31,000 107 521 Source: Annual reviews published by the firms (for example www.pwc.com/en_GX/gx/annual- T) review/2012/assets/pwc-global-annual-review-2012.pdf, http://public.deloitte.com/media/0564/pdfs/ P DTTL_2012GlobalReport.pdf, www.ey.com/Publication/vwLUAssetsPI/Global_Transparency_ 5 ( Report_2012/$FILE/2012_Global_Transparency_Report.pdf, www.kpmg.com/Global/en/ 1 20 international-annual-review/Documents/iar-2012.pdf, www.bdointernational.com/Publications/ TableI. ary Annual-Statements/Documents/Annual%20Statement%202012.pdf, http://grantthornton.ge/js/ Accountancyfirmincome nu editor_innova/assets/2012_GTI_Transparency_Report.pdf) andsize,2011-2012 a J 3 0 2 0 2: The explosion of tax avoidance schemes finally led to an investigation by the US 1 At Senate Permanent Subcommittee and the resulting report highlighted the role of V accounting firms (see Appendix 1). E G The Subcommittee received documentation (emails, memos, letters), subpoenaed E N witnesses and held public hearings to peer below the veneer of professional E H respectabilityandfoundanindustrymiredindubiousandevenillegalpractices.The T F Subcommittee’s finding exposed the sham of professional ethics (seeAppendix 2). O Y TheUSlegislatorsareconcernedabouttheleakageoftaxrevenuesastheamounts SIT arelargeandcouldbeusedtosupportpublicservicesorpayoffthedeficitincurredby R bailingoutfinancialinstitutions.Theofficialstatisticsfocusonwhatisknownasthe E V “taxgap”,whichisthedifferencebetweentheamountthatshouldbecollectedandthe NI U amounts actually collected. Tax gap primarily consists of tax arrears, tax avoidance N and evasion. The estimates depend on models and various assumptions. The O RI calculationsareincompletebecauselittleisknownabouttheshadoworunderground U G economy, which probably escapes various forms of taxes. The position is further N- complicated by the shifting of corporate profits to more favourable jurisdictions E B though transfer pricing practices (Sikka and Willmott, 2010). The US Treasury y d b estimates the annual tax gap to be $345bn (Internal Revenue Service, 2012), though de othersputtheamountsataround$500bn(FeigeandCebula,2011).Some$100bnofthis a nlo maybeduetoschemesoperatingthroughoffshorejurisdictions(USSenatePermanent w o SubcommitteeonInvestigations,2006,2008).For1998-2005,nearly66percentofthe D USdomesticand68percentofforeigncorporationsdidnotpayanyfederalcorporate taxes. In 2005, 28 per cent of large foreign companies generated gross revenues of $372bn, but paid no federal corporate taxes (US Government Accountability Office, 2008). TheEuropeanUnion(EU)hasestimated“theleveloftaxevasionandavoidancein Europe to be around e1 trillion [£830bn or $US1.25 trillion]” (European Commission, 2012).WithaGDPofapproximatelye1.7trillion,theUKisthethirdlargesteconomy (surpassedbyGermanyandFrance)intheEU,andthegovernmentadmitstoataxgap of £40bn (Her Majesty’s Revenue and Customs, 2010), later reduced to £35bn (Her Majesty’s Revenue and Customs, 2011). This compares to leaked government papers CPOIB suggestingthatthetaxgapmaybebetween£97bnand£150bn(SundayTimes,2006), 9,4 an economic model producing £100bn (Lyssiotou et al., 2004) and another report claimedittobe£120bn(Murphy,2010).AUKgovernmentreportshowedthatforthe year2005-2006,220ofthe700biggestcompaniespaidnocorporationtaxandafurther 210 companies paid less than £10m each and 12 of the UK’s largest companies extinguishedallliabilitiesin2005-2006whilescoresmoreclaimedtaxlosses(National 420 Audit Office(2007). The UK’s top 20 companies operate over 1,000 subsidiaries from secretive tax havens (Daily Mail, 2011a), often formed with advice from accountancy firms to create opportunities to craft tax avoidance schemes. T) Developing countries,often someof the world’spoorest, receivearound$120bn in P foreignaid[1]fromG20countries,buttheymaybelosingupto$1trillionthroughillicit 5 ( 1 financialoutflowseachyear,mainlytoWesterncountries(KarandCartwright-Smith, 0 y 2 2008). Around $500bn is estimated to be lost through a variety of tax avoidance ar schemes(Baker,2005),ofwhichsome$365bnisattributedtotransferpricingpractices u n a that shift profits from developing to developed countries (Christian Aid, 2009). Such J 03 resources could be used to provide, sanitation, security, clean water, education, 2 0 healthcare,pensionsandsocialinfrastructuretoimprovethequalityoflifeformillions 2: 1 of people. At V Developingcountriesmaylacktheresourcestocombatthetaxavoidanceindustry, E but the UK appears to be soft-touch compared to the USA, where the Department of G E Justicehasatleastprosecutedandfinedanumberofaccountancyfirmsandsenttheir N E partners to prison (see below), though its scale and severity has clearly been H T insufficienttocurbtheirpredatorywaysofdoingbusiness.Thefirmssimplytreatthe F O penaltiesasanothercostofdoingbusiness.Aspublicexposureofsleazeandscandals Y hasincreased,theUKgovernmentdepartmentsandregulatorshaveshownlittlesign T SI of emulating the USA[2]. There has been no investigation of the tax avoidance R E industry, and no accountant or accountancy firm has been disciplined by any V NI professionalbodyforpeddlingtaxavoidance,evenaftercourtsdeclaredtheirschemes U N to be unlawful (Sikka, 2012). The timidity of the UK institutions emboldened an O accounting firm partner to declare (The Guardian, 2004) that “No matter what RI U legislationisinplace,theaccountantsandlawyerswillfindawayaroundit.Rulesare G N- rules, but rules are meant to be broken”. The suggestion that “rules are meant to be E broken” may have a popular resonance, as it appeals to an individualistic antipathy B y towards collective responsibility. But its effects are plain enough in the recklessness b ed driven by competition and venality that preceded the 2007-financial crisis, the social d oa consequences of which are becoming clear through austerity programmes, wnl unemployment and erosion of pensions, wages and welfare rights. However, as we o D willsee,taxavoidanceisaccomplishednotsomuchbybreakingtheletteroftherules as by deploying rules for purposes for whichthey were not (probably) intended. Big Four on the make In this section, we focus upon the evidence of the extensive involvement of Big Four accountancyfirmsincraftingingenioustaxavoidanceschemes.Indoingso,weseekto underscore Perrow’s (2010) thesis that the development and use of tax avoidance schemes, like the financial innovations associated with the scale and depth of the financial crisis, comprise a significant agential component. The notion of “tax planning”isanexampleofthe“ideology”towhichPerrowreferswhen,effectively,itis aeuphemismfortaxavoidance,ifnottaxevasion.AsPerrowputsit,suchideologies The tax serveto“maskorjustifynarrowinterests”(Perrow,2010,p.326).Inthiscase,itisthe avoidance “narrow interests” of the shareholders and executives of multinational corporations industry andwealthyindividualsaswellasthepartnersofthebigaccountancyfirmsthatare advanced to the detriment of the 99 per cent who rely upon public services paid for from taxation revenues. Inthefollowingsubsections,weillustratethediversetaxavoidanceschemesoperated 421 bytheBigFour.Ourpurposehereistocounteracttheoverwhelmingnumberofstudies ofaccountinganditsbigfirmsthatprimarilyfocusonauditingandaccountingandpay T) littleattentiontotheirroleintaxavoidance.Manyofthestudiesaretooeasilyseduced 5 (P byclaimsof professionalethicsanduncriticallyreflectexactlytheimpressionthatthe 1 firms seek to convey – of being upstanding and reputable servants of good corporate 0 y 2 governance. Our exposition is primarily descriptive as we present a series of concrete uar examplesinsupportofourcontentionthataccountingfirmsarepredatoryandshouldbe n a treated with contempt rather than respect. Only by providing such examples is it J 03 possible to challenge and debunk the conventional wisdom that these firms are 2 0 honourableintheirintentionsandarestaffedbyupstandingindividuals. 2: 1 At V Ernst & Young: gold bars, trustsand credit cards E G Ernst&YoungdesignedschemestoenabledirectorsofPhones4u(partoftheDextra E N Group of Companies) to avoid UK National Insurance Contributions (NIC) by paying E H themselvesingoldbars,finewine,andplatinumsponge[3].Nosoonerhadlegislation T F beenpassedtooutlawthatschemethanErnst&Younghaddevisedanotherscheme. O Y ThisenabledhigherpaidemployeesanddirectorsofPhones4U(andothercompanies) T to avoid NIC and income taxes by securing payments through an offshore employee SI R benefit trust(EBT) in Jersey.Insuchschemes companies paid money intothe trusts, E V which is then “lent” to employees. As long as the transaction looks like a loan – for NI U example,bycarryinginterest – thentaxisavoidedbythecompanyandtheemployee. N Thelegalchallengerevealedsomeinterestingaspects.Firstly,itshedsomelighton O RI networksof creative compliance. The court transcript noted that: U G N- VariousschemeswereinvestigatedontheadviceofErnst&Youngleadingultimatelytothe E establishment[...]oftheCaudwellHoldingsLimitedInternationalEmployeeTrust(theEBT) B y by a deed between Caudwell Holdings Limited (as Settlor) and Regent Capital Trust b d Corporation Limited (Regent), a Jersey company (as Trustee). Regent was owned by the e d partnersofaJerseylawfirm,BedellandCristin.Ernst&Young’strustcompanyinJersey, a o nl Ernst&YoungTrustCompany(Jersey)Limited(E&YTC),couldnotactastrusteebecause w o Ernst & Young were the auditors of the Caudwell group. Regent was used only for Ernst D &YoungclientsandtherewasanarrangementthatintheeventoftheownershipofE&YTC changing so that it was no longer owned by the auditing firm, or if the regulatory rules changedsothattheauditrelationshipwasnolongerabar,E&YTCcouldacquireRegent. There was also an arrangement that E&Y TC [...] would do all administrative work in relationtotrustsofwhichRegentwasthetrustee,leavingthedecisionstoRegent(Para1and 2,DextraAccessoriesLtdandOrsv.InspectorofTaxes[2002]UKSCSPC00331). Secondly, the firms knowingly are engaged in aggressive practices. The initial letter from Ernst & Young stated that the “tax planning points [...] will be viewed by the Inland Revenue as aggressive and therefore contain an element of risk” (para 15(2), Dextra AccessoriesLtdand Ors v. InspectorOf Taxes [2002] UKSC SPC00331). CPOIB The scheme involved complex transactions and Ernst & Young subsequently 9,4 advised the clients that “The ultimate success of the proposed arrangement depends upontheEBThavingsubstanceandcommercialpurpose”(para15(3)).Thiswastaken to mean that other employees could be added to enhance the scheme’s legality, but subsequentrecordsnoted,“IstatedthatifJohn,BrianandCraig[alldirectors]wereto participateinsub-truststhenitwasnecessaryforotherindividualstoparticipatewith 422 sub-trusts as well on the same terms. There should be no deviation from this” (para 15(5)). The court’s interpretation of the documentation was that the directors were settingupaschemeforthemselvesandbeingadvisedthatothersshouldbeincludedto T) makeitlookgenuine.Somesevenyearsafteritsdesign,theschemewasthrownoutby P theHouseofLordsjudgmentinHMInspectorofTaxesv.DextraAccessoriesLtd[2005] 15 ( UKHL47 (7 July 2005). 0 y 2 AnotherofErnst&Young’savoidanceschemeswasdesignedtoenableDebenhams ar and90majorUKhighstreetretailerstoavoidpayingvalueaddedtax(VAT)collected u n a fromcustomerstothetaxauthoritiesandincreasetheirprofits(seeAppendix3).The J 03 keyideawastoexploitexemptionsbuiltintotheUKandEuropeanUnionlegislation 02 and awarenessthatenactingcounter legislationwouldbe time-consuming. 2: 1 Ernst & Young told Debenhams that the revised credit card arrangement was At designed to “produce a position whereby less VAT is paid than was paid previously V E and fornootherreason”(paragraph 5,DebenhamsRetail PLCv.CustomsandExcise G E [2003]UKVATV18169).Theoutwardsignofthisschemewasastatementprintedon N E customers’creditcardreceipts.Itread“Iagreethat2.5percentoftheabovevalueis H T payabletoDebenhamsCardHandlingServicesLtd(DCHS)forcardhandlingservices. OF The total amount I pay remains the same”. As financial services were exempt from Y VAT,Ernst&Youngadviseditsclientstoclaimthat2.5percentoftheproceedswere T SI not subject to VAT, and therefore the output tax payable to the Treasury would be R E less. In correspondence presented to the court, Ernst & Young referred to the £4m V NI VAT saving for Debenhams as “a very lucrative tax planning opportunity [...] an U N ongoing opportunity ‘unless legislated against by Customs’ [...] counteracting O measures would take ‘a number of years’ to enact. [...] Due to the level of potential RI U profit opportunity available there is a desire to introduce the scheme as quickly as N-G possible” (para 39, Debenhams Retail PLC v. Customs and Excise [2003] UKVAT E V18169). Ernst & Young informed Debenhams of a strong “counsel’s opinion that B y Customswouldneedalegislativechangetostopthis”.Thetaxtribunalconcludedthat b d the transactions: e d a nlo ...werecarriedoutsolelyforthepurposeofavoidingtax.Otherthantaxavoidancethere w were no commercial or economic reasons [...]The arrangement was wholly artificial. The o D artificialityisdrivenhomebythefacts[...]acontingencyplanwasinplaceto‘pull’them shouldtheyactuallycauseharmtoDR’sordinarytradingactivities”(para117,Debenhams RetailPLCv.CustomsandExcise[2003]UKVATV18169). ThecasewenttotheHighCourt(DebenhamsRetailPlcv.CommissionersofCustoms and Excise (2004) EWHC 1540 (Ch)), and subsequently to the Court of Appeal (Debenhams Retail Plc [2005] EWCA Civ 892), which outlawed the scheme. The presiding judge referred to the scheme as “Tweedledum in Alice in Wonderland: I know what you’re thinking about, but it isn’t so, no how”. (para 45, HM Revenue & Customs v. Debenhams Retail Plc [2005] EWCA Civ 892). This scheme alone could have deprived the treasury of some £300m of tax revenues and was described by a treasuryspokespersonas“oneofthemostblatantlyabusiveavoidancescamsofrecent The tax years” (Daily Telegraph, 2005). avoidance Ernst&Young’spracticeshavebeenscrutinisedintheUSA(USSenatePermanent industry Subcommittee on Investigations, 2005) and a number of – what under these circumstances always become former – partners and employees have been sent to prison[4] for facilitating tax evasion. In March 2013, the firm paid the US authorities $123m to avoid prosecution over “the wrongful conduct of certain partners and 423 employees”(USDepartmentofJustice,2013).However,Ernst&Younghavecontinued to design and market tax avoidance schemes, as evidenced by cases such Wal-Mart T) Stores East v. Reginald S. Hinton, Case No 06-CVS-3928, 31 December 2007, North P Carolina Wake County, Superior Court Division, and Prudential Plc v. Revenue and 15 ( Customs [2007] UKSPC SPC00636. 0 2 y uar PricewaterhouseCoopers (PwC): beer,propaganda andlossesout of thinair n Ja SABMilleristheworld’ssecondlargestbeercompany,withbrandsthatincludePilsner 3 0 Urquell,PeroniNastroAzzurro,MillerGenuineDraft,Grolsch,Aguila,Castle,MillerLite 2 0 andTyskieamongstmanyothers.Itsaccountsfortheyearto31March2011[5]showed 2: 1 sales revenues of $US19,408m (2010 $18,020m), pre-tax profits of $US3,626m (2010 At V $2,929m)andtax-paid$US885m(2010$620m),whichapproximatesaneffectivetaxrate E of 24 per cent (2010 21 per cent). Its 65 tax haven subsidiaries exceed the number of G E breweriesandbottlingplantsinAfrica(ActionAid,2010).In2011,PwCreceivedfeesof N E $20m,including$3mforadviceontaxationandanother $5mfor“otherservices”.The H T companyisauditedbyPwC,whichcontinuestogiveitacleanbillofhealth. F O ActionAid (2010) alleged that SABMiller may be avoiding around £20m in taxes TY eachyearinIndiaandAfricathroughcomplexfinancialtransactions,transferpricing SI techniques and shuffling profits to subsidiaries in tax havens. The report noted that R E SABMiller’sbreweryinGhana,AccraBrewery,hassalesof£29m,butinthelasttwo V NI years declared alossandhaspaidlocal corporationtaxinonlyoneofthefouryears U N from 2007 to 2010. The ActionAid report also showed that SABMiller companies in O India and Africa paid some £47m a year in management services fees to Swiss RI U subsidiaries of the Group. These fees count as expenses for the Indian and African G N- operations and deprive the local governments of some £9.5m of tax revenues. E SABMiller denied the allegations and claimed that: B y d b Intheyearended31March2010,thegroupreportedUS$2,929millioninpre-taxprofitand de group revenue of US$26,350 million. During the same period our total tax contribution a nlo remittedtogovernments,includingcorporatetax,excisetax,VATandemployeetaxes,was w just under US$7,000 million. Seven times that paid to shareholders. This amount is split o D between developed countries (23 per cent) and developing countries (77 per cent). In both Colombia and South Africa, we contributed over US$1,000 million in taxation to each respectivegovernment’srevenues[6]. The implausibility of SABMiller’s claim is noteworthy. The company had a profit of $2,929millionbutmadetaxpaymentsof$7,000million!Thetaxpaymentsarefantasy figuresmanufacturedbyPwC,allforafeeofcourse.TheyareanexampleofwhatPwC sellsasaproductcalled“TotalTaxContribution”(TTC)[7].McIntyre(2006)observes thatthiscalculationistoenable“corporationstopretendtheirtaxbillsarebiggerthan they really are,by countingnotjust their actual taxes, butalso taxes they don’tpay, such asthosepaid by their customers, workers, suppliers,and soforth”.