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Big four defend presence in tax havens as campaigners call for a ‘change in ethics’

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Tax campaigners have called on the big four accountancy firms to abandon their support for ‘tax haven practices’ and to support a change in the ethics of the accountancy profession to ‘ban’ tax avoidance by members of professional bodies.

The Tax Justice Network published the second edition of Tax us if you can, exploring ‘the root causes of tax injustice’, a day after heads of tax at the UK offices of the big four defended their support for multinational businesses – but backed limited reform of the international tax system – in evidence to the Commons public accounts committee.

More on the PAC hearing:

Tax experts defend work with government to shape legislation

OECD needs to address allocation of profits, ‘big four’ tax bosses tell MPs

Big four tax bosses unmoved by public accounts committee grilling

KPMG published its UK Principles of Tax Advice on the firm’s website following the PAC hearing. The principles were first set out in 2004 and have been updated from time to time since then, as Tax Journal reported last week. The firm said in a statement: ‘Our position is that tax should be charged according to law and not dictated purely by prevailing sentiment. But that’s not to discount the importance of the public interest in the debate. In deciding how to organise their tax affairs, responsible companies do look beyond the strict letter of the law and take account of the interests of all their stakeholders including the wider society in which they operate.’

Kevin Nicholson, head of tax at PwC, said it was important to have an open debate on the tax system and the roles of all those who play a part. Writing on a PwC blog, he said: ‘Understandably there will be different views on what's working and what isn't. But what I hope came across is that we support change that will simplify the tax system and help businesses large and small to grow.’

‘Race to the bottom’

The TJN said much had changed since publication of the first edition of Tax us if you can in 2005: ‘The financial crisis has exposed the structural weaknesses of public finances across the world, ushering in austerity programmes that are rapidly widening existing inequalities. Tax competition pressures are building up, accelerating the race-to-the-bottom on corporate tax payments. Wealth continues to concentrate in the hands of a tiny minority who hold their wealth offshore in tax havens.’

The TJN advocates unitary taxation. The OECD will remain ‘an obstacle in the path of tax justice’, it claimed, until it ‘acts to substantially change its approaches to tax havens, information exchange and profit allocation in multinational corporations’. The OECD, which has been considering possible reforms to tackle profit shifting and erosion of the tax base, will report to the G20 shortly.

Tax havens

PAC chairman Margaret Hodge asked heads of tax at Deloitte, KPMG, Ernst & Young and PwC why their firms all had offices in ‘most of the well-known tax havens – Bahamas, British Virgin Islands, Cayman Islands, Luxembourg, Guernsey, Jersey’.

Bill Dodwell, head of tax policy at Deloitte, said: ‘Because there is legitimate, straightforward business taking place in those locations …’

Hodge asked: ‘So, [British] Virgin Islands, population 23,000, how many people have you got there?’ Dodwell said he did not know whether Deloitte had an office there.

More than 700 professionals work across eight practices known as the ‘Deloitte Caribbean and Bermuda Cluster’, according to the firm’s website. The practices are located in the Bahamas and Turks and Caicos Islands, Barbados, Bermuda, British and United States Virgin Islands, Cayman Islands, Dutch Caribbean, Jamaica, and Trinidad & Tobago.

Dodwell told Hodge that Deloitte was helping to audit local firms as well as global firms with a presence in locations such as the Cayman Islands and Guernsey.

Hodge asked: ‘Are you there because of the local people or are you there because of the global firms who you structure in such a way that they have a presence there?’

‘To support both,’ Dodwell replied.

Hodge said later that Deloitte had 160 people in the Cayman Islands, with a population of 56,000. ‘What are they doing?’ she asked.

Dodwell said those people would be auditing financial institutions and ‘funds which have their top structure there’. Many hedge funds had a presence there, he added.

‘Tax haven structures are a peculiarity of US multinationals and [US law],’ he said. Under new and existing UK law ‘you cannot escape UK tax if you have no presence in a location’.

Dodwell told the committee that an ActionAid report, stating that 98 of the FTSE 100 companies had subsidiaries in tax havens, was wrong. The report was published in October 2011.

The largest number of UK companies was reported to be using Delaware companies, which pay US federal tax at 35%, Dodwell said. ‘That is not a tax haven.’

The second largest number had subsidiaries in the Netherlands, which had some low tax regimes but its basic rate was about 25%: ‘It regards itself not as a tax haven but as offering facilities to business to base employment and jobs there.’

US multinationals use Ireland ‘a great deal’, he added. ‘They directly employ about 5% of the Irish workforce and indirectly, probably, another 15%. Without that contribution, Ireland would probably be in more trouble than it is.’

Country-by-country reporting

In a statement posted on its website, Deloitte said: ‘Deloitte advises our clients to make tax decisions in line with their commercial position. Multinational companies, like all businesses, make commercial decisions based on a wide range of factors, of which tax is just one. We advise clients on how approaches will be seen from a risk and reputational standpoint, and take this into account in our recommendations.’

The firm took the opportunity to record its opposition to country-by-country reporting of profits and taxes paid, saying that such a requirement appeared ‘impractical and burdensome on business’.

It was ‘unlikely to provide the clarity and simplicity that would aid a better understanding of an organisation’s tax contribution’, Deloitte said.

The One Show

The TJN briefing was written by TJN director John Christensen and Richard Murphy, director of Tax Research. Murphy appeared on the BBC’s The One Show on Thursday evening.

‘We learned that these big firms do sell tax avoidance,’ he said, responding to an interview with Hodge. ‘We learned that they have so many branches in tax havens that one of the partners didn’t even know where his firm had offices and had to be reminded. We learned that they are auditors to the same companies that they are advising on tax, and they sign the deals off … They are also helping write the law for the government.’

Asked ‘how big an operation’ tax avoidance was, Murphy said he put the figure at £25bn of UK tax lost while HMRC’s estimate was £5bn. HMRC’s estimate would not include, he said, tax alleged to have been avoided by large multinationals using low-tax jurisdictions. ‘[HMRC does not] think that problem can be solved yet,’ he said.

In a reference to the general anti-abuse rule (GAAR) included in the Finance Bill, Murphy said: ‘Is it possible to make [avoidance] illegal? The government is trying. It’s got a law coming up – I don’t think that’ll work well enough. We’ve got to push a lot harder to solve this problem.’

Murphy is a member of the GAAR interim advisory group. It is widely understood that the GAAR was not intended to catch aggressive tax planning by multinationals using low-tax jurisdictions to reduce their effective tax rate, and that the legislation as drafted would not do so.

In other developments:

  • Oxfam claimed that ‘less than a third of the money that developing countries lose to corporate tax dodgers would be enough to end global hunger’. In a press release Oxfam, one of more than 100 organisations backing the Enough Food for Everyone IF campaign, said: ‘Just $50.2bn a year is needed to end global hunger yet an estimated $160bn is lost to corporate tax dodgers.’ Oxfam's chief executive Barbara Stocking said: ‘Unpaid taxes by greedy corporations is enough to help poor countries end global hunger three times over.’ As David Cameron prepared to co-host a meeting of the UN high level panel on the post-2015 development agenda, Stocking said the prime minister should be ‘pushing for an end to global hunger by 2025, and an end to tax dodging which could pay for this and much more’. She added: ‘These companies are effectively taking food from hungry mouths.’
  • War on Want called on the chancellor, George Osborne, to abolish the UK’s ‘network of tax havens, the Crown Dependencies and Overseas Territories, by requiring an end to their financial and corporate secrecy’. It claimed that UK ‘plays a central role in the “offshore” system that allows companies to dodge tax, with the City of London at the heart of the UK’s own network of tax havens including Jersey and the Cayman Islands’.