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PAC challenges PwC and Shire over Lux leaks

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The Public Accounts Committee held its follow-up hearing on the role of large accountancy firms in multinational tax avoidance on Monday, calling both PwC’s head of tax, Kevin Nicholson, and Fearghas Carruthers, Shire Pharmaceuticals’ head of tax, as witnesses. In the sometimes-heated exchange, PAC chair Margaret Hodge opened by demanding to know if Nicholson had ‘lied’ during the previous hearing on the subject in light of the recent ‘Luxembourg leaks’ (in which PwC was named as advisor in many of the confidential documents and tax agreements), a charge which Nicholson denied.

‘There are two things happening here,’ Nicholson had explained. ‘One is multinationals looking to finance operations overseas, and the second is really the holding of investments, mainly through funds or private equity. What we are doing is going to the Luxembourg authorities in advance, saying, “If I did these certain things, what would be the tax position?” and getting that agreed; then, in the case of a UK company – there are about 80-odd UK companies there – they would disclose that to HMRC and that would be settled and agreed … If we were advising, say, a US company on where to build their research and development centre, it might be the UK, so you would see lots of UK letters.’

Hodge questioned Nicholson about PwC’s denial at the previous PAC hearing that PwC had mass-marketed tax avoidance schemes, saying: ‘All that has come to light – I am sure there were more – is 343 companies that you advised and 548 letters that have reached the public domain on your headed notepaper, in which you appear to me to have mass-marketed’, to which Nicholson reiterated that they were not mass-marketed schemes as ‘if you look at HMRC’s definition under DOTAS, it’s all around secrecy, not wanting HMRC to know. This is nothing like that; this is going to a revenue authority [in Luxembourg to correspond about a client’s tax affairs].’

The Shire Pharmaceuticals ‘deal’ was also discussed, which, according to the PAC, resulted in a corporate tax rate of 0.0156% and was financed by a $10bn loan between ‘artificial’ (and largely Luxembourg-based) entities in the Shire group. Carruthers confirmed that Shire had 5,600 employees worldwide, but just two full-time employees in Luxembourg, which Carruthers said ‘is entirely appropriate to the operation we have in Luxembourg’.

‘The profit on an average basis in the financing company would be about $400m, but it also has borrowings in from Ireland which equal that, so in terms of the net spread, they pay 29% corporation tax in Luxembourg’, Carruthers said. After questioning from the PAC’s Stephen Phillips, Carruthers said that a $1.87bn profit over a five year period was indeed a number that ‘our financing company has received’, and that tax paid was $2m: ‘On the spread between what Luxembourg borrows at and what it earns income on, it pays tax at 29%, which is $2m of Luxembourg tax.’

When quizzed further on the $10bn loans from the Luxembourg companies and the interest deductions on those loans, Carruthers was accused of being ‘evasive’ and ‘not answering the question’. Phillips eventually summed up the situation by saying: ‘What is actually happening here is that Mr Nicholson’s firm [PwC], or at least the Luxembourg part of it, has managed to negotiate a deal where Shire is managing to reduce the amount of corporation tax it pays in the places where it is actually operating, while at the same time not paying a corresponding amount in Luxembourg because PwC has managed to persuade the Luxembourg tax authorities that there is nothing of significance going on in Luxembourg. It’s a scam, isn’t it?’

However, a spokesperson for PwC said it had long supported tax reform, adding: ‘We want a tax system in tune with the way businesses operate today, and a system that people trust. Reform isn't a distant aspiration; the OECD’s international tax reforms are progressing faster than many people had anticipated. In the meantime, global businesses investing, transacting, selling and expanding, must comply with the existing rules across multiple jurisdictions. We're proud of the work we do to help them.’