Inside job

Long stories short

• Standard Chartered bank announced layoffs in Hong Kong, Singapore and London.
• Asset manager LGIM and Swedish pension provider AP7 partnered on an active investment strategy targeting “climate laggards”.
• Lord Jonathan Sumption quit the board of the English National Opera over a plan to move the company out of London.

Inside job

Two pebbles were dropped into the global tax avoidance pond this week, both in Australia.

So what? The ripple effect could be substantial.

The first was a warning from a senior tax official that he could share potentially incriminating information with overseas counterparts about partners at PwC Australia apparently helping to make tax laws and bend them at the same time.

The second was an appearance at a senate hearing in Canberra by the senior partner of KPMG Australia at which he appealed for tougher regulation. He said, effectively, “please fence us in”.

Gamekeepers. The senate inquiry is one of three investigations into 144 pages of PwC Australia emails that suggest the firm was consulting with the federal government between 2014 and 2017 on anti-tax avoidance rules while circulating confidential information on those rules to colleagues around the world in pursuit of fees for advice on… tax avoidance.

Since its inception the PwC Australia scandal – under-reported elsewhere – has left two questions hanging:

• What about the rest of the Big Four?
• What about the rest of the world?

The lesson of recent history is that neither PwC nor Australia is alone.

Similar scandals in the US (2005), UK (2018) and South Africa (2017) have led to nine-figure fines and promises of reform even if they haven’t been kept.

PwC’s Australian unit is now trying to insulate itself from others by keeping names redacted in the emails, but pressure is building to disclose them. Meanwhile the unit’s senior partner and two other board members have stood down, and there are lessons for directors in any jurisdiction:

• Governments aren’t yet ready to give up outsourcing tax policy work to consultants when it’s cost effective.
• But they are ready to go after firms working both sides of the tax avoidance ledger when the result is lost tax revenues.
• When that happens, claiming to be divided into autonomous geographical units isn’t a viable long-term defence. There’s a reason the Big Four are called “big”.

Poachers. “This isn’t about bad apples; it’s about systemic failure,” says Sheffield University’s Professor Richard Murphy, who sat on a UK Treasury advisory committee on tax law in the coalition years. The Big Four keep close ties with tax authorities all over the world including in tax havens – especially Jersey, the Cayman Islands and the British Virgin Islands, he says. The conflicts of interest are “fundamental”.

The emails indicate PwC Australia offered bespoke tax advice to a “dirty 30” US tech firms within hours of new tax laws – on which senior partner Peter-John Collins had consulted – coming into force in 2015. Emails giving fellow partners a heads-up carried warnings like “treat as rumour” and “for your eyes only”.

By the numbers:

$2.5 million – fees booked by PwC Australia for advice on one new law in 2016 alone

$350 million – fees earned by PwC Australia from government contracts in the past two years

$456 million – penalties paid by KPMG in the US in 2005 for promoting tax shelters

80,000 – personnel employed by the Big Four in tax havens worldwide, approx.

$427 billion – tax lost each year to tax havens, according to the Tax Justice Network (2021)

Solutions. Splitting professional services firms into their constituent audit and consulting arms looks doomed. EY tried it and gave up two months ago after a $100 million consultation and a rebellion by US-based partners over how to divide up lucrative tax work. 

“The answer is for governments to hire better and pay better” and bring tax policy formation fully in-house, Murphy says. It’s an idea with a big following Down Under, and it could catch on under Labour in the UK. If the Big Four lose out, they’ll have only themselves to blame.