By Susan Deng
Susan attended the 2016 World Bank and IMF Annual Meetings in Washington D.C. She is a UNSW Co-op Scholar studying a Bachelor of Commerce.
Tax advisors in the Big Four professional services firms represent a concentration of expertise and a channel through which governmental knowledge and private interests are exchanged. Solving global corporate tax avoidance requires engagement with tax advisors who facilitate aggressive tax planning and address conflicting incentives. This paper will explore potential conflicts and threats to independence enabled by tax advisor activities. It will also discuss the necessity for improved transparency and the consolidation of information disclosure.
Address conflicts of interest in consulting for tax legislation.
Contracted taxation consultants who provide technical advice to government should be independent of those advising multinational enterprises (MNEs) on tax planning strategies. Governments should recognise the potential conflicts of interest when mandating tax advisors to consult on the development of tax legislation.
Mandate independence between audit and tax advisory departments of full service professional services firms.
A professional service organisation (including the Big Four firms) should not provide both auditing and taxation services to the same MNE. A code of ethical conduct must be instated to ensure consistency across the industry.
Increased transparency and disclosure consolidation.
Country by Country (CbC) reports must be disclosed publically through integration with Corporate Social Responsibility (CSR) programs. This minimises compliance burdens while maximising transparency and public awareness, placing MNE tax strategies under more scrutiny.
The international business landscape has opened opportunities for multinational enterprises (MNEs) to reduce their tax obligations through aggressive tax planning strategies. This includes shifting income into tax havens[i], using complex hybrid securities[ii], and engaging in the use of tax shelters[iii]. This global issue denies governments the tax revenue they are entitled to. The phonemenom erodes tax bases and impedes infrastructure development, as profits are funnelled into low tax jurisdictions.
The OECD and G20 Base Erosion and Profit Shifting (BEPS) Action Plan acknowledges the significance of the problem and aims to reform the global tax system and develop methods to effectively tax MNEs. These efforts have been supported by the World Bank and IMF however the effectiveness of unilateral BEPS implementation schemes has been varied. For example, the UK government opened a public register requiring foreign companies to register beneficial ownership information[iv]. Australia is yet to implement such an initiative, despite earlier promises to do so.
Media coverage of Google and Facebook’s tax avoidance scandals makes little mention of the role of tax advisors. These companies provide advice to MNEs while utilising their knowledge gained through consulting governments on tax legislation. This represents a serious conflict of interest. Solving global corporate tax avoidance needs to engage stakeholders who facilitate aggressive tax avoidance strategies.
The impact of tax advisors
The role of tax advisers
The ‘Big Four’ are the largest professional services firms in the world and consist of KPMG, Ernst and Young, Deloitte and Pricewaterhouse Coopers (PwC). These firms are experts at finding tax loopholes to minimise tax burdens for their clients and provide myriad of services including audit, taxation services, risk assessment, and management consulting.
Tax legislation is complex so tax advisors provide a critical service for MNEs. Note that there is a distinction between tax evasion and tax avoidance: tax evasion is illegal whereas tax avoidance is legal. Many companies take advantage of grey areas to exploit and avoid fulfilling their tax obligations. It is here where tax advisers can leverage their specialised knowledge and expertise in tax regulation.
Other than the explicit provision and facilitation of tax planning strategies, tax advisers are also responsible for a cultural shift in MNEs to avoid their taxation responsibilities (CRC, 2010)[v]. Tax advisers have the power to shift wider corporate attitudes to tax responsibility, a necessity in combatting such a systemic problem.
The marketing material and client notes issued by the ‘Big Four’ reveal the attitudes on corporate tax avoidance. The KPMG Tax team website states: “KPMG's Tax team can assist companies to consider reputational risk, tax narratives, their tax structures and how to future proof them”[vi]. In 2016 PWC published a report ‘Managing Tax Disputes in Asia’ presenting the need to “read the play” and to “be agile as the landscape shifts”[vii]. This kind of dialogue threatens the viability of BEPS projects and efforts to combat the issue.
Reputational risk and brand protection informs the nature of advice given to multinational corporations and distracts from the ingrained structural inequalities arising from global corporate tax avoidance. This discourse solidifies industry culture where tax legislation is reduced to a public relations risk. This removes the focus from the responsibility of MNEs to pay taxes which fund essential public services.
The 2014 Luxembourg Leaks scandal (LuxLeaks) revealed the full extent of the professional service industry in facilitating MNE tax avoidance. The leaked documents demonstrated how Pricewaterhouse Coopers (PwC) Luxembourg shifted profits from countries where the service or goods were undertaken or sold.
A typical tax avoidance mechanism incorporates subsidiaries for the purpose of lending to sister companies[viii]. First the Luxembourg subsidiary lends to its sister company in a higher tax jurisdiction (e.g. Australia), then the interest payments are made by the Australian group company, reducing payable tax. The interest payments received by the Luxembourg subsidiary are then taxed at a much lower effective tax rate due to Luxembourg’s MNE preferential tax regime. This method was adopted following advice from PWC tax advisors in Luxembourg.[ix] This structure is one example of the many tax aggressive strategies MNEs may utilise.[x]
Tax advisers and government legislation
Governments also utilise experts when reforming tax legislation. Advisors from the ‘Big Four’ firms sit on public tax advisory panels and are often seconded to provide technical advice. These advisors simultaneously provide strategies for clients to minimise tax their burdens, representing a conflict of interest.
Tax advisers who provide consultation to government on tax legislation are also better placed to identify loopholes for their corporate clients. This is apparent when observing advice given to clients. In 2013, KPMG was mandated to advise the UK government on tax legislation involving the development of new “Patent Box” rules[xi]. The policy was aimed at increasing the competitiveness of the UK tax system and offered a low effective tax rate of 10% on profits derived from patents. It subsequently published a marketing brochure entitled “Patent Box: what’s in it for you”. The brochure not only highlighted their recent government advisory role, but marketed their services in preparing “defendable expense allocation”[xii]. The purpose of government policy will not be realised if large tax advisory firms can leverage their knowledge of taxation systems to suggest ways of working around legislation to their client.
Recommendation One: Addressing conflicts of interest in consulting for tax legislation
Tax advisors contracted by government to give technical advice for tax legislation should be independent of tax advisors advising MNEs on tax planning strategies. Governments should recognise the potential conflicts of interest when mandating tax advisors to consult on the development of tax legislation.
Accountability of tax advisors
The Big Four accounting firms avoided major public scrutiny of their business practices in Australia until the Senate Inquiry into Corporate Tax Avoidance in November 2015.[xiii] When probed about the switch from general purpose accounts to special purpose accounts, the tax partners’ representatives deferred to the audit and assurance services of the firm. The switch to special purpose accounts allows MNEs to comply with as few as five accounting standards, as opposed to over forty for general purpose accounts[xiv]. This allows MNEs to avoid audited disclosure of transactions in foreign tax jurisdiction, thus offering concealment of the tax aggressive actions. The behaviour at the Senate hearing brings to light the lack of accountability and awareness of the actions of tax advisors, and the blurred lines between the roles of tax advisors and auditors.
Role of auditors
Sikka (2005)[xv] describe how ‘Chinese Walls’ (informational barriers designed to segregate sensitive information between different parts of the firm to prevent conflicts) do not prevent firms selling tax avoidance schemes to audit clients and then attesting the resulting transactions when auditing the same clients. Other academic literature has discussed the relationship between tax advisory, audit and tax avoidance. Extant research has found that tax-specific industry expertise of external audit firms played a significant role in client tax avoidance[xvi]. Experts are able to combine audit and tax expertise to develop tax strategies which benefit clients from both a tax and accounting perspective. Hogan and Noga (2015)[xvii] found that firms who reduce or eliminate tax services provided by their auditor pay on average more taxes in the long term.
Recommendation Two: recognition of threats to independence between tax and audit functions
The above suggests the necessity of recognising potential conflicts of interest between tax and audit functions of the Big Four accounting firms. Current legislative and professional body efforts have failed to address the issue. Australia, Canada, the European Union and the UK do not currently impose a legislative ban on non-audit services[xviii]. The Sarbanes-Oxley Act (SOX) was introduced in 2002 to improve financial disclosure and corporate governance requirements in effort to protect US investors from fraudulent accounting activities. Part of SOX pertains to auditor independence, however independence pertaining to conflicts between tax advisory and audit departments are not explicitly covered. SOX prohibits eight non-audit services to audit clients, tax services are not one of them[xix]. Indeed, a 2010 report from the Public Company Accounting Oversight Board, a US accounting industry watchdog, found a 33% incidence rate of deficient audits in 2010[xx].
The UK Auditing Practicing Board (APB) analyses threats to auditor independence arising from the provision of tax services under APB Ethical Standard 5[xxi]. In contrast, the Australian Professional Ethical Standard 110, which contains the mandatory professional and ethical requirements relating to the conduct of accounting professionals[xxii], states that generally tax services do not create auditor threats18. Australia must recognise the provision of tax and auditor services to the same client as a threat to professional independence, and all countries must move towards legislation to cancel the potential conflict.
Firms with both accounting and tax functions must be subjected to stringent compliance measures to ensure a separation of conflicting departmental purposes. The government must ensure that the auditor of an MNE should not be from the same organisation as the tax advisor of that MNE. A clear code of professional and ethical conduct must also be enforced by a peak professional body (Chartered Accountants and Certified Practising Accountants in Australia) to ensure uniformity across organisations.
The importance of transparency and consolidation of disclosure
The 2015 Senate Inquiry into Corporate Tax Avoidance aptly stated that “you cannot tax what you cannot see”13. Transparent disclosure by both tax advisors and MNEs seems all the more crucial in light of the LuxLeaks scandal, which demonstrated the extent of the exploitation of Luxembourg’s preferential tax loopholes. However, disclosure does not come without costs and efforts to increase transparency must recognise the commercial burdens excessive reporting can cause[xxiii]. I propose taking advantage of existing sources of disclosure, consolidating these sources and facilitating the distribution of this disclosure to the general public.
The OECD recently developed a country-by-country (CbC) BEPS reporting framework (BEPS Action Item 13). The CbC reporting template combined with comprehensive data on the financial position of multinational enterprises (MNEs), allows tax authorities to better identify and assess tax risks. The framework requires the parent entity to complete an annual CbC report for each tax jurisdiction they operate in. The intention of CbC reporting is to assess transfer pricing and BEPS risks for tax authorities. As such, current data from CbC reporting is subject to confidentiality protections to avoid the public disclosure of “commercially sensitive information”[xxiv].
Recommendation Three: Public disclosure of CbC reporting
I believe there is potential in making CbC reports publicly available through integration with company CSR reporting. This would require corporations to be accountable to governments and clients and allow for public scrutiny over the accounting and auditing practices of professional services firms.
The integration of CbC reporting into CSR minimises compliance burdens while maximising publicly available information. This will cement efforts by responsible investment advocates, increase scrutiny on MNE tax responsibility and hopefully change corporate attitudes.
Australia and other countries should follow moves by the UK and mandate public country-by-country reporting[xxv], despite criticism from opponents who suggested the public disclosure mandate would risk the competitiveness of U.K. multinationals.[xxvi] However the decision was unanimously approved by parliament and has praised by academic and commentators as a “victory for fairer taxation” and a move “towards an inevitable conclusion”25.
International tax legislation is complex and difficult to administer therefore existing resources should leveraged rather than introducing complex new disclosure mandates. Integration of CbC reporting can meet legal disclosure requirements at the global and state level, as well as increasing tax transparency to investors and the general public.
Tax advisers are an often overlooked but intrinsic part of the tax avoidance “supply chain”. The complexity of the international and domestic tax regimes provides tax advisors with a huge informational and network advantage when advising clients on tax legislation. This oligopolistic advantage enables these organisations to advising government on tax legislation, whilst advising the MNEs that government is trying to target. Regulatory bodies are also yet to extend standards of conduct on professional independence to the relationship between audit and tax advisory arms of the Big Four. Such potential conflicts of interest must be recognised and mitigated. Finally, there must be an overall increase in transparency and public awareness to hold MNEs and tax advisers more accountable to their actions. More effort needs to be made to consolidate existing disclosure requirements from government, professional bodies, and multilateral organisations, in order to make tax transparency viable for MNEs, and accessible to the public. Meaningful engagement and an alignment of interests and attitudes with all stakeholders, including tax advisers, is an essential part in combating the systemic problem that is global corporate tax avoidance.
[i] Dyreng, S., and B. Lindsey. (2009). Using financial accounting data to examine the effect of foreign operations located in tax havens and other countries on US multinational firms’ tax rates. Journal of Accounting Research, 47, 1283–1316
[ii] Engel, E., M. Erickson, and E. Maydew, (1999). Debt-Equity Hybrid Securities. Journal of Accounting Research 37, 249-274
[iii] Wilson, R. (2009). An examination of corporate tax shelter participants. The Accounting Review 84, 969-999
[iv] UK G20 beneficial ownership implementation plan (2015, November 16). Cabinet office, HM Revenue & Customs. Retrieved from https://www.gov.uk/government/publications/uk-g20-beneficial-ownership-implementation-plan
[v] Roman Tomasic & Brendan Pentony (1990, November). Defining acceptable tax conduct: The role of professional advisers in tax compliance. Retrieved from http://crg.aic.gov.au/reports/6-89.pdf
[vi] Base Erosion and Profit Shifting. KPMG Insights. Retrieved on 20 September 2016 from https://home.kpmg.com/au/en/home/insights/2016/03/base-erosion-profit-shifting.html
[vii] Managing tax disputes in Asia: New strategies for the post-BEPS environment (2016, April). Report by Pricewaterhouse Coopers. Retrieved from https://www.pwc.com.au/tax/assets/managing-tax-disputes-in-asia-apr16.pdf
[viii] Luxembourg Leaks: Global Companies Secrets Exposed. International Consortium of Investigative Journalists. Retrieved from https://www.icij.org/project/luxembourg-leaks on 18 September, 201
[ix] Simon Bowers (2014, November 6). Luxembourg tax files: how tiny state rubber-stamped tax avoidance on an industrial scale. Retrieved from
[x] Shackelford, D.A., Slemrod, J. and Sallee, J.M. 2007, A unifying model of how the tax system and generally accepted accounting principles affect corporate behaviour, (No. w12873). National Bureau of Economic Research
[xi] Salman Shaheen (2013, May 3) KPMG Treasury seconded behind UK patent box hits back at PAC criticisms. International Tax Review. Retrieved from http://www.internationaltaxreview.com/Article/3201047/KPMG-Treasury-secondee-behind-UK-patent-box-hits-back-at-PAC-criticisms.html’
[xii] Ayesha Mahomed (2014). The Patent Box: How does it work and what does the future hold? KPMG. Retrieved from http://www.kpmgtechgrowth.co.uk/the-patent-box/
[xiii] Senate Inquiry into Corporate Tax Avoidance: Report and Submissions (2015). Retrieved on 21 September 2016 from
[xiv] Jeffrey Knapp (2016, February 25). Big four accounting firms avoid scrutiny in multinational tax avoidance. UNSW Business Think. Retrieved from https://www.businessthink.unsw.edu.au/Opinion/Pages/big-four-accounting-firms-avoid-scrutiny-in-multinational-tax-avoidance.aspx
[xv] Sikka, P. and Hampton, M.P. (2005). ` The role of accountancy firms in tax avoidance: Some evidence and issues. Accounting Forum, 29, 3: 325–343.
[xvi] McGuire S.T., Omer T.C., Wang D. (2012) Tax Avoidance: Does Tax-Specific Industry Expertise Make a Difference? The Accounting Review, 87 (3), pp. 975-1003.
[xvii] Hogan, B. & Noga, T. J. (2015). Auditor Provided Tax Services and Long Term Tax Avoidance. Review of Accounting and Finance, 14 (3), 285-305.
[xviii] The Treasury (2006, November). Australian Auditor Independence Requirements: A comparative review. Retrieved from
[xix] U.S. Securities and Exchange Commission. Audit committees and auditor independence. Retrieved from https://www.sec.gov/info/accountants/audit042707.htm
[xx] HakJoon Song and Zhongxia Ye (2014). The Impact of PCAOB Reports Containing Audit Deficiencies on Non-U.S. Audit Firms: Initial Evidence. Current Issues in Auditing: June 2014, Vol. 8 (1), 12-25.
[xxi] Financial Reporting Council UK (2011). APB Ethical Standard 5 (Revised): Non audit services provided to audited entities. Retrieved from https://frc.org.uk/Our-Work/Publications/APB/ES-5-(Revised)-Non-audit-services-provided-to-audi.pdf
[xxii] Standards and Guidance: Issued standards. Accoutning Professional & Ethical Standards Board. Retrieved on 20 October 2016 from http://www.apesb.org.au/page.php?id=12
[xxiii] Australian Government Productivity Commission (2010). Annual Review of Regulatory Burdens on Business. Retrieved from http://www.pc.gov.au/inquiries/completed/regulatory-burdens/business-consumer-services/report/business-consumer-services-report.pdf
[xxiv] OECD (2014) Discussion on transfer pricing documentation and CbC reporting. Retrieved from https://www.oecd.org/ctp/transfer-pricing/volume2.pdf
[xxv] Penny Sukhraj (2016, September 7). U.K. opts for public country-by-country reporting. Bloomberg Professional. Retrieved from https://www.bloomberg.com/professional/blog/u-k-opts-public-country-country-reporting/
[xxvi] Robert Sledz (2016, July 6). UK Parliament defeats public CbC reporting proposal by narrow margin. Thomson Reuters. Retrieved from https://tax.thomsonreuters.com/blog/checkpoint/UK-Parliament-Defeats-Public-CbC-Reporting-Proposal-by-Narrow-Margin