PwC charged with “selling tax avoidance on an industrial scale”; indulging in “scams”

The House of Commons Public Accounts Committee on Monday held a hearing on the role of accountancy firms in tax avoidance and PwC (PricewaterhouseCoopers), the Big 4 accounting firm, was represented by Kevin Nicholson, PwC head of tax in the UK and former HMRC (HM Revenue & Customs) tax inspector, who the chair charged with “selling tax avoidance on an industrial scale” and “indulging in scams”

Fearghas Carruthers, head of tax at Shire the British/Irish/American pharmaceutical firm, was also a witness. It became Irish by establishing a small headquarters in Dublin in 2008 and the recently revealed trove of 28,000 documents from the offices of PwC in Luxembourg showed that it was one of more than 340 multinational companies that got 548 rulings from Luxembourg in the period 2002-2008 that provided very low tax rates on cash routed through the Grand Duchy.

Carruthers outlined how the 2-person Luxembourg operation handled $10bn of intra-company loans at a tax rate of 0.0156%, which incurred tax of $2m on the profit earned on the “spread” between the rate it borrowed at and the rate it paid interest on.

Margaret Hodge MP, the PAC chair, said the staffing in Luxembourg did not represent substance “in any common sense way” but Nicholson said the guidance issued by the Treasury and HMRC said that “not much substance” was required for a treasury company.

Hodge said: “It is stretching our credulity in suggesting to us that these two employees, who are also directors of umpteen other companies, are seriously the guys taking the decisions on loans totalling $10bn. Let me put this to you, Mr Carruthers, because it is a very serious matter, because if the decisions in substance aren’t taken in Luxembourg, this isn’t just avoidance; for me, it’s fraud.”

Carruthers replied: “Madam chair, I can assure you that the decision-making in respect of that Luxembourg company is made in Luxembourg.”

Stephen Philips MP said: “It is extraordinary: you are a Jersey company, domiciled for tax purposes in Ireland, with your major operations in the United States, a legacy in the United Kingdom and a treasury operation of gargantuan proportions operated by two middle-ranking employees in Luxembourg, whom you visit a few times a year.”

Fearghas Carruthers responded: “As I said before, only 3% of our turnover is in the UK, 6% of our employees are in the UK, and the majority of our board members are non-UK tax resident.”

Kevin Nicholson referred to cross-party support for the UK’s recent reforms of its corporate tax rules, which facilitated financing through Luxembourg. He said the reforms, which introduced a low tax rate for offshore finance companies, was part of a drive to make the UK an attractive place for business. He said: “Politicians cannot duck the responsibility.”

Margaret Hodge concluded: “Mr Nicholson, a final question to you. I think what we are trying to understand—you will write to us about the specific scheme you suggested to Shire—is about the murky, underground pool here, with dodgy operations. That is what it feels like to us. You talked about material being stolen from PwC. In my view, you had whistleblowers. I have done this job for four and a half years, and I must tell you that you will carry on having whistleblowers for as long as you undertake business of this nature. You will carry on having such people in your employ. In fact, I will invite them to write to me, and I am sure this Committee will treat their evidence with confidentiality. Going back to Stewart’s point, I cannot think of a company that would want to do business with you if they thought that they would end up in The New York Times or The Guardian, because you are simply indulging in scams.”

Guardian Media, owner of The Guardian newspaper has said that a 2008 joint venture between private equity group Apax Partnersused a Luxembourg structure after it invested in the magazine and events group Emap, now called Top Right.

When the Luxembourg leaked documents were published, a GMG spokesman said: “We partnered with a private equity company which regularly used such structures. A Luxembourg entity was used because Apax already had that structure in place. The fact that the parent company is a Luxembourg company does not give rise to any UK corporation tax savings for GMG.”