Since November, the LuxLeaks scandal has been gathering ever-greater momentum, but the main culprits remain in the shadows.
Journalists have revealed that over 300 multinationals, including Apple, Ikea and Disney, had negotiated secret deals with Luxembourg, to secure drastic reductions in their tax rates.
These journalists have accessed thousands of confidential documents from the world’s four biggest accountancy firms: PricewaterhouseCoopers (PwC), KPMG, Ernst & Young and Deloitte.
Unbeknownst to the general public, these companies – the so-called Big Four – advise governments and multinationals, lay down the law in tax havens, and spin their web of influence in international institutions, all whilst promoting “aggressive tax avoidance”.
Together they have a turnover of some €90 billion (US$105 billion).
In the case of LuxLeaks, the aim of the Big Four’s lawyers was to secure a tax rate lower than the official tax rate in Luxembourg. The result: several billion dollars “saved” by multinationals, at the expense of ordinary taxpayers.
Such practices come as no surprise to tax professionals.
"In France, wealthy individuals hold direct negotiations on their tax rate with the taxman,” says Damien (not his real name), a young tax lawyer. “It’s the same in Luxembourg, except that multinationals negotiate too”.
Damien used to work for one of the accounting giants.
“The multinationals are all customers of one of the Big Four, which employ hundreds of lawyers. They tell the lawyers: ‘Find me a way of reducing my ETR (effective tax rate).’ The lawyers draw up a memo devising the best scheme possible. They exploit the loopholes and the benefits offered by the tax systems around the world.”
The fees for these ’tax optimisation’ memos are astronomical. “They are negotiated with the client, based on the time spent,” explains Damien.
“A partner in a big firm charges €600 an hour, on average; they work with one or several managers, whose hourly rates are €350, and a number of juniors, who are paid €100 an hour. In a year, PwC rakes in €6.4 billion from tax advice (US$7.3 billion).”
Although caught red-handed in the LuxLeaks affair, PwC remained unperturbed: “We have done nothing wrong, nor has Luxembourg. They are legal and legitimate activities,” said one of its directors.
It is true that these sleight-of-hand accounting tricks are not officially forbidden. They are referred to as ’aggressive tax planning’ in a bid to avoid the unsavoury term ’tax evasion’.
However, the line between the two is, in fact, very thin.
In response to questions from British members of parliament, a partner at Deloitte stated that the rule was to sell schemes that had at least a 50 per cent chance of being upheld in court. In private, tax advisors admit that the real figure is 25 per cent.
It is a potentially expensive gamble. In 2013, Ernst & Young had to pay US$123 million to the United States to avoid criminal prosecution: the firm had sold tax schemes to 200 clients, allowing them to save US$2 billion in taxes.
Auditing and tax advice, a dangerous combination
Tax planning is not, however, the audit giants’ primary activity. Their main business, as their name indicates, is ’auditing’ multinationals.
Between them, the Big Four scrutinise the annual accounts of the 500 biggest companies on the planet, to ensure there are no irregularities.
This dual role is questionable: on the one hand, they play the role of the “cops” in charge of inspecting the companies whilst, on the other, they encourage them to flirt with illegality.
What’s more, the auditors are paid by the very same people they are auditing.
The Enron collapse, in 2002, demonstrates how flawed the system really is. Arthur Andersen, the energy giant’s auditor and financial advisor, was accused of having covered up its client’s financial manipulations. Employees at the auditing firm did not hesitate to shred thousands of documents to cover their tracks.
As a result of this scandal, the law now requires that accounting giants separate their auditing and their advisory services. The two are, however, still being mixed.
Take the example of ketchup giant Heinz, quoted in LuxLeaks.
While PwC tax advisors were helping the multinational to avoid the taxman, the firm’s auditors were still certifying Heinz’s accounts, as demonstrated by its 2010 annual report.
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Giants lay down the law
Having spent so much time in tax havens, the accounting giants have come to feel very much at home there. Jersey is a prime example. The lawmakers of this tiny territory are often happy to transcribe turnkey projects into law.
In 1995, the accounting firms managed to have a tailored-made legal status passed especially for them: the ’limited partnership’. It is a status that combines the advantages of little transparency, lower taxation and limited liability in case of bankruptcy.
The idea was to then use the threat of fleeing to Jersey if the United Kingdom refused to pass an identical text.
Operation successful: one morning, the lawmakers of Jersey found the bill on their desk, a lobbying campaign pushes the most hostile opponents to give in.
In the European Union, the Big Four’s influence is more covert. Their objective: to stop any legislation that might bother multinationals. They have pride of place in a variety of expert groups.
In April 2013, when the European Commission launched the platform to tackle aggressive tax planning, its members included no less than PwC, which was nailed 18 months later in LuxLeaks.
For years, the OECD has been contemplating the introduction of ’country-by-country reporting’.
Such reporting would oblige the multinationals to disclose information such as the profits made by each subsidiary.
This would be more than enough to upset the big groups locating their subsidiaries in tax havens. And to put an end to the accounting giant’s money-spinning schemes.
In April 2014, the OECD suggested that key data could be left out of these reports, much to the relief of the Big Four, for which tax advice represents a quarter of their turnover.
Running states like companies
The Big Four do not only act as experts for companies and the European Union.
Over the last 30 years, they have diversified their client base, offering their services to states and local authorities. Their expansion corresponds with the neoliberal shift of the 1980s.
Their philosophy is simple: states should be run like companies, with cost ’optimisation’ s a key objective.
The French state regularly calls on the services of the Big Four.
During the launch, in 2007, of the General Public Policy Review (RGPP) – a sweeping package of reforms aimed at cutting public spending – the French government commissioned several firms, including Ernst & Young. The operation – paid by the taxpayer – cost €111 million.
Local and regional governments also call on the accounting giants’ services. KPMG is advising 6000 municipal councils, departmental and regional authorities in France.
“For a public service that is simpler, more efficient, more accountable – in short: more sustainable, KPMG assists public sector players,” proclaims the firm in its promotional material.
A seasoned auditor who works for one of the Big Four explains: “More and more local authorities are coming to us because they can no longer take on all their missions with the continual fall in state funding. Our role is to tell them, ‘You’re going to have to have one of your limbs cut off, and we will tell you whether you need to lose an arm or a leg’. After doing a complete audit of their books, we advise them to abandon certain missions or to outsource certain services (IT, cleaning, etc.). It’s either that or bankruptcy.”
Another promising market has opened up for the Big Four in the South, with the growth in the ’structural reforms’ driven by the IMF or the World Bank.
African countries, for instance, hire the firms to advise them on the privatisation of their public sectors.
Côte d’Ivoire, despite being one of the world’s poorest countries, reportedly forked out €800,000 to pay for PwC’s advice on the privatisation of five state-owned banks. Its competitor KPMG had asked for no less than €2 million when bidding for the contract.
By knocking at the doors of the states around the globe, the Big Four are managing to pick up some unlikely customers.
Who would have thought that the Pope would one day turn to KPMG to put the Vatican’s books in order?
Pope Francis hopes, in so doing, to turn the page on the successive financial scandals that have marked the Holy See.
KPMG’s mission is to “bring greater transparency” to the Vatican’s finances.
It is true that when it comes to financial transparency, the Big Four are not short of know-how...
Photo: CC Adam_T4