Big Four firms consistently ‘unaware’ before tax inquiry
Credit: The Sydney Morning Herald
Representatives from “Big Four” accounting firm Deloitte were up before the Senate tax inquiry on Friday morning. They were keen to dispel any notion that their firm would have any involvement in tax avoidance.
Senator Christine Milne asked if they were aware of the Deloitte document “Investing in Africa though Mauritius”, advising clients on how to avoid tax through Africa.
The Deloitte partners were not aware of the document but found the idea of the firm’s involvement in tax avoidance utterly abhorrent.
As did their Big Four peers PwC, Ernst & Young and KPMG; veritably peas in a high-minded pod of professional integrity.
There has been a significant level of unawareness from companies and Big Four firms appearing before the inquiry, even about their own activities.
Many questions from the Senate have been “taken on notice”. Of course, all the firms are engaged in tax avoidance. That’s legal. Tax evasion is the illegal one.
However one doesn’t become a tax evader until one is busted, having been dragged through the courts at an expense of millions of dollars then found guilty. So if a multinational is clipping the ticket on transfer pricing – even at 2 per cent – it is only found to be up to no good if successfully prosecuted in the courts.
Broadly, a transaction is only wrong if its “dominant purpose” is to skive out of tax, rather than a “proper” commercial purpose. It’s a hard one to stack up.
As Mark Zirnzak from the Tax Justice Network told the inquiry in the first session on Friday, if somebody picks your pocket and you don’t notice, does that mean it didn’t happen?
If the police can’t be bothered or don’t have enough resources to apprehend the pickpocket, file charges, go to court and get a conviction, then a crime is never prosecuted or recorded.
The Senate committee has been careful to emphasise over the past three days that this inquiry is not about criminality, not about tax evasion at all, this is all about minimisation and avoidance – they are even careful about using the word avoidance even though the title of the show is the Senate Inquiry into Corporate Tax Avoidance.
But these are very blurred lines indeed; a bit like one of those optical illusion graphics that change shape depending on your perspective. Avoidance only becomes evasion once a conviction occurs, and the weight of evidence is that government, Treasury and the Tax Office are enjoying an increasingly matey relationship with each other.
By its own admission the Tax Office has adopted a strategy of doing more negotiation with multinationals these days rather than litigation.
The explosive evidence of the day has come however from former head of withholding tax at the ATO, Martin Lock, who told the committee there was a “climate of fear” and “internal fiefdoms” that led to a culture of autocratic management where dissent was not tolerated.
He had been working on a big multinational avoidance case for three years but was forced to drop it despite amassing good evidence against the perpetrators. The culture he said was such that it was in the interests of tax avoiders. Further there was no separation of powers. Lock had previously told Fairfax Media that the Tax Office was losing its independence and had been politicised.
His most dramatic testimony was of a case against one of the Big Four banks, which owed $100 million. But instead of prosecuting, the ATO cut a deal for a $30 million settlement. Subsequently, one of his bosses who had been involved in the case went to work for PwC, which had been advising the bank on the matter.
This apparent “regulatory capture” is nothing new in government agencies around the world but such evidence usually only comes to light under parliamentary privilege where people feel secure enough to talk freely.
Along with the mass media coverage of recent days, Friday’s proceedings are further proof that the Senate inquiry has been an outstanding success. It will probably save Australia’s tax base hundreds of millions of dollars merely by sending the message that more people are now watching for tax chicanery. Hence it should constrain behaviour.
PwC, in its testimony – which trod delicately around the LuxLeaks scandal – even let slip the word “leakage”. Tax practitioners refer to tax as leakage, a word which conveys the notion that it is a bad thing to pay tax, it is a leak. And the plumbers are the tax lawyers and the Big Four audit firms.
It is their job to represent the client and make sure no leakage occurs, or only enough leakage to prevent damage to the reputation of their clients and themselves and not be dragged before the courts.
Representatives for Glencore, Australia’s third biggest miner and biggest coal miner, was asked about the $3.4 billion loan it took from its Swiss parent company at an interest rate of 9 per cent during the biggest coal boom in history. It took the question on notice.
“I want to be clear, Glencore does not profit shift,” said one representative.