This blog was posted by the Tax Justice Network yesterday. Because I think it important I am sharing it here, with permission:
As scandals emerge from the Paradise Papers, the Big Four accountancy firms seem to have managed to stay largely out of the spotlight once again. But research released today shows that scrutiny of their practices is justified in the public interest. The new study is authored by Dr Chris Jones and Dr Yama Temouri of Aston Business School and the Tax Justice Network's chief executive, Alex Cobham. You can find the abstract and details for access here, but here's a summary of the findings:
Leading estimates show that profit shifting by multinational companies is responsible for tax revenue losses globally of $500 billion or more each year. Various document leaks, including the Paradise Papers and earlier LuxLeaks, have shown anecdotally the central role of the ‘big four' accounting firms — Deloitte, EY, KPMG and PwC. Now our research published today in a top tier, peer-reviewed academic journal shows the systematic nature of the Big Four's role.
We find that multinationals that use a Big Four audit firm to audit their accounts make significantly greater use of tax havens compared to a set of firms who choose not to use the Big Four. Hence, we demonstrate a strong correlation between Big Four use and tax avoidance but also, and importantly, we offer evidence of causality. It would appear that those multinationals that take on a Big Four firm become more tax aggressive. 
Our research shows that rather than leading the way in ensuring the public accountability and transparency of their clients, the big four are key players in the promotion of financial secrecy and complexity that underpins the massive revenue losses globally from profit shifting. Those losses in turn impose enormous social costs through cuts in public spending.
The study was authored by Dr Chris Jones and Dr Yama Temouri of Aston Business School — which is in the top 1% of business schools worldwide with triple accreditation from AMBA, AACSB and EQUIS — and the Tax Justice Network's chief executive, Alex Cobham.
On the publication of the new research Dr Jones said: “This study clearly demonstrates how the Big Four have become key enablers of the systematic use of tax havens and tax avoidance by multinational firms.”
Alex Cobham said:
The Big Four on a global scale appear to help MNEs to escape the regulatory limits and controls of specific nation states — which runs completely counter to their global licence to audit firms and ensure their accountability. It's quite possible that the Big Four have a hand in the majority of the $500 billion of annual, revenue losses due to multinational profit shifting worldwide. It's high time that policymakers consider global coordination to limit the damage the big four are imposing — and to re-evaluate urgently the enormous policy influence that they allow the Big Four to have.”
Dr Temouri said
An additional worrying feature of our study is the weakness of the Orbis database of company balance sheets — the leading data source for most studies of multinationals' tax behaviour. The systematic weakness of data coverage for tax haven subsidiaries means that all these studies risk understating the degree of profit shifting — and similarly our results here are likely to be biased in a conservative direction.”. If multinationals are forced by legislators to publish their accounts on a country by county basis, and if this reporting is made public, then it will enable researchers to shed more light on the degree of tax haven use by multinational firms.”
Notes
1. The Tax Justice Network is an independent international network launched in 2003. We are dedicated to high-level research, analysis and advocacy in the area of international tax and the international aspects of financial regulation. We map, analyse and explain the role of tax and the harmful impacts of tax evasion, tax avoidance, tax competition and tax havens. The world of offshore tax havens is a particular focus of our work. Our core goals are to create understanding and debate and to promote reform, especially in poorer countries. We are not aligned to any political party.
2. Founded in 1895 and a University since 1966, Aston is a long established research-led university known for its world-class teaching quality, and strong links to business and the professions. Dr Chris Jones is a reader, and Dr Yama Temouri a senior lecturer, in the Economics, Finance & Entrepreneurship Department of Aston Business School
3. This research has been presented at the UK-AIB (Association of International Business) Chapter conference, Birkbeck 2016; the annual world AIB conference in New Orleans in 2016; the Academy of Management (AoM) annual conference in Anaheim in 2016; and the Tax Justice Network's annual research conference in 2016. The 2018 annual conference will be held in Lima, Peru, in June. Registration and the call for papers will open shortly.
4. Estimates of the global scale of multinationals' profit shifting, and the resulting losses, are summarisedhere.
5. The Journal of World Business (JWB) is a premier journal in the field of international business with a history dating to 1965 with the founding of the Columbia Journal of World Business. JWB publishes cutting-edge research that reflects important developments in the global business environment and advances new theoretical directions and ways of thinking about global phenomena:https://www.journals.elsevier.com/journal-of-world-business/
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Isn’t it possible, either through legislation, or a professional code of conduct with teeth, to target these firms where they create schemes which are clearly artificial where its only purpose is to enable their clients to avoid tax.
I mean there’s plenty of “clever” (aka amoral) lawyers and accountants who can find their way through all the loopholes, so there must be some respectable ones who can close them back up again.
A lot of attention is given to the tax havens and the companies but without these third parties the whole thing would collapse. Strike them off.
I try
I discussed it with parliamentarians this morning
civil service salaries are much lower than big 4 so you will rarely get anyone with any skill or knowledge in this sector moving to the Treasury or HMRC – that is fundamentally the issue. you end up with sub standard individuals drafting the tax laws and all the “talent” gravitating to lawyers and accountants who try to apply the laws to their clients and inevitibly finding gaps in the rules to get through.
Sub standard?
Do you understand prejudice?
Let alone motivation?
I would be interested in your analysis as to how HMRC have ended up in this situation if it’s not attracting sufficient talent
The political destruction of its opportunity to fulfil its potential as a result of the prevailing ethos that tax is a bad thing
All very interesting but surely the fastest and most effective way of stopping a lot of this is to recruit the people designing it and implementing it into HMRC to educate them on exactly what weak points in the planning to push on
Sure you might have to pay them 700k a year but the amount of extra tax that individual would yield would be many multiples of that amount
Surely some radical thinking is required here, although I don’t really regard a cost benefit analysis as particularly radical.
I think you’ll find £100k would attract what’s needed
£100k is the package of a senior manager in the big 4 – they are the people cranking the handle on the reports, you need the partners who are the ones coming up with the ideas in the first place and thats going to cost you £700k.
The senior managers are the brains
And know how it all works
Lol. Clearly it’s been a long time since you worked in the big 4 Richard.
Yes
But I talk to them, often
Interesting. In what context do they speak to you and why? Is it the heads of tax. That you talk to? I have to say it’s surprising given the amount of criticism you level at them. Are the discussions in connection with the gaar panel which I thought you had some involvement with?
I speak with three of the big 4 pretty regularly and the other occasionally on a range of issues and seemingly to mutual benefit
I believe that HMRC & others actually invite secondments from the Big 4, perhaps elsewhere too, in order to help draught legislation. A bit like the farmer inviting Reynard to guard the hen coop. Surely that’s got to stop too?
Richard,
I do agree in the role of the big 4, I don’t like the way they conduct business, but they have this freedom of searching the best for their clients in terms of taxation, what I see is a heavy dependency on corporations by governements, MN’s and corporations are the main tax collectors and thus it gives them leverage to negotiate a lower corporate tax income rate, to me the solution for governments is to switch to individual tax, all governments are way behind in terms of using the technology to calculate taxes, there are several myths that need to be challenged, in the following ways:
1) A more progressive income tax, nowadays no one use a pencil and a piece of paper to calculate taxes, so the number of brackets could be increased a lot.
2) Low income individual should pay progressively the income tax, Do we want them to demand better wages or we keep treating them like childs?, tax expenditures and tax credits, at least in Mexico, are worthless
3) Unfortunely, consumption taxes, like VAT, as the OECD had pointed out, needs to consider tax on Internet sales, which means it needs to be added on all the Treaties to avoid double taxation
4) All countries try to attract investment, and the Amazon open letter to shop for a new location is another simple, it encourages governments to be “creative” and offer real incentives, adn the governments are responding
5) We live in a free global market, and we have a lot to do regarding taxation, but the answer doesn’t seem to be to punish corporations and the governments (like Ireland), although the country by country reporting is a very good idea, it’s kind of intrusive, unless it gives valuable information to the potential investor, then is going to become mandatory
Best regards
Miguel
Audit firms have strict independence guidelines set out by both their professional body and the regulator. The pressure surely needs to be on the regulators to more stringently enforce the independence guidance set out both by the ICAEW (Chartered Accountants’ professional body) and the FRC (the regulator). Whilst aggressive offshoring tax avoidance schemes are legal then the Big 4 surely have to offer the best advice for their clients to remain competitive – therefore the pressure also needs to be on policymakers to close the loopholes in the legislature.
As a strong social libertarian I am all for recovering the tax lost to aggressive tax avoidance schemes, but the finger needs to be pointed towards the right individuals to make the change.
You may be a strong social libertarian but you are Lao talking nonsense
First the Big 4 are an oligopoly: there is a veneer of a market
Second the regulator is not independent of the Big 4 as successive evidence shows
Third, you assume international abuse is within in the control of domestic law. How is that?
Please explain