Public Accounts CommitteeWritten evidence from KPMG UK

Thank you very much for your letter of 22 January.

In addition to the specific information requested we have included, as an appendix, some information about our internal governance procedures. We have also attached a copy of our internal UK Principles of Tax Advice (Tax Principles).

In view of the subject matter of the hearing we have also attached as an appendix some views of the current debate which may be of interest to you.

Some of the information provided is confidential in nature and we would be grateful if you would exclude the following from this written evidence before making it public.

The second and third sentences of the answer to question 2.

The answers to questions 3, 4, 5 and 6.

1. What was the scale of KPMG’s tax practice globally in 2011–12?

In financial terms.

In terms of the number of employees.

As a proportion of turnover.

In the year to September 2012 the aggregate reported income of the tax practices of KPMG International’s member firms was US$4.86bn which was 21.1% of KPMG’s global turnover. There were approximately 1,850 tax partners and 21,600 tax professionals.

2. What was the scale of KPMG UK’s tax practice in 2011–12?

In financial terms.

In terms of the number of employees.

As a proportion of turnover.

In the year to September 2012 the reported income for KPMG1’s tax and pensions practice was £380 million. The turnover relating to tax was £310 million which was 17.5% of KPMG’s total turnover. There were 112 tax partners and 1,670 tax professionals.

3. What income did KPMG receive in aggregate from providing tax advice to multinational companies in 2011–12?

KPMG is organised by function (Audit, Tax and Advisory) and market (financial sector, large corporates and regions). Within each of those markets there is a mixture of domestic and international clients. For example, many inbound multinationals are managed from regional offices because their UK headquarters are often outside of London. Therefore the income information which you have requested is not available, although we can advise that approximately £33 million of KPMG’s tax income relates to advice on international corporate taxation and transfer pricing. Of the remainder of tax income from corporate clients, approximately £100 million relates to tax compliance and the balance covers advice on indirect taxes, employment taxes, transactions and domestic tax.

4. What income did KPMG receive in aggregate from providing tax advice to high net worth individuals in 2011–12?

The income from personal tax clients was £21.5 million of which £11.5 millionm is for compliance services. We cannot separately identify revenue from high net worth individuals.

5. How many schemes has KPMG disclosed under the DOTAS rules in each of the last three financial years?

KPMG made eight disclosures in 2009–10, four in 2010–11 and eight in 2011–12. To date, no disclosures have been made in the current financial year.

6. What was KPMG’s income from all the services it provided to the UK public sector in 2011–12?

In the Government’s 2011–12 financial year (ie April 2011 to March 2012), KPMG’s revenue from all the services provided to the UK public sector was £94.5 million. This includes all revenue earned from central government (and related) bodies, local and regional government bodies, educational institutions and NHS trusts.

Since you asked us about our financial position we thought you would like to know KPMG’s tax contribution in the UK. In the year ended 30 September 2012, KPMG paid £122 million in corporation tax, employers’ national insurance and business rates. A further £184 million was paid to HMRC on account of income tax liabilities of the partners and £443 million of PAYE, employees’ NIC and VAT was collected as agent for HMRC. In the interests of increased transparency on these matters this information will be published on our website later this year.

Jane McCormick
Head of Tax and Pensions



1. External Regulation

1.1 In the UK the provision of tax advice is not a regulated activity and is provided by accountants, lawyers and those with relevant experience. However many of the professional bodies have a role in regulating the activities of their members. KPMG is regulated by, amongst others, the ICAEW. The ICAEW code of conduct requires that professional advisers act with integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. The ICAEW together with other professional bodies such as the CIOT and ICAS have developed a code specifically covering the provision of tax services and KPMG is in compliance with this code.

2. Global Code of Conduct

2.1 In addition to external regulation KPMG member firms internationally apply a common Global Code of Conduct (Global Code) which govern how we run our business.

2.2 The Global Code lays out the expectations of ethical behaviour that KPMG expects of its people. At the heart of the Global Code are the KPMG values which define KPMG in the UK and KPMG member firms internationally; that we lead by example, work together, respect the individual, seek the facts and provide insight, are open and honest in all our communication, are committed to our communities and, above all, act with integrity.

2.3 The Global Code encourages KPMG partners and staff to act as role models, promoting ethical behaviour and ensuring that their actions reflect and reinforce the values. The Global Code constantly evolves in line with changes in regulation, law and professional ethics.

3. Tax Principles

3.1 In 2004, KPMG introduced the UK Principles of Tax Advice (Tax Principles) which codified and enhanced existing governance procedures. This was prompted in part by the ongoing investigation by the Department of Justice into the US member firm of KPMG International in relation to the sale of tax shelters in the US between 1996 and 2002.

3.2 The Tax Principles are KPMG’s own code of conduct in relation to tax advice. They are a core element of our internal tax governance procedures. All advice that is given has to stand up to scrutiny in the context of these principles. They provide a framework for our UK tax professionals to assess the wider implications of our advice and promote consultation and discussion within the practice. The Tax Principles are regularly reviewed to ensure that they stay relevant and appropriate. In 2011 all KPMG International member firms adopted the global Principles for a Responsible Tax Practice to which the UK firm’s Tax Principles were aligned.

3.3 Most recently in December 2012 a new principle was added to the UK firm’s Tax Principles to recognise the importance of the intention of Parliament and the increasingly purposive approach by the courts.

3.4 Our Tax Principles are enclosed with this letter and will shortly be published on our website.



1. Tax Avoidance

1.1 The issue of tax avoidance and what constitutes legitimate tax planning as opposed to aggressive tax avoidance is not a new one. The difference between the two is acknowledged as difficult to define. A recent paper by Oxford University Centre for Business Taxation encapsulates this complexity, “Tax avoidance has no fixed legal meaning, although courts have sought to elucidate it in some cases and, for example, to distinguish tax avoidance from tax planning or tax mitigation. Matters are often complicated but not usually clarified by the addition of adjectives such as ‘aggressive’ ‘abusive’ or ‘unacceptable’.2

1.2 Ten to 15 years ago there was a demand for what are now clearly perceived to be “aggressive” tax strategies both at a corporate and personal level.

1.3 Corporate scandal, the resulting increased regulation and disclosure, together with public demands for accountability and socially responsible behaviour have changed this, we believe, permanently. In particular:

Increased focus on corporate governance.

A heightened awareness of the wider responsibility of business to society.

Adverse publicity resulting in damage to corporate and personal reputations with the associated financial damage.

OECD work on tax intermediaries and tax transparency.

Initiatives such as the Joint International Tax Shelter Information Centre and bilateral sharing of information between countries.

The Disclosure of Tax Avoidance Schemes (DOTAS) regime.

The 2009 Banking Code of Practice.

Other laws such as Senior Accounting Officer.

1.4 Tax planning has become a matter of reputational risk, for both the tax adviser who is perceived to be marketing tax avoidance schemes and for the taxpayer who implements them, particularly since such action is often or even inevitably described in the media as “aggressive” regardless of the substance of the arrangements . The reputational aspects of tax avoidance were recognised by Lin Homer in her evidence at the Public Accounts Committee in December.3

1.5 Looking ahead, the scope of the existing DOTAS regime is being extended which will provide HMRC with more real-time information about tax planning. Also, and probably of more significance, a General Anti-Abuse Rule is being introduced under which planning which is abusive will fail to deliver the intended tax benefits.

2. International Taxation

2.1 A critical part of the current debate is the perception that multi-nationals are not paying tax where the visible economic activity happens. Globalisation and new technologies have resulted in business models which were not anticipated by existing international protocols. We support the Government prioritising improvements to this part of the international tax system as part of its presidency of the G8.

2.2 There is a trend in international business to centralise business functions and asset ownership in one location. The choice of location is ultimately a decision for the corporation concerned but, in our experience, tax will be influential but will not be the determining factor.

2.3 HMRC recently stated that “Globalisation means that multinationals have the opportunity to structure their business to take advantage of beneficial tax rules in different countries. Provided that this results in profits being taxed in line with where genuine economic activity is carried on, this does not amount to tax avoidance”.4

2.4 Tax administrations introduce specific reliefs and incentives to attract international investment. The UK is part of that international competition for investment and recent law changes, such as the Patent Box regime have started to increase the UK’s competitiveness. In fact, many of our clients are looking at bringing more business activity to the UK.

2.5 The taxation of international transactions is complex and the interaction of different tax codes can create double taxation as well as double non-taxation. The UK has a raft of anti-avoidance rules which seek to ensure profits stay in the UK.

2.6 However, the transfer pricing rules, in particular, have not caught up with the technological age in which we now live, especially in the area of intellectual property, brands and the internet. HMRC’s recent announcement of further investment in this area is welcome and necessary although this also needs action at a global level to be fully effective. The OECD has started work in this area but has warned that lack of co-ordination or collaboration could lead to “increased possibilities for mismatches, additional disputes, increased uncertainty for business, a battle to be the first to grab taxable income through purported anti-avoidance measures, or a race to the bottom with respect to corporate income taxes”.5

3. Competitiveness

3.1 The CBI has stated that in 2010–11 businesses operating in the UK contributed over a quarter of all tax collected.6 Businesses generate employment and sales income which gives rise to PAYE and VAT. These taxes are collected on behalf of the Government but providing employment also creates additional costs in the form of Employer’s National Insurance contributions which are borne directly by the business concerned.

3.2 We believe it is important that the Government maintains a competitive tax environment that offers both predictability and certainty and continues to encourage business to invest in the UK. The UK’s tax code has a vital role to play in helping economic recovery through international competitiveness.

3.3 In 2010 the Coalition Government announced its aim was to create the most competitive corporate tax regime in the G20. The Government has done some valuable work in attracting international investment through new legislation and initiatives such as the new Controlled Foreign Companies and Patent Box regimes as well as a steady reduction in the headline corporation tax rate. The success of these initiatives is evidenced by the repatriation of a number of businesses which had previously re-located overseas. KPMG fully supports these aims and has been actively involved in HMRC consultations developing these initiatives.

4. Transparency

4.1 Tax is complex and it is important that it is demystified. We welcome the current debate and the need for greater transparency that it has identified. As a firm we have been active in raising this issue with our clients and encouraging voluntary disclosure.

4.2 There are already some industries which proactively publish enhanced tax information, particularly the extraction industry. However, mandatory country by country reporting without explanation or context will not help address the issues or move the debate forward. We consider the way forward is for business, the tax profession and other relevant stakeholders to develop an approach that addresses the concerns but also improves understanding of the UK and international tax system and so rebuilds public confidence and trust in that system.

1 References to KPMG in these responses refer to KPMG LLP, the UK member firm of KPMG International except as where otherwise specified.

2 Tax Avoidance, Oxford University Centre for Business Taxation, 3 December 2012

3 Uncorrected Transcript of Oral Evidence before the Public Accounts Committee on Tax Avoidance Schemes, 6 December 2012, responses to Q286, Q334 and Q335

4 Taxing the Profits of Multinational Business, Issue Briefing, HMRC, October 2012

5 BEPS—A Background Brief, OECD, 20 November 2012

6 HMRC, CBI Analysis, Tax and British Business: Making the case, CBI, 2012

Prepared 23rd April 2013