2 Ernst and Young's evidence to the
16. In January 2013, we invited Ernst and Young,
along with Deloitte, KPMG, and PwC to give evidence to the Committee
about the nature of the tax advice they provide to multinational
companies. We were concerned about large companies paying little
corporation tax in the UK, despite doing a large amount of business
here. We found these large accountancy firms enjoy a large market
for advising companies on how to take advantage of international
tax law, and on the tax implications of different global structures.
We concluded there is no clarity over where the large accountancy
firms draw the line between acceptable tax planning and aggressive
tax avoidance. The big four firms advise their clients on reducing
tax liabilities, including offering complex operating models to
multinationals with the aim of minimising tax through exploiting
the lowest international tax rates.
17. We recommended HM Treasury should introduce
a code of conduct for tax advisers, setting out what it and HMRC
consider acceptable in terms of tax planning. We also recommended
HMRC and HM Treasury should push for an international commitment
to improve tax transparency, including by developing specific
proposals to improve the quality and credibility of public information
about companies' tax affairs.
18. In the light of the information from whistleblowers
and published by Reuters, we invited back John Dixon, Head of
Tax at Ernst and Young (Google Ltd's auditor) to give us further
evidence. Mr Dixon refused to provide any answers specifically
about Google's affairs, but discussed the ways in which Ernst
and Young work with multinationals generically.
19. Mr Dixon stated that Ernst and Young provides
multinationals with a statutory audit service and is able to assist
a company with the design of its structure, and can provide tax
planning advice. Mr Brittin did not know whether it was Ernst
and Young which had designed Google's company structure when it
was formed in 2002.
20. Mr Dixon considered there are many multinational
businesses claiming they do not have 'permanent establishments'
in the UK. He thought HMRC would examine a multinational's case
that it was not a 'permanent establishment' as a matter of course.
He told us that, at the front and centre of an HMRC investigation
into the UK operation of a multinational which is providing services
to its operations overseas, would be how close its UK staff get
to the point of sale.
21. Mr Dixon explained that when Ernst and Young
conduct an audit of a large multinational company, it ensures
the company's accounts do not contain a material misstatement
that would lead to an understated tax liability for the company.
Its audit processes require it to question whether that company
is trading in other jurisdictions through a 'permanent establishment'.
Mr Dixon told us that Ernst and Young review the substance of
what is happening on the ground.
22. In his evidence to the Committee in January
2013, Mr Dixon had confirmed that Ernst and Young auditors would
check whether a client's staff were carrying out activities consistent
with the client's claimed structure and activities in the UK.
In his additional evidence, Mr Dixon added that Ernst and Young
would also interrogate the client's e-mails and interview staff
if they found evidence contradictory to the claimed structure.
He reported that, when auditing a multinational for which there
might be a question whether it has a permanent establishment in
the UK, the auditors would examine what the multinational's staff
are doing with UK clients, including tracing back from an invoice
to the customer, to see whether there is a grey line between procurement
and sales activities.
20 'Tax avoidance: the role of large accountancy
firms',44th report, Committee of Public Accounts,
HC870, 26 April 2013 http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/870/870.pdf Back
Qq 47 - 50 Back
Qq 181-184, 197 Back
Qq 179 -180 Back
Tax avoidance: the role of large accountancy firms',44th
report, Committee of Public Accounts, HC870, 26 April 2013 http://www.publications.parliament.uk/pa/cm201213/cmselect/cmpubacc/870/870.pdf,
Q 101-102 Back
Q 188 Back
Q 191 Back