Tax Avoidance-Google - Public Accounts Committee Contents

2   Ernst and Young's evidence to the Committee

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.[20]

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.[21]

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.[22]

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.[23]

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.[24]

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.[25] 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.[26] 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.[27]

20   'Tax avoidance: the role of large accountancy firms',44th report, Committee of Public Accounts, HC870, 26 April 2013 Back

21   Qq 47 - 50  Back

22   Qq 181-184, 197 Back

23   Q77 Back

24   Qq 179 -180 Back

25   Tax avoidance: the role of large accountancy firms',44th report, Committee of Public Accounts, HC870, 26 April 2013, Q 101-102  Back

26   Q 188 Back

27   Q 191 Back

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Prepared 13 June 2013