The Australian Labor Party went to the 2022 election with a plan to ensure multinational corporations (MNCs) pay their ‘fair share’ of tax. Once elected, the Albanese government promised to extract greater tax revenues from MNCs through embracing changes proposed by the OECD, including limits to debt-related tax deductions, removing rights of companies that hold intellectual property in tax havens and increased reporting requirements. Details of these changes are likely to be included in the upcoming mini-budget.
However, in our recent research, published in the journal Global Policy, we argue that these reforms are the latest in a range of government commitments to addressing MNC tax avoidance that have, in reality, changed little in terms of corporate tax practices. We suggest this is partly due to the role played by the companies that advise MNCs on establishing corporate tax avoidance regimes, namely the Big Four professional services firms EY, PwC, Deloitte and KPMG.
The power of the Big Four
The Big Four are a global force in auditing, advice and tax strategy. Together, they audit 99 per cent of the FTSE 100. PwC, alone, provides services to 429 of the Fortune 500. The Big Four not only provide services to MNCs, they also fill in for an increasingly depleted public service. In Australia, in the five years to 2017 they provided consulting services to the Australian federal government totalling AUD1.7 billion. Their reputation as technical experts in taxation policy hinges on their key roles in promoting, sanctioning and regularising the behaviour of other firms. This includes the enabling of aggressive corporate tax minimisation practices by MNCs.
As our article shows, the Big Four are also a powerful force in tax policy advice in the public governance arena in addition to enablers of private corporate practices. Governments and international organisations continue invite them to the policy making ‘table’, to provide advice based on their technical expertise, or what we refer to as their perceived discursive legitimacy in economic policy-making. They do so by directly engaging the Big Four as consultants to governments, inviting them to hearings such as the Australian Senate Inquiry (discussed below), and allowing the Big Four to use their discursive legitimacy to dominate open consultation processes, such as that which the OECD has run in regards to BEPS 2.0. The result is that they are both rule and reputational intermediaries, as they occupy a place of authority between their clients and regulators. Their advice is remarkably consistent, suggesting they have a shared agenda – either formally or informally.
Given their core business in underpinning the status quo of MNC tax avoidance, then the question is: Should the Big Four’s advice be taken at face value? Our analysis suggests it should not.
Why we should be sceptical of the Big Four tax policy advice
The reason the Big Four’s advice should be received sceptically is that they have changed their advice as the likely regulatory environment in which they operate has shifted.
At the time of the 2015-2016 Australia Senate Inquiry into Multinational Corporate Tax Avoidance the Big Four promoted ‘global reform’ as the safest path to effectively regulating their activities, when, at the time, it was widely believed the OECD-led reform was moving at a glacial pace and likely to exclude tax haven states. This effectively guaranteed the future of the Big Four’s business model.
Later on, when OECD-led reform did look increasingly likely, the Big Four made submissions to the 2019 OECD’s Public Consultation Document Addressing the Tax Challenges of the Digitalisation of the Economy, warning that any multilateral reform would threaten the status quo, long-standing tax practices, and the sovereign right of nation-states to set their own tax laws. They cautioned against any radical measures.
Protecting the business model
While their advice changed, we suggest the purpose it served did not. The advice of the Big Four changed because of changes in the likely regulatory environment at the global level, but their interests remained the continued dis-harmonisation and fragmentation between national tax systems that provides the tax loopholes used by MNCs to minimise their tax obligations.
We show that this stands to reason when one considers the Big Four’s interests, notably the substantial part of their business of advising on and facilitating MNCs’ tax arrangements. We conclude therefore that the Big Four can be expected to continue to push for multilateral solutions to the problem when these seems less likely or problematic (for example, when states fail to adopt agreements negotiated in the OECD, or when OECD reforms exclude ‘tax havens’). Yet, when genuine multilateral reform seems likely, they will discourage it on basis of tax sovereignty and respect for the status quo, and counsel caution to national regulators.
Governments should support multilateral reform and avoid unilateral action
We argue that governments truly interested in tax reform should first prioritise achieving true global tax reform, through the OECD. In this light, it is encouraging to see that the latest proposals by the Australian government are based on the OECD’s reform program.
There are some larger implications of our research that go beyond addressing global corporate tax avoidance. While the Big Four continue to be invited to give advice, attend hearings and make submissions regarding tax reform, we should expect the challenge of taxing MNCs to remain. In regards to the participation of the Big Four in economic policy-making arenas, it should be acknowledged that their advice is self-interested in service of their business model, whether this be the facilitation of ongoing tax avoidance by their clients or reforms that affect their financial returns.
Governments suffer direct losses due to the advice the Big Four give MNCs, yet they continue to seek the Big Four’s input to address the MNC tax avoidance as well as other economic policy matters. Governments and multilateral organisations truly interested in minimising corporate tax avoidance should treat the Big Four as the vested interests that they are, and that they represent.
On this basis, governments should cease both directly and indirectly taking advice from the Big Four on reforming the global tax system. Governments and multilateral institutions should no longer engage the Big Four as tax policy consultants, or directly invite them to provide advice on corporate tax reform. And, when these professional services firms do give advice at open forums, such as the OECD BEPS 2.0 consultation, it should be recognised that they amplify their views above other voices, using their discursive legitimacy. If governments continue to engage the Big Four in regards to advice on tax reform, at the very least they should hold these firms to account by asking why their advice changes in differing contexts.
Other 2022 October Budget articles
Improving Tax Compliance of Large Multinational Companies, by Max Bruce.
What the Budget Did Not Address – Unfair Tax Minimisation Using Discretionary Trusts, by Sonali Walpola.
Australia’s First Wellbeing Budget Leaves People Behind, by Ben Spies-Butcher, Troy Henderson and Elise Klein.
Proposed Changes to Australia’s Thin Capitalisation Rules, by Mark Brabazon.
Demand-Side Climate Related Measures, by Diane Kraal.
Click here for 2022 March Budget articles.
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