The Big Four and Corporate Tax Governance

Global corporate tax avoidance is a major policy problem. It stems from multinational corporations (MNCs) being able to exploit legal loopholes to shift where they report their profits to countries where they pay low or no taxes. As they do so, they erode the tax bases of these, and other countries, where they might otherwise have reported their profits. The Organisation for Economic Cooperation and Development (OECD) labels the problem Base Erosion and Profits Shifting (BEPS) and The Tax Justice Network estimates that it costs governments at least US$483 billion annually. The impact is especially felt in developing countries, which Oxfam estimates are denied US$172 billion annually. These are conservative estimates based on what might be the case if things were done differently, as opposed to what might be regarded as most desirable. For example, it is surely desirable that the governments of developing countries collect as much corporate tax as possible to steer their own destinies, rather than being dependent on concessional loans or conditional aid from multilateral and bilateral donors.

Strange then, that corporate tax avoidance is not such a popular topic of discussion in the mainstream media, nor society more generally. No doubt that is because tax, like finance, seems a bit boring, a bit technical, and something therefore best left to the experts. Instead, there is much more discussion about corporate social responsibility and how it might solve a lot of the world’s environmental and social problems. Likewise, the philanthropic endeavours of wealthy former CEOs are celebrated and encouraged by many while criticised by others. Yet, it is surely preferable that democratically elected governments, representing the interests of their citizens, have the resources to perform this role. That means, as historian Rutger Bregman bluntly stated at the Davos World Economic Forum in 2019, we must “stop talking about philanthropy, and start talking about taxes!”

In our article, that was awarded the 2023 AIPEN Richard Higgott Prize for best journal article, we analyse some of the key political actors that do talk about taxes, namely the Big Four professional services firms of PwC, Deloitte, EY and KPMG. They are presumed to have great technical expertise in the field, which they use to advise both their clients on how to minimise the taxes they pay, as well as being invited by governments and policy advisers to provide guidance on potential regulatory reforms. They are, as we explain, both rule and reputational intermediaries because they “embody and enact both informal and formal industry norms that become widely accepted as self-evident”. The result is that this handful of MNCs that advises other MNCs, governments and the OECD on tax arrangements, are invited to have a ‘seat at the table’ to put forward their views on global corporate tax reform.

Their views, as we show, are neither simply technical nor neutral, but rather they are informed by their and their clients’ interests. Put simply, they wish to sell tax minimisation services to their clients while advising governments on the rules that allow them to do so. In the case of Australia, the conflict of interest this raises was revealed all too clearly in the furore surrounding revelations that PwC had leaked confidential information about potential changes to Australian tax law that could have helped its clients reduce their tax payments. PwC did so while it and the other Big Four firms are paid in excess of A$1 billion a year for consulting services to the Australian Government. As shocking as these revelations were, we were unsurprised, because the clear conflict of interest that characterises the role played by the Big Four was evident from our research.

In our article we examine the testimony of the Big Four’s representatives at the Australian Senate Economic References Committee Inquiry into Corporate Tax Avoidance held in 2015-2016. We contrasted this with their representatives’ testimony with written submissions they made to the OECD’s Public Consultation Document Addressing the Tax Challenges of the Digitalisation of the Economy in 2019. We saw that they changed their tune quite noticeably between the two arenas. In the Senate Inquiry, they all stressed the need for multilateral reform led by the OECD, and cautioned against unilateral action on the part of individual nation states. This seems puzzling because while Thomas Seymour from PwC emphasised the need for “multilateral consensus-based international tax reform” he also noted that a lack of this “would be great for our business”. By 2019, the Big Four were instead highlighting a need to retain the status quo as “international tax principles . . . are still fit for purpose and have been internationally agreed to for decades” (PwC). They were also concerned “that the global anti-base erosion proposals outlined in the consultation document would erode the sovereign right of countries to choose the corporate tax rate that is best for their particular economic circumstances” (EY). They therefore stressed state sovereignty over tax affairs, while also noting that it must be ensured that multilateral reform “does not conflict, or is clearly reconciled with, existing international tax rules and standards” (KPMG).

These statements on their own are confusing. However, we show that viewed in context they make perfect sense if we are to understand these firms’ key interests. In essence, in 2015 when multilateral reforms looked less likely, the Big Four stressed the need for these rather than governments going it alone. By 2019 when more states had signed up to the OECD’s BEPS initiatives and multilateral reform looked more likely, including a global rate of corporate tax, they urged caution and stressed state sovereignty over tax affairs. Rather than their interests changing, their discourse did in relation to the context in which they were providing advice. Furthermore, we note that although they presented a remarkably unified voice in both 2015 and 2019, the firms that changed their tune most by 2019 were PwC and EY, the two firms that generate the highest returns among the Big Four from tax advice.

Among the policy conclusions we draw from our analysis are that in addition to the desirability of multilateral reform being pursued for a truly globally harmonised corporate tax regime, “governments and multilateral organisations should cease seeking advice from the Big Four or at the very least hold these firms to account by asking why their advice changes in differing contexts”. This is because their advice is neither neutral nor technical.  What is good for them and their clients is not necessarily good for states and their societies. In fact, “the Big Four are simply a special interest group leveraging their perceived technical expertise and structural position in the global economy to further their own interests”.