The issue of tax avoidance by corporations is a hot one. In the US and in the UK, legislators and pundits seeking “tax justice” have changed the discussion from one of tax breaks that stimulate “jobs and growth” to one of tax fairness to provide much needed funds for public works and public commitments in time of economic hardship.
In December 2012, I wrote in the UK publication Accountancy on the subject of offshore profit shifting by corporations such as Starbucks, Google, Amazon, and other US multinationals. The UK is mad as hell and not going to take it anymore. It seems US multinationals move profits out of the UK via circuitous supply chain routes leaving no profits, no tax liability and, therefore, no tax revenue there, for all their hoopla here about success abroad.
Multinationals are under increasing scrutiny for income shifting and offshoring profits. Francine McKenna reports
US corporations with activities in relatively high tax UK avoid tax on profits by moving income to tax havens. Loopholes in the US tax code allow corporations to do this with impunity. Governments continue to prioritise a ‘competitive tax environment for business’ in the hope corporations will convert profits into economic growth and jobs. Tax justice and a fair spread of the deficit reduction burden have been ignored.
Multinationals headquartered in the US often reduce income taxes by shifting profits offshore. Profit shifting erodes the corporate tax base and reduces overall tax revenues. Lower revenues are squeezing governments all over the world trying to provide services during a prolonged period of economic uncertainty and high sovereign debt. There are now significant differences in the tax burden among corporate taxpayers and an overall unequal burden on all taxpayers in the US and in the UK.
Here’s the PDF of that article from the December 2012 issue of Accountancy.
So it was quite a shock for me to learn that, when the debate landed in the US, HP paid Ernst & Young, probably the preeminent tax advisor of the Big Four accounting firms at least for US multinationals, for testimony before the Senate Subcommittee on Investigations in September.
Maybe it doesn’t seem strange to you to see $2 million in “Other” fees to the auditor show up on the HP proxy. Maybe you weren’t aware Ernst & Young is already being investigated by the SEC for independence violations related to tax lobbying. According to Reuters, Ernst & Young provided tax lobbying services to audit clients.
The last time we had a big Big Four independence rules crackdown, it was 2004. It was Ernst & Young again, sanctioned for its systems integrator relationship with PeopleSoft, an audit client. Ernst & Young was suspended from accepting new public company audit clients for six months.
I bet you can’t tell me about an SEC or PCAOB enforcement order for a similar firm-level independence offense since. But they do occur with some regularity, in my observation. There was one in Australia against KPMG that resulted in an enforcement order. It was suspiciously similar to what I reported regarding tax services provided by KPMG to audit client GE. The KPMG GE issue went away quietly.
And I reported over the holidays about PwC’s systems integration relationship with audit client Thomson Reuters, an inappropriate business alliance that’s very similar to the PeopleSoft case. An SEC inquiry of the potential independence was inadvertently confirmed by PwC, to my editors at Forbes, when a PwC spokesman complained to them about my recent reporting. PwC told Forbes editors the SEC had called them about it even though I had “not given them much time that morning to respond to the story.” PwC did not request a retraction or a correction to the story, only a chance to talk me and Forbes out of it.
That’s not going to happen.
Here’s what Ernst & Young did for HP – and Microsoft – in September of 2012. Microsoft was also called by Senator Carl Levin to testify. Microsoft is a tax lobbying client of Ernst & Young.
Let’s hope EY didn’t charge Microsoft for the same appearance.
Last September Senator Carl Levin’s Permanent Subcommittee on Investigations called auditor Ernst & Young to Washington DC to explain how its client HP moves profits offshore to avoid taxes. Beth Carr, the partner responsible for the tax-related services provided to audit client HP, testified on behalf of Ernst & Young. Ernst & Young’s testimony cost HP almost $2 million dollars, according to HP’s latest proxy.
“All other fees included reimbursement of approximately $2.0 million in costs relating to responding to a request for EY information from, and EY providing testimony before, the U.S. Senate Permanent Subcommittee on Investigations relating to taxation of earnings generated outside of the United States as well as fees for advisory services relating to HP’s services business.”
The $2 million paid to Ernst & Young for showing up is shown as “Other” advisory fees, not audit-related or even tax services, in the proxy. For that much walking around money, I’m sure the firm, and Ms. Carr, are more than willing to sit through some grilling by Levin.
HP and Microsoft were singled out in this hearing, “Offshore Profit Shifting and the U.S. Tax Code,” for practices multinationals such as Google, Amazon, and Starbucks, and their Big Four accounting firm advisors, are also suddenly under heavy fire for, both here and in the UK.
The largest audit firms don’t get called out by Congress very often. None of them – not even Lehman Brothers auditor Ernst & Young – was ever asked by Congress to explain what happened during the financial crisis. In December of 2011, Deloitte testified before the Senate Committee on Banking, Housing and Urban Affairs about its role as an “independent” consultant for JPMorgan Chase in the OCC/Fed mandated foreclosure reviews. That testimony was an information request, not an adversarial encounter.
That’s how it typically goes in DC for the global audit firms, made easier still by the millions they spend on lobbying on both sides of the aisle.
Here’s Hector Lavoe and Willie Colon with No Me Llores Mas