How a paper tiger mauled PwC
Shock revelations by the tiny Tax Practitioners Board offer the government a major reset of how it takes advice on tax policy from the big four accounting firms.
As government outrage deepens over leaks of secret tax policy consultations by PwC personnel, industry figures were describing the scandal as a watershed event for the government which is wrestling with whether it can trust advice from big four firms on whom it relies to help shape new tax laws.
The Tax Practitioners Board went almost entirely unnoticed last November when it deregistered PwC’s former head of international tax, Peter Collins, and sanctioned the firm for its failure to monitor conflicts of interest by partners who shared confidential information with clients.
Treasurer Jim Chalmers faces a rare opportunity to change the relationship the government has with big four firms. Alex Ellinghausen
But the TPB set off shockwaves in Canberra this week after it published its reasons for the decisions, triggering a furious response by the government. Insiders say it has created a rare opportunity for Treasurer Jim Chalmers to change the relationship the government has with big four firms as it consults over tax laws in future.
It is also looking at past advice. The wider issue the government is struggling with is whether the advice it got about the Base Erosion Profit Shifting (BEPS) policies from big four firms was flawed, and whether weaknesses were baked into the new laws or loopholes ignored.
“These are serious questions the government will need to consider given how established this process has become,” according to a tax insider familiar with the process.
Dr Chalmers called the PwC scandal a “shocking breach of trust” which put the quality of economic decision-making and policymaking at risk. He asked Treasury, the Tax Office and the Board of Taxation to advise on how to stop further leaks.
The TPB found that Mr Collins, despite signing three confidentiality agreements between 2013 and 2018, shared government documents with other partners in Australia and overseas, who in turned shared them with current and prospective clients.
PwC says the TPB findings related to a consultation with Treasury and the Board of Taxation in 2014.
The TPB doesn’t say what was leaked. But OECD plans to fight tax avoidance by global companies were a red-hot issue in 2014, with intense international interest in what the Australian government was doing.
The first of these BEPS measures was the multinational anti-avoidance law (MAAL) legislated in 2015.
The TPB says the PwC partners who received the leaked information were aware it could be used to circumvent proposed BEPS laws, though PwC says the TPB report does not state that it was used in specific schemes.
It is not just Australia where PwC is accused of leaking. A High Court trial in London this week heard claims by the Watchstone software group (previously named Quindell) that a senior PwC partner divulged commercially sensitive information about its financial position and deal strategy to an investment banker in 2015, who then shared the information with its client Slater and Gordon, which was bidding for an arm of the group.
PwC denies that its UK head of restructuring shared confidential information and says that an email written by the investment banker after a meeting was not an accurate account of what was said.
This week’s furore is all the more remarkable because the TPB, which oversees Australia’s 80,000 tax agents responsible for more than $500 billion a year in tax and GST returns, is such a tiny operation. Its limited legal powers make it a paper tiger when dealing with the big four firms.
In 2019, then assistant treasurer Michael Sukkar commissioned a review of the TPB led by tax lawyer Keith James. The review noted that the TPB is the only regulator that can discipline wayward tax agents or tax firms, imposing either a written caution, making an order (like training sessions), or suspending or terminating registration.
It can also sue for civil penalties in the Federal Court, but rarely tries because this is slow and costly, Mr James noted.
But deregistering or suspending a big four firm is the nuclear option. In reality it probably isn’t feasible.
Mr James recommended (as did the Inspector-General of Tax in a separate report) that the TPB have a wider range of possible sanctions, including infringement notices, enforceable undertakings and quality assurance audits and more flexibility in running investigations.
“Our recommendations were made after extensive consultations with all interest groups,” Mr James told AFR Weekend. “There was a common thread that the independence of the TPB should be strengthened, the consequences for breaches of the code be extended and the TPB be resourced to improve ethical standards.”
Went nowhere
Despite support from the profession, the Tax Office and the TPB, the 45 recommendations by Mr James went nowhere for three years.
This week Mr Sukkar was one of the few voices in support of PwC, which signed contracts worth $329 million for government work last year. He saw no role for further sanctions against the firm: “Sanctions administered by the TPB are rightly imposed against individual tax practitioners, as has occurred here.”
By the time Labor won power last year a process was already well in train that resulted in Treasury releasing draft legislation on November 18 for five minor James recommendations.
So when the TPB met to decide on its PwC investigation six days later, board members knew the three-years struggle to overhaul the TPB had failed.
The TPB decided PwC’s failure to set up a structure to oversee conflicts of interest merited more than a written warning but less than deregistering the firm. So it ordered PwC to run training sessions.
The decisions came into effect on December 22. The TPB is legally required to remove sanctions notices from its register after 12 months, so by Christmas there’ll be no public record that PwC was ever disciplined.
But on Wednesday Dr Chalmers said he had written to Treasury, the Tax Office and the Board of Taxation on how to implement the recommendations, and on whether other additional steps were necessary.
It is a watershed moment. At least until Christmas.