Thursday, July 06, 2023

44 Ali MAAL Baba companies: ATO keeps tech companies’ PwC secrets . - PwC’s tax leaks disclosure to US

Prologue of MMXXII:

Tax chiefs meet in Sydney to address multinational tax issues 


Big Four accounting firms dodge a bullet

OECD - 15th Plenary meeting - 20 Years of Forum on Tax Administration

PwC asked to name companies it pitched on basis of leaked Australian tax plans

SYDNEY, July 6 (Reuters) - Two lawmakers on Thursday called on PwC Australia to name all the companies it sought to advise on the basis of leaked government tax plans, after a report linked Google (GOOGL.O) to the national scandal first exposed in January.

How Uber, Facebook used PwC schemes to beat tax crackdown Neil Chenoweth Neil Chenoweth


  • Why it matters: This is the first time any of the schemes used to avoid the MAAL have been revealed.
  • Context: The Tax Office audited 44 companies that restructured to avoid the MAAL. Audits of Microsoft, Apple, Facebook and Google raised $1.25 billion.
  • What next: The involvement of US companies could lead to referrals to US regulators.

US tech giants Uber and Facebook set up new company structures to sidestep Australia’s multinational tax avoidance law using PwC advice, days before the legislation came into effect in January 2016.

Uber transferred its Australian business to three general partnerships registered in the Netherlands, in a structure devised by its then tax adviser PwC to bypass the new law.

The structures are revealed in filings with the Australian Securities and Investments Commission, which also show the companies dumped the schemes, as part of negotiated confidential settlements with the Tax Office. Evelyn Barota

The speed with which Uber, Facebook and other clients were able to restructure to sidestep the new tax avoidance law in time for the January 1 start shocked the Tax Office.

It also reflected the head start that PwC gained before the legislation was unveiled in September 2015, thanks to confidential information obtained by its head of international tax, Peter Collins.

The Uber structure closely resembled a PwC scheme which the Tax Office discovered in a September 2016 meeting with the firm and an unnamed client. This discovery triggered alarm at the Tax Office, which issued sweeping discovery orders against all big four firms to name clients that had restructured to avoid the Multinational Anti-Avoidance Law.

The Tax Office notices to produce eventually revealed that PwC had used confidential Treasury information obtained by former partner Mr Collins to design workarounds of the law to market to new clients.

“Uber received advice from PwC Australia on how to comply with its obligations under the Multinational Anti-Avoidance Law after the draft legislation was released,” an Uber spokesman told The Australian Financial Review.

“We had no knowledge the advice from PwC may have been based on information that was improperly obtained.”

Uber did not address whether it was the PwC client at the September 2016 meeting with the Tax Office, but the spokesman said: “We ended our relationship with PwC Australia as our tax adviser in 2016.”

A second PwC client, Facebook, owned by Meta, also distanced itself from the big four firm’s advice about the tax avoidance law.

“Facebook had no knowledge that any of the advice provided by PwC in regard to the MAAL was based on improperly obtained information,” a Facebook spokeswoman said.

PwC has previously said its clients “were not involved in any wrongdoing and no confidential information was used to enable clients to pay less tax”.

The structures are revealed in filings with the Australian Securities and Investments Commission, which also show the companies dumped the schemes, as part of negotiated confidential settlements with the Tax Office.

In an internal PwC email dated January 6, 2016, which was tabled by the Senate in May, an unnamed PwC partner described how the firm had booked $2.5 million in initial fees, after signing up 14 US tech companies to advise on the new laws. PwC has refused calls by senators to release the names of the 14 clients.

The MAAL, also colloquially known as the “Google tax”, was designed to target multinationals selling services or products into Australia from offshore offices in low-tax countries. It was announced in the federal budget on May 12, 2015, and the legislation was released four months later in September ahead of the January 1, 2016, start date.

The Tax Office became alarmed in 2016 over the speed that schemes to avoid the MAAL appeared and issued a series of taxpayer alerts starting in April that year.

In early September, Tax Office deputy commissioner Mark Konza stormed out of PwC’s Sydney office after partners explained a new structure under which an unnamed international client would bypass the MAAL entirely.

A taxpayer alert was issued on September 15 in connection with this new scheme, which involved a foreign multinational directing its Australian business through an offshore partnership, in which an Australian entity was a minor partner.

The Australian partner had no control over the operation and received little or no profits, but its involvement as a minority partner allowed the multinational to claim this was an Australian operation and thus exempt from the MAAL.

In an October 2015 submission to the Senate tax avoidance inquiry Uber Australia said it had created new jobs and donated $50,000 to charity but offered no details on tax payments.

On December 1, 2015, the US group incorporated Uber Pacific Holdings Pty Ltd, which then acquired a 10 per cent stake in three general partnerships registered in the Netherlands: Portier Pacific VOF, Rasier Pacific VOF and Uber Pacific VOF.

In a new technology services agreement issued in July 2016, drivers had to acknowledge that a Dutch company, Uber Pacific Holdings BV, was “a technology services provider that does not provide delivery services”, and that it was the “solely authorised partner” of the VOF Netherlands partnerships.

While these Dutch partnerships conducted Uber’s Australian business, Uber could say it had an Australian presence and thus was not caught by MAAL, even though Uber Pacific Holdings Pty Ltd had no control and minimal earnings.

Facebook, meanwhile, on December 9, 2015, set up a new local company, FCL Tech Australia, owned by FCL Tech Ltd in Ireland.

This appears consistent with another anti-MAAL scheme described by the ATO in which multinationals reversed previous arrangements and set up an Australian company as the distributor of services or products, while the foreign entity that actually distributed the services (from a low tax jurisdiction) was deemed an agent of the Australian company, again avoiding MAAL.

“Facebook did not seek advice from PwC on how to comply with the MAAL until after Treasury issued the draft legislation, which is why we were surprised to learn of PwC’s alleged conduct,” the spokeswoman said.

However, Facebook quickly reversed course and became one of the first multinationals to become compliant with the MAAL. Facebook Australia became a reseller of advertising inventory for ads booked by the Australian sales team.

On October 13, 2017, Facebook made a $31.3 million settlement with the ATO to cover disputes covering 2009 to December 2016, the first full year of MAAL.

Two days later, in what appears to be another settlement, Uber incorporated Uber Australia Holdings Pty Ltd (UBAH). The Netherlands partnerships subsequently transferred their business to the new local subsidiaries, Rasier Pacific, Uber Pacific and Portier Pacific.

Uber Australia went from reporting revenue of $18.2 million in 2015 before the MAAL, to $36.4 million with the offshore partnerships in 2016, then after the reset with the ATO the newly incorporated UBAH reported revenue of $595 million in calendar 2017. Tax payments rose more modestly, from $501,000 in 20125, to $953,000 in 2016 to $4 million in 2017.

It’s not exactly a tax bonanza. Last year UBAH reported $2.55 billion revenue from “contracts with customers” (by which it means Uber drivers), but after paying $1.14 billion service fees and $1.3 billion in administrative expenses its tax bill was just $14 million.

ATO keeps tech companies’ PwC secrets

Google, Uber, Microsoft and Facebook say they had no idea tax advice was based on confidential information. And for the Tax Office it’s settled.

Neil ChenowethSenior writer

If you run the Australian arm of a US tech giant like Google it must be almost a nervous reflex by now to pull out your last confidential settlement with the Tax Office for another quick squiz at the fine print.

The ATO is marvellously proud of the settlements it pulled off with Microsoft, Apple, Facebook, Google (which together raised $1.25 billion), Uber and a string of other tech outfits, and Commissioner Chris Jordan is ferociously protective of the secrecy the agreements are cloaked in.

Second Commissioner Jeremy Hirschhorn: breaching tech companies’ confidential settlements would threaten faith in the tax system. Alex Ellinghausen

This will be reassuring if the unpredictable wrecking ball that is the PwC tax scandal veers towards the tech companies. The ones the firm targeted with its workarounds for new tax laws that Peter Collins and others at the firm were helping the government write.

From a US standpoint, the only issue that could trouble these tech companies is what confidential information did PwC share with them and did they know it was improperly obtained?

Facebook, Uber, Microsoft and Google have denied any such knowledge. In a response to Greens Senator Barbara Pocock tabled in the Senate consultants inquiry, PwC said there was just one time, in August 2015, when former partner Paul McNab emailed to a company that Reuters on Thursday reported was Google, confirming the Multinational Anti Avoidance Law would come into force from January 2016. McNab has denied he knowingly shared confidential information.

PwC said there were “suggestions” that McNab may have shared the date with other companies but “we have not identified any communication to any other company to that effect”.

“Suggestions” is one way to put it. On August 5, 2015 Collins emailed another partner, “Main questions from clients relate to start date”, one of multiple assurances from him about the timing.

“Unless they know about a deal one of the IT companies has brokered with the prime minister or treasurer or the minorities, I cannot imagine [a delay],” Collins wrote. “Treasury was crystal clear on this and the politics of delaying the rule for the dirty 30 seems impossible. There is no sympathy for this group in treasury or govt or the ATO. Controversy treasure trove if we can land a few of these.”

Another partner emailed August 6 about how helpful Collins’ information was at a PwC “global brainstorm” session in the US about future tax strategy for tech companies: “The intel is very helpful here.”

One of the things Collins decided that they wouldn’t share was the fact that a PwC staff member was working on the Google tax at Treasury, “in case the tech cos don’t like it”.

In another email Collins said he had “sent you a note … which we should send to your friends in the bay”, a reference to tech companies in the San Francisco Bay area.

Despite references to multiple companies, just one email was sent to one of them. Or perhaps rather, just one email that wasn’t covered by legal professional privilege.

Which brings us back to those confidential settlements with the ATO – and woe betide anyone like the Tax Practitioners Board that tries to catch a look at them.

Such a breach of taxpayer secrecy threatens the whole faith in the tax system, Second Commissioner Jeremy Hirschhorn assured the Senate inquiry last month.

These agreements can cover future actions as well. The ATO code of settlement says: “The ATO cannot guarantee in a settlement freedom from prosecution, however, the ATO can agree not to allocate resources to investigate a taxpayer’s disclosure for the purposes of prosecuting a taxpayer for a criminal offence or to refer the taxpayer for criminal investigation by another law enforcement agency.”

That’s a world of comfort for any tech company tax director, if indeed that’s in the fine print boilerplate. It’s not to say they did anything wrong, but the optics of any investigation would be challenging.

It took six years for the PwC emails to become public, in part because of the ATO’s insistence that it could not investigate non-tax crime even though it wanted to. And it shows no sign of wanting to revisit anything connected to those settlements.

The tech guys are safe.

PwC’s tax leaks disclosure to US regulator brings global risk

Edmund Tadros
Edmund TadrosProfessional services editor

PwC Australia has belatedly reported the details of an official investigation into its tax leaks scandal to a powerful US audit watchdog, a move that dramatically widens the risk to the firm’s global operations.

The Australian firm also missed its statutory 30-day deadline to self-declare “reportable events” to the US Public Company Accounting Oversight Board (PCAOB) by more than a year, increasing the risk the board takes enforcement action.

Macquarie Business School emeritus professor James Guthrie said PwC had to report the leaks matter because it affected the global partners of PwC and especially partners in the US. “This a big deal because it’ll have an effect upon the reputation of PwC in the US.”

PwC Australia was tardy in disclosing the tax leaks matter to the US PCAOB. Eamon Gallagher

The big four firm has been under fire locally since May, when The Australian Financial Review reported on a cache of emails that showed multiple PwC partners received correspondence relating to a plan to exploit confidential government tax information.

The PCAOB, created in 2002 by the US Congress because of the failure of self-regulation by auditors, polices accounting firms and can issue sanctions for bad behaviour including million-dollar monetary penalties and limits on a firm’s ability to continue auditing public companies. The board also has extensive coercive powers to demand documents and information from firms.

A PwC spokesman said the firm had made the required disclosure to local and US regulators about the tax leaks matter.

“PwC Australia has made disclosures to regulators on these matters. Since the deep root cause analysis on this matter began in early May, we have taken the necessary steps to keep regulators informed,” he said.

US reputation

On Monday, the firm announced that eight veteran PwC partners, including the ex-chairman, chief risk officer and head of government, were being removed from the firm for either their involvement in the tax leak scandal or for not adequately addressing matters.

The PCAOB is a powerful US regulator, says Professor James Guthrie. Peter Braig

The lack of early disclosure about the extent of the leaks has already led the Department of Finance to cut PwC from Commonwealth advisory work, a move that destroyed a business worth $250 million in revenue and which led to the fire sale of its entire public sector consulting business to private equity investor Allegro Funds for $1.

The tardy reporting could now lead to international consequences for the firm.

PwC Australia, like other local major auditing firms, has a range of reporting obligations to the PCAOB because of its role in auditing companies based in the US. In PwC Australia’s case, the firm audits the US operations of companies such as Westpac, Woodside Energy Group and biotech firm Immutep.

‘Special report’

On June 20, 2023, PwC Australia submitted a “special report” about an “administrative or disciplinary” matter to the PCAOB outlining the details of the initial investigation by the Tax Practitioners Board, which regulates tax agents, into the leaks matters.

In the “special report” to the PCAOB, the firm states that on February 16, 2022, the TPB “informed PwC [Australia] of an investigation of a tax partner into alleged failure to comply with certain provisions of the Tax Agents Code of Professional Conduct in connection with a confidential consultation undertaken by the partner personally with the Australian Government Treasury Department”.

The firm also states in the report that: “On October 21, 2022, after completing its investigation, the TPB found that PwC had ... failed to have in place adequate arrangements to manage conflicts of interest that arose in relation to its activities as a registered tax agent in certain specific circumstances. The TPB ordered PwC to have processes and training in place to ensure conflicts of interest are adequately managed.”

PCAOB rules state that “reportable events” must be “filed no later than 30 days after the occurrence of the reportable event”. Events covered include the firm or a partner becoming “a defendant or respondent” in “an administrative or disciplinary proceeding ... arising out of conduct in the course of providing professional, audit or other accounting services”.

This means that PwC Australia’s June 2023 “special report” to the PCAOB is more than one year late.

In September 2021, the PCAOB fined KPMG Australia $US450,000 over “widespread” cheating on tests designed to ensure partners and staff act with integrity and have the relevant skills for their work. The board also ordered that KPMG improve the way tests are carried out at the firm, while noting that the firm had quickly self-reported the cheating last year.

Professor Guthrie said the action showed the power of the US regulator: “We have seen in the KPMG cheating case that the PCAOB is a powerful body that can reach into Australia and both fine and issue enforcement actions against the Australian partnerships.”