Tax Office halved $1.4m PwC fine for false privilege claims
The Tax Office’s secret settlement with PwC in March shaved $785,400 off penalties and blocked any further action against the big four firm and its clients for making false claims of legal professional privilege over an estimated 100,000 documents.
Last November the ATO imposed $1.428 million in penalties on PwC over 170 false LPP claims, but the confidential settlement reduced this to just $642,600. The agreement also prevents the ATO from taking action against five multinational clients who supported the false legal professional privilege claims.
Second Commissioner Jeremy Hirschhorn: “We put rigorous controls around settlements”. Alex Ellinghausen
The Tax Office had previously agreed it would not issue penalties against PwC over LPP claims involving a sixth client, Brazil-based meat group JBS, to expedite a Federal Court challenge of the claims.
A redacted copy of the deed – published as part of the Ziggy Switkowski report into the PwC tax leak scandal – reveals a string of new details about the settlement, which was signed by a senior tax officer on March 17.
This coincided with strenuous efforts by the ATO that week to prevent the Tax Practitioners Board from releasing copies of PwC internal emails that showed multiple partners, including the head of international tax, Peter Collins, leaking confidential Treasury information.
ATO Second Commissioner Jeremy Hirschhorn told the Senate consultants inquiry on June 7 that “we were frustrated through large claims for legal professional privilege on behalf of clients”, but the ATO did not disclose the confidential settlement until PwC told the inquiry of the agreement on July 26.
The disclosure of the deal was “symptomatic of the secrecy that surrounds the relationship between PwC and the Tax Office”, Greens senator Barbara Pocock said.
Internal emails
PwC former partner Wayne Plummer negotiated an in-principle agreement to settle the case on a no-admissions basis last December. This was a month after Mr Collins was deregistered by the Tax Practitioners Board, but before the board published details of Mr Collins’ and PwC’s role in the tax leaks scandal, which triggered widespread public criticism of the big four firm and arguably would have worsened PwC’s position.
The deed of settlement lists 14 dates between September 2016 and April 2021 when the Tax Office issued notices to produce to PwC, and 10 responses by PwC between March 2018 to August 2019 when the firm claimed LPP over documents prepared for clients.
It was the initial blanket claims of LPP that led the Tax Office to request PwC internal emails that revealed the (unrelated) leaks of confidential information by Mr Collins and other partners.
The Tax Office ruled that PwC had failed to take reasonable care in making false and misleading statements with the LPP claims, a finding that for large multinationals carries an $8400 penalty for each document. A finding of recklessness or international disregard would have boosted the penalty to $16,800 or $25,299 for each document.
Senior ATO officers have previously said that legal professional privilege was claimed over tens of thousands of documents for each client, suggesting that total claims for all clients could have exceeded 100,000.
Litigation risk
“There is an element where if you get a notice that asks you to provide lots of documents, you could say something is privileged in relation to each document – is that one misstatement or 200 mis-statements?” Mr Hirschhorn told Senator Pocock at the Senate inquiry on September 26.
“In this sort of matter ... the original position could be based on every statement being a false or misleading statement ... [but] we must always be willing to discuss settlement. We must always take into account our advice regarding litigation risk.”
The ATO issued penalties in respect to only 170 documents. In the settlement, the ATO dropped 17 of the penalties entirely and reduced the remaining 153 penalties by 50 per cent.
In addition to the fines, PwC is required for three years to conduct staff training sessions, run a “triage and approval process” for legal services engagements, review a sample of files and appoint an independent reviewer to report on these arrangements.
If it fails to do this it faces a further $642,600 fine.
“This is a set of deals that advantages the most wealthy international multinational tax avoiders,” Senator Pocock said. “Isn’t it the case that lighter penalties and discounted settlements are not deterrents at all?”
“I would disagree with that because we put rigorous controls around settlements,” Mr Hirschhorn said.
The PwC settlement was reviewed by a retired judge and the ATO informed the Tax Practitioners Board on June 5.
Board chief executive Michael O’Neill told the Senate inquiry on June 7 that the ATO “did say to us that they expected there would be some issues in relation to those legal privilege cases that they would ultimately refer to us, and recently they’ve had discussions with us about the conduct, or alleged misconduct, associated with those legal privilege claims. So that’s another issue for our consideration.”