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Monday, March 11, 2024

How PwC helped Facebook argue its bill down in tax fight with ATO: AND Why business leaders can’t cope with criticism

 How PwC helped Facebook argue its bill down in tax fight with ATO

Mar 10, 2024 
Facebook considered restructuring its local team as a media agency to pay less tax in Australia as part of a long-running – and since settled – dispute with the Australian Taxation Office.
Documents obtained by The Australian Financial Reviewshow that tax partners from PwC working for Facebook, now known as Meta, commissioned external research to support its case against the ATO.
In the wake of Meta’s decision to pull out of renegotiating commercial deals worth $210 million with media companies under the government’s News Media Bargaining Code laws, a spotlight has been thrown on Facebook’s revenue from Australians and its relatively small tax bill.
All the news that’s fit for Facebook: Meta is opting out of doing deals with Australian news media businesses. 
In its latest corporate filings, Facebook Australia – not including stablemates Instagram or WhatsApp – paid $42 million in income tax on $1.4 billion in turnover paid by Australian customers. Most of that revenue was counted as the “cost of sales”, or advertising space it bought from related Facebook entities.

But the competition watchdog estimates Meta makes between $4.7 billion and $5.1 billion from Australians in total, most of which is obscured by direct payments from Australia to its entities based in Ireland, which has a much lower tax rate.
The issue of how much tax it pays has been raised by news publishers meeting with the Albanese government several times over the past week. Assistant Treasurer Stephen Jones, who is responsible for the code, has said “everything is on the table” in his moves to force the $1.9 trillion giant to comply.
PwC’s research for Facebook was commissioned by former PwC partner Paul McNab from marketing research firm TrinityP3.
Mr McNab was named by PwC as one of four senior personnel who appeared in emails associated with last year’s tax leaks scandal; he is now suing the firm over its decision to stop retirement payments.
Mr McNab shared detailed figures about Facebook’s revenue from Australians at the time, and said the ATO had issued a position paper to the social platform in October 2016. Facebook’s revenue from Australians grew from $16.5 million to $101.1 million between 2009 and 2013, the documents reveal.
“After discussion, PwC instructed … that a reasonable solution would be to compare the agreement between Facebook Australia and Facebook Ireland to that between a media buying agency and its client in the Australian market,” the report said.
Facebook Australia’s role, the argument went, was comparable to a media agency buying and placing ads – in this case, the Australian entity was representing Facebook Ireland.
“In the same way as a media buying agency, Facebook Australia is acting as the intermediary between Facebook Ireland and the Australian advertising market.”
Facebook ultimately settled its dispute with the ATO in October 2017 for $31.3 million, covering back taxes between 2009 and 2015. But the agreement itself also covered 2016 – the first year of Australia’s Multinational Anti-Avoidance Legislation – and agreement on how the law would be applied going forward.
Meta chief executive and founder Mark Zuckerberg will not renew deals with publishers worth more than $210 million over three years.  AFR
Media buying agencies often make money in opaque ways, but a common structure is known as a “cost plus” model that charges salaries, overhead and a profit mark-up to arrive at a final price for services.
It was clear to the third-party consultants that Facebook was making an unusual argument. “We have carefully considered a ‘best possible fit’ approach when building a comparable model for assessment, acknowledging that a ‘precise fit’ is not achievable, given the fact that Facebook Australia is not a media buying agency”, the authors wrote.
Nevertheless, the consultancy calculated Facebook Australia would have made $3.8 million in profit between 2009 and 2013 using the media agency model. It took into account salaries, an overhead recovery percentage, a 15 per cent profit mark-up and a 13.04 per cent profit margin.
“This number, speaking relatively, is not significantly different from our estimate of Facebook’s declared profit,” the report concluded.
PwC said it did not comment on client matters. The ATO said it could not comment on individual cases, but noted its Tax Avoidance Taskforce had raised $29.5 billion since it started in 2016.
“The ATO will only settle a matter if it has a comprehensive understanding of the true facts and circumstances of the arrangement and the tax outcomes,” a spokesman said. “All significant settlements are reviewed by former judges through the Independent Assurance of Settlements process.”
Meta said it “pays all required taxes in every country we operate, often at effective rates well above local taxation laws”. It pointed out the PwC report was nearly 10 years old and was not advice Facebook Australia sought.
“Since 2016, all revenue from advertisers supported by our local teams in Australia is subject to tax in Australia. We chose to make this change to provide more transparency into our revenue associated with locally supported sales,” a spokeswoman said. “The ATO reviews the tax affairs of Facebook Australia annually to satisfy itself with the tax position of the company.”
Mr McNab has denied being involved in any Treasury conversations about Multinational Anti-Avoidance Legislation where confidential information was discussed, and has said his job was to help clients “comply with Australia law, not avoid it”.
TrinityP3 CEO Darren Woolley said the firm did not comment on client projects without permission.
Find out the inside scoop about Accenture, Deloitte, EY, KPMG, PwC and McKinsey. Sign up to our weekly Professional Life newsletter.
Sam Buckingham-Jones is the media and marketing reporter at The Australian Financial Review. Connect with Sam on Twitter.
Edmund Tadros leads our coverage of the professional services sector. He is based in our Sydney newsroom.Connect with Edmund on Twitter. Email Edmund at edmundtadros@afr.com.au

Don’t get distracted by PwC’s reforms, Senator warns 

REGULATION

PwC’s recent governance restructuring announcement should not detract from their ‘ongoing obfuscation’, Senator O’Neill said.

By Nick Wilson  • 11 March 2024 • 

Following PwC’s release of a partnership governance reform package, Senators close to the consulting inquiry have warned the changes ought not to distract from the consulting giants’ broader failings.

“The earnestness of PwC’s reforms is undermined by the firm’s ongoing obfuscation with regards to the provision and publication of the Linklaters report into the international dimension of Mr Peter John Collins’ misuse of confidential government information,” said Labor senator Deborah O’Neill.

The announced changes “should not be considered anything more than necessary changes to a firm governance structure which has demonstrably failed to offer necessary safeguards against poor behaviour among PwC partners and leadership,” said Senator O’Neill, adding the reforms were a “clear admission” of the firms’ wrongdoing.

Under the reform package, which was endorsed by partnership, which it said will “significantly enhance the firm’s governance and set a new standard for professional services firms in Australia,” the governance board will be restructured.

The firm will have the ability to appoint an independent, non-executive as chair of the governance board, a key recommendation of the Switkowski report.

At least two additional independent non-executives will also be added to the governance board. The Switkowski report recommended that at least three or “preferably a majority of” independent non-executives would be added to the board.

Andrew Greenwood, former federal court judge and non-executive director of Scyne Advisory – the spin-off of PwC’s government consulting arm – said “had there been independent persons on the PwC governing board, I suspect the tax-TPB issues would have been addressed differently.”

The Switkowski report also recommended that the board be given power to remove the CEO. While the reform package said the board will undertake an “exhaustive due diligence process” over incoming CEOs, it did not expressly commit to granting a removal authority.

“However, improved independence, as well as increased oversight, powers and duties will ensure the governance board is well equipped to hold management to account and to provide strong governance oversight for the firm,” said PwC.

The package included several other changes including that all governance board members will also be reviewed annually by the chair, and every three years by an external third party, and a power to withhold payment for leaders who engage in serious misconduct or regulatory or audit failure occasioning a “loss of confidence in the firm.”

In responding to the announcement, Greens senator Barbara Pocock said the package was a “weak measure in view of evidence that shows PwC International can reach over the local board as they did in the sacking of Kristin Stubbins.”

Stubbins was ousted after 30 years of tenure at the company by global management who, Senator Pocock told the consulting inquiry was “running the show.”

PwC International has been called out for refusing to release a report on the alleged involvement of six international partners in the tax scandal, which conduct Pocock said amounted to “thumbing its nose at Parliament.”

Justin Carrol, chair of PwC Australia’s governance board said the measures “will herald a new era for the firm.”

“Our people, clients, and communities rightly expect the highest standards of governance and accountability from our firm and these enhanced measures establish a best-in-class governance framework,” said Carrol.

PwC Australia CEO Kevin Burrowes said he was “really proud” of the changes, adding, however, there is “still much work to do.”

PwC Australia said it “intends” to have the new board members in place by 1 July, 2024.


Why business leaders can’t cope with criticism


Sally PattenBOSS editor

Business leaders who use reputation specialists and chiefs of staff become unable to hear dissenting voices or handle public criticism, speechwriter and author Lucinda Holdforth says.

Ms Holdforth – a former speechwriter for ex-Qantas chiefs Geoff Dixon and Alan Joyce, as well as a former adviser to insurer IAG, financial services company AMP and the ABC – said top chief executives who surrounded themselves with “yes people” were unable to calmly present their arguments in public forums such as Senate committees, annual shareholder meetings and media 

There is an apparatus that has grown up like a court around so many of the very top business leaders, but even further down the chain. They think listening means asking those people what they think,” Ms Holdworth said in a discussion at The Australian Financial Review Business Summit.
In a Four Corners interview last month, outgoing Woolworths CEO Brad Banducci asked for comments he had made to be cut from the final program. When the request was denied, he attempted to end the interview.
Ms Holdforth, a former policy adviser to Kim Beazley, blamed American leadership expert Brene Brown for today’s emphasis on leadership traits such as empathy, vulnerability, humility and authenticity.
Leaders, said Ms Holdforth, needed integrity, honesty and the means to harness resources and take people towards a shared vision of an organisation.
“There are many different ways to be a good leader. If you’ve got a vision, you know what resources you need, how to deploy what you’ve got, and you can attract followers to your cause, then you’re the one for the job,” Ms Holdforth said.

Soft skills have a place

Mark Fitzgibbon, who has been chief executive of health insurer NIB for more than 20 years, agreed that vision was critical for leaders, adding it was important to deliver short-term wins to keep staff buoyed.
“Leadership and communication is so important. We have huge obligations to get people to believe that what the company or organisation is trying to achieve is actually possible,” he said.
However, Mr Fitzgibbon said he was a fan of soft leadership skills, including authenticity and vulnerability. He pointed to the importance of inclusion and taking other people’s ideas into account.
“[Writer and lecturer] Dale Carnegie said: ‘People listen to us when we listened to them’. It sounds cheesy, but it’s so true. It’s about accommodating other peoples’ views in whatever resolution you reach. It’s just so important,” Mr Fitzgibbon said.

Company stances silence staff

Ms Holdforth, referring to the Indigenous Voice referendum, questioned the trend for companies to speak out on social issues, arguing companies should not take positions on behalf of all employees, some of whom may not agree with the stance.
“All day [workers] are silenced by all the rules and regulations of the company. So not only are they silenced [by them], but suddenly the board and the managing executive presume to speak for them. I think that needs rethinking. I don’t have an answer to that, but to me, it feels very wrong,” Ms Holdforth said.
Mr Fitzgibbon argued it was appropriate for companies to voice an opinion on social issues in some circumstances, particular if the matter was in line with their company purpose.
Sally Patten edits BOSS, and writes about workplace issues. She was the financial services editor and personal finance editor of the AFR, The Age and the Sydney Morning Herald. She edited business news for The Times of London. Connect with Sally on Twitter. Email Sally at spatten@afr.com
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