• When Pearson US took a tax break - Courtesy of PwC

    By Alia Tarek

    30-07-2015

    While not everyone agrees on the fact that profit shifting, transfer pricing and double taxation treaties are fair, it is important to remember that this is how the world is working.

    Pearson's tax free money shifting scheme from the UK is legal but not entirely ethical (in my opinion). The problem is with the loopholes in the tax laws but not with the brilliant accountants who thought of it.

    The following is a summary of what Richard Brooks uncovered regarding this tax scheme, which was featured in his book "The Great Tax Robbery" (2013), and discussed in my masters dissertation as well.

    Luxembourg is considered a tax haven and has many dealings especially with PwC, who has been Pearson's external auditor for the last eight years.

    In the former tax inspector and current investigative journalist Richard Brooks' most recent book, The Great Tax Robbery, a tax evasion scheme concerning Pearson was exposed. In 2011, a French TV journalist names Edouard Perrin was able to obtain a document detailing the communications between Luxembourg's tax authorities and PwC's engineered tax avoidance schemes used by hundreds of British companies.

    The schemes were complex but simple in principle that enabled companies to decrease the taxable profits in countries with high tax rates like the UK and the US and they would not get minimal taxes in Luxembourg in agreement with the tax authorities.

    The scheme involving Pearson goes as follows:

    In November 2009, a letter was sent to the Luxembourg tax authorities by PwC explaining that their client, Pearson Plc., wanted to invest $587 million in its US educational books business through a scheme in which firstly, a UK company called "Embankment Finance Ltd" (EFL) would establish a branch in Luxembourg and would give the amount of money to the branch as a loan. EFL would invest the money (taken as a loan) in another company in Luxembourg called "Pearson Luxembourg No.2 S.a.r.l" in return for share capital.

    Luxembourg No.2 S.a.r.l would also lend the $587 million to another Luxembourg company called "FBH" that would finally lend the money to Pearson US. Ultimately, Pearson US would have a tax break in the US from the interest to be paid back to "FBH" in Luxembourg as it is tax deductible and thus the loan would not be considered as an income in the US.

    The money passed between the three countries was only fictitious borrowing and the companies in Luxembourg (EFL's Luxembourg branch, Pearson Luxembourg No.2 S.a.r.l and FBH) had received money for free and received interest payments from the process.

    The Luxembourg tax rate for corporations is usually at 29%, however the agreement with PwC enabled Pearson's branches in Luxembourg to only got taxed on 0.06% of the $587 million (about £220 thousand out of £362 million), and therefore the 29% amounted to approximately £70,000 in taxes.

    Pearson's tax break flowchart as copied from 'The Great Tax Robbery'

    Pearson's tax break flowchart as copied from "The Great Tax Robbery" (exact page number to be updated)

    This post does not attack Pearson or PwC as it relies on the works reported by other individuals.

    Some might call it tax evasion, others will call it a legal move to reduce a client's tax liability.

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  • The information provided in this article is for general information purposes only. The information is not intended to be comprehensive or to include advice on which you may rely. You should always consult a suitably qualified professional on any specific matter.

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