Master’s Thesis 2020 30 ECTS Faculty of Landscape and Society
The Power of Consulting: The Big Four in Angola, Tanzania and South Africa
Irgen Wiig Sørensen Global Development Studies
The Department of International Environment and Development Studies, Noragric, is the international gateway for the Norwegian University of Life Sciences (NMBU). Established in 1986, Noragric’s contribution to international development lies in the interface between research, education (Bachelor, Master and PhD programmes) and assignments.
The Noragric Master theses are the final theses submitted by students in order to fulfil the requirements under the Noragric Master programme “International Environmental Studies”, “International Development Studies” and “International Relations”.
The findings in this thesis do not necessarily reflect the views of Noragric. Extracts from this publication may only be reproduced after prior consultation with the author and on condition that the source is indicated. For rights of reproduction or translation contact Noragric.
© Irgen Wiig Sørensen - June 2020
E-mail: [email protected] Noragric - Department of International Environment and Development Studies P.O. Box 5003, N-1432 Ås, Norway Tel.: +47 67 23 00 00 https://www.nmbu.no/fakultet/landsam/institutt/noragric Declaration I, Irgen Wiig Sørensen, declare that this thesis is a result of my research investigations and findings. Sources of information other than my own have been acknowledged and a reference list has been appended. This work has not been previously submitted to any other university for award of any type of academic degree.
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II Acknowledgements First of all, I would like to thank my wife Berit, who has supported me through all the ups and downs and who has contributed with continuous good feedback. Secondly, I would like to thank my study group consisting of Jonas and Grant, who have through the whole journey of the master programme shown great support.
I would further like to thank my supervisor at NMBU, Morten Jerven for the feedback and support during my research. During this research project, I have also gotten feedback and support from Ingrid Hjertaker in “Tax Justice Network Norway”, who I would also like to share my gratitude with. And last but not the least, thank you to everyone else who has contributed to this research with all their knowledge, expertise and critical questions. This has helped enormously, and I am very grateful for the time you have spent on sharing your thoughts and reflections on my research!
Thank you!
III Abstract Though the Big Four have been identified in their involvement in reported and leaked data regarding lobbying, tax evasion and misconduct in the western world, the capacity and underlaying interests of the Big Four in development countries have received little focus in executed research. Thereby, while acknowledging the need for further studies on the Big Four, conducting a multiple case study has allowed for the observation of the Big Four in different contexts, and by doing so, improved the understanding of how the operations of these firms affect the development capacities of Angola, Tanzania and South Africa.
The thesis has shed light on the ongoing capacity of the Big Four as a result of their global network, size and expertise in their field, which enables the Big Four to operate on a scale much larger than any other accounting and auditing companies in the world. The global network of the Big Four further enables their national entities to gain hold of the richest clients as well as gaining structural access to government employees and politicians. This access and capacity as well as if the Big Four’s national/local offices operate in an illegal or unethical manner can have detrimental outcomes for the states’ development capacities. The findings can provide a theoretical roadmap for further studies on the Big Four, especially in terms of how their operations affect the development capacities in Angola, Tanzania and South Africa.
IV
V Contents
Acronyms ...... VIII Chapter I Introduction ...... 1 Research Context ...... 2 Research Objectives and Questions ...... 4 Thesis Structure ...... 4 Chapter II Background ...... 5 State Capacity ...... 5 Tax and Development ...... 6 Interest Groups and Lobbying ...... 8 Theoretical Framework ...... 9 Power: A Radical View ...... 9 Example of Power Relations in Politics...... 10 Chapter III Methodology ...... 13 Research Design ...... 13 Case study as a method ...... 13 Research Questions and Propositions ...... 15 Case study selection ...... 16 Data Sampling and Collection ...... 18 Data sampling ...... 18 Data collection ...... 18 Methods for analysis ...... 19 Ethical considerations ...... 20 Chapter IV Literature Review & Findings ...... 20 The Interests of the Big Four ...... 20 In the context of: ...... 23 Tanzania...... 24 Angola...... 26 South Africa ...... 30 Chapter V Analysis and discussion ...... 33 Analysis ...... 34 The Big Four as interest groups ...... 34
VI Where is the state capacity? ...... 35 The development issues ...... 37 Power and Relations...... 38 Discussion ...... 41 Access from the Global Network ...... 41 Global Code of Conduct ...... 42 The Results and Outcomes ...... 43 Chapter VI Conclusion...... 45 References ...... 47 Appendix A - A conversation about laws ...... 52
Figures and Tables Figure 1 - Model for power relations ...... 11
Table 1 - Revenue generated by the Big Four ...... 22
VII Acronyms
GDP Gross Domestic Product HNWI High Net-Worth Individual ICIJ International Consortium of Investigative Journalists IMF International Monetary Fund MNC Multinational Corporation PRV Power: A Radical View (Book) SARS South Africa Revenue Service SDG Sustainable Development Goals TRA Tanzania Revenue Authority TPSF Tanzania Private Sector Foundation
VIII
“Think of [these] as fairytales that actually happened”1
1 Proclaimed by Gary Oldman acting as “Jürgen Mossack” in the movie “The Laundromat”, portraying some of the issues relating to the offshore law industry and the panama papers in 2016 (Burns, Jacobs, Grey, Sugar & Soderbergh, 2019, 0:00:47).
IX Introduction
Chapter I Introduction
In 2016, the panama papers were a leak of 11,5 million documents from the fourth biggest offshore law firm Mossack Fonseca. These leaks revealed the intertwined industry of offshore banking and how politicians, multinational corporations and high net worth individuals were given the opportunity and advice on how to avoid and evade millions of dollars in taxes, by using shell companies in so called tax havens (Obermaier, Obermayer, Wormer & Jaschensky, 2016). As a result of these leaks the company Mossack Fonseca shut down a short time after, as well as that multiple of the people who were exposed resigned from their jobs. However, these leaks can only be described to be the tip of the iceberg.
As according to an estimation by Zucman (2015 as cited in Fjeldstad, Jacobsen, Ringstad & Ngowi, 2017, p. 10), African citizens hold in total USD 500 billions of financial wealth in offshore accounts. This amount equals to approximately 30% of the financial wealth owned by all African citizens. Offshore accounts are often established with the main purpose of evading taxes, as these estimations of capital flight and tax evasion are. Which could cost the African countries USD 15 billion annually (Zucman, 2015 as cited in Fjeldstad et al. 2017, p. 10.). An efficient and accountable tax system is crucial for the further development of African countries. Without the necessary revenues generated through taxation, neither institutions nor government policies will be able to function in an imperative manner. Indicating that there will be fewer resources to all the public sectors, like health, education and the creation of infrastructure.
The issues of capital flight and tax evasion are rooted in a so called “tax industry” created with the purpose of generating the highest possible revenues for the richest clients all over the world. The two main actors in this tax industry are firstly the tax havens that facilitate secrecy jurisdictions with low - or no - tax rates, and secondly the accounting and auditing companies, that generate international tax schemes with the purpose of avoiding taxation in its whole or paying as little as possible.
The four largest accounting and auditing companies are generally known as the Big Four, and are in order of size: Deloitte, PwC, EY (Earlier known as Ernst & Young) and KPMG. The services they provide can be viewed in two parts, where the accounting services can be referred
1 Introduction to as services directed towards the economically best interest of their clients and include inter alia consulting and tax planning. The auditing services are seen as a societal service as these tasks are for the benefit of the society. Where they audit the operations of other companies and ensure that the businesses follow the rules and regulations (Fjeldstad et al., 2017, p. 71).
The ongoing international interest in the Big Four has to do with their size and capacity. Together these four corporations audit most of the major companies all over the world, including – just to give an example - “99 of the 100 largest companies on the London Stock Exchange” (Murphy & Stausholm, 2017, p.4; Fjeldstad et al., 2017, p. 71). In 2016, the Big Four had together 887 695 employees, operated in 186 jurisdictions and had combined sales revenues amounting to more than USD 120 billions (Murphy & Stausholm, 2017, p.4). As shown, one cannot argue with the statement that the Big Four are so large that they control most of the worlds auditing and accounting services. Fjeldstad et al. (2017, p. 71) describe the Big Four as “too big to fail”, which has enabled the corporations a unique position and bargaining power towards most governments. This is an issue as the Big Four have all advocated for the use of tax havens, and assisted companies in exploiting legal loopholes in the international tax system, which have cost countries USD billions in tax revenues ((Fjeldstad et al., 2017, p. 70- 71).
Research Context Not only is the field of capital flight and tax industries a new field of research, taxation has in the recent decades received only little attention as part of development projects. This appears to be paradoxically since the amount of revenue generated through taxes can have a large impact on the degree of growth and development in a country. The United Nations’ Sustainable Development Goals (SDGs) have highlighted the importance of taxation in the SDG 17.1, which seeks to “strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection” (UN, 2020). In 2015, only 0,13% of all official development assistance were directed towards improvement of tax and revenue systems (Lundstøl, 2018, p. 3), showing that the global arena has recently had very little focus on taxation as an important factor in the development industry.
2 Introduction
Issues related to tax collection and being a development country, can be said to be two sides of the same coin (Lundstøl, 2018, p. 8). As developing countries with less revenue and weaker institutions will have less capacity to operate on the same scale as developed countries. Combining this with a political science perspective that establishes that interest groups with economic interests are good at getting what they want (McFarland, 2010, p. 39). One can question, how does this play out in the case of interest groups lobbying in African countries?
The current research literature reveals how tax avoidance can be compared if not illustrated to be synonymous with the Big Four as a major part of the revenues generated by these four companies emerges from advising other large companies on how to avoid taxes (Sikka, 2017 p. 87). In developing countries, there is little research and therefore data on how the operations of the Big Four and tax havens affect the domestic tax systems and government institutions (Fjeldstad, 2017, p. 93). As the field of capital flight and secrecy of the tax industry, is relatively new (Fjeldstad et al., 2017, p. 11).
While literature is scarce on this topic, studies conducted by Fjeldstad and others (2017, p. 93- 4; Fjeldstad & Rakner, 2020) have shed light on the operations of the Big Four in Tanzania. The studies were able to reveal how the Big Four actively lobby to influence tax legislation in the interest of their clients. One example which will be discussed in this thesis, is the case of a new “Value Added Tax (VAT) Act” in Tanzania established in 2014/15. And more specifically how the Big Four manage to lobby forward the interests of their clients which as a general rule appear to be contradictory to the interests of the country.
The research findings regarding the capacity and access the Big Four have in Tanzania, has revealed the need for further studies. The Big Four are - as mentioned above - situated in most jurisdiction all over the world, giving them an insight and expertise in most domestic and international tax systems. Yet, this capacity of the corporations has not been closely studied in comparison to the capacity of the jurisdiction they operate within, but one must ask: “If the Big Four operate in weaker states, what advantage and bargaining power will these companies have with their global access and expertise in the field of taxation?”.
3 Introduction
Research Objectives and Questions The initial phase of this study focused on Tanzania as a single case study. But in order to get a broader insight on the operations of the Big Four. A multiple case study where established, including Angola and South Africa. The choice of multiple countries will allow the study to observe the Big Four in different contexts, and by doing so, may improve the understanding of how the operations of these firms affect the development capacities in these countries. The capacity and underlaying interests of the Big Four have been shown through their continuous involvements in reported and leaked issues regarding lobbying, tax evasion and misconduct.
Based on the current research and the need for further studies, the research questions are as followed:
- How and why does the Big Fours’ operations affect the development of Angola,
Tanzania and South Africa?
o Does the Big Fours’ global network give them easy access to political leaders
and civil servants?
o To which degree is the vulnerability of the named countries affecting the access
and power of international interest groups?
To be able to find answers to these questions, a deeper insight into state capacity and the operations of interest groups and lobbying will be established in the background part. With established theories regarding power relations, this thesis will elaborate on the established unsymmetrical power relation between the Big Four and the chosen three countries they operate within. The findings can thereafter provide a theoretical roadmap for further studies on the Big Four, regarding how their operations affect the development capacities in Angola, Tanzania and South Africa.
Thesis Structure The thesis is divided into six chapters: Chapter II, follows the introduction, and establishes the background and the theoretical framework for the executed research. The background part introduces theories of state capacity, tax and development, as well as interest groups and
4 Background lobbying. The theoretical framework presents theories on power and power relations within a government. This framework will enable the reader to maintain ideas of power relations while analyzing the operations of the Big Four in the chosen countries together with the researcher.
Chapter III contains the methodology, which is meant to explain the research design used in this thesis. To state how this design has enabled the data sampling and the collection of data as well as how the theories have been chosen, helps structure the research, while being not least a necessary tool for analyzing the findings in chapter V. Chapter III has been structured in a way that combines the existing literature, with the findings gathered by the data collection. This structure has been utilized to create a more consistent and clear explanation of each of the three countries, and how the Big Four operate there.
Chapter V contains the analysis and discussion parts. The analysis will investigate the actions of the Big Four by using the theoretical framework and background explained in chapter II. By using these theories, their operations will be able to be analyzed in light of their power relations, interests and capacities. Chapter VI is the last chapter and is meant to summarize and conclude on the research conducted.
Chapter II Background
This chapter will provide insight into fundamental issues regarding the necessity of taxation and its relation to state development. But in order for taxation to be of full use for the state and indirectly its citizen, it is necessary for the level of the state’s capacity to uphold certain criteria. Keeping in mind a state’s capacity will help understand certain issues and structures better when analyzing the role of the Big Four and their role in each of the countries in chapter V. The final part of the background will highlight some important parts in the role of interest groups in order to understand the functions of the Big Four, before the theoretical framework will be explained.
State Capacity States have different levels of efficiency and capacity. The strength of their institutions and their capacity to provide public services for their population are indicators of how well each
5 Background state functions. More effective states are based on the notion that they have free and fair elections, laws are (mostly) obeyed and the state controls and taxes all of its territory. Where the tax revenue should consist of 25-50% of the Gross Domestic Product (GDP). In effective states there is little corruption in the government and public offices, and the government provides services and security for the whole population. Weaker states on the other hand are pervaded by corruption, poverty and crime. They lack the strength to follow up on the mentioned issues, as well as not having the capacity to gather revenues through taxes at the same scale as effective states, which further limits their capacity to provide essential services. Weaker states are portrayed by their inequality, lack of social services and security. Many weak states are also rentier states, meaning they get most of their revenue from natural resources like oil and gas, while often neglecting parts of the tax collection. Which can weaken the bond between the citizens and the government, as the government is less economically reliant on the support of its citizens (Roskin, Cord, Medeiros & Jones, 2017, p. 52-3).
Tax and Development Why does a society need taxes? As the market can provide for most goods and services, there are a few things which are not efficiently provided through the market. Market imperfections come as a result of information and coordination failures, and when some goods and services cannot efficiently be provided by individuals and companies, for example infrastructure and security. It makes more sense to let the state provide services like education, health care, public safety and a regulated system of laws. History shows that the public expenditures have grown with the level of development in countries. The U.S. and European countries went from spending 1% to 25% of GDP on social services between 1900-2000. Indicating why taxes is a necessity in order to be able to provide all the necessary goods and services (Lindert, 2004 as cited in Lundstøl, 2018, p. 7-8).
Furthermore, taxation is not only a necessity in order to provide public services, but it is also the adhesive that connects the population and the government together. Once a state taxes its citizens, the people will have a stronger interest in and need for questioning the actions of the ruling government. Without this bond, governments which have other sources of income like rentier states have freer reins to circumvent the needs of its citizens. This can make governments as a whole more authoritarian, and the institutions in the state weaker while diminishing the possibilities for a democratic rule (More, 2008 as cited in Lundstøl, 2018, p. 8). Amundsen
6 Background
(2014, p. 169) says, whether the resource rents (or tax revenues) are spent on national development, or capital flight and unproductive means, it all comes down to the quality of the institutions. The institutions that matter in the case of taxation, are mostly related to the legislative and executive body, as well as the tax revenue authorities and services. These are the institutions that play a part in the tax collection and the establishment of new legislations as well as the interpretation and execution of the existing rules and regulations.
Securing taxes can be crucial for the future development of developing countries if done and utilized correctly (Lundstøl, 2018, p. 26). Studies by Lustig (2017, p. 28; Lundstøl, 2018, p. 10) observed that many developing countries experienced negative outcomes due to regressive taxes. Tax revenue gathered through consumption taxes like VAT (Value-Added Tax) have revealed negative outcomes towards poverty and inequality alleviation, when there are no public services to counter weigh the effects these taxes have on poorer citizens. In more effective states, public policies can help the weakest by counter-attacking the pressure of certain taxes. This is rarer in weaker states, so the collection of taxes can have more detrimental effects, if the taxation is regressive rather than progressive.
Issues regarding tax collection have often focused on the capacity of the tax revenue authorities, in the individual countries, as the source for the lagging results of tax revenue. Ananou and Houngbonon (2015, as cited in Lundstøl, 2018, p. 27) find that poor tax collection and tax efficiency has more to do with tax policies, than with the tax administrative performance itself. This indicates that exemptions in tax conditions, special economic zones and other beneficiary conditions to general tax legislations, have a greater impact on the size and efficiency of the tax collection compared to the isolated performance of the national tax authorities. Indicating that tax is always political and not only technical.
The political issues are highly represented in the cases of lobbying and corruption. In the mentioned case of Tanzania, the Big Four operate as interest groups, paid by richer clients in order to lobby forward tax legislations in favor of these clients. The political aspect is seen in how parliament members are swayed by the arguments of certain interest groups for changing the future tax legislations befitting certain private actors, rather than more progressive legislation that could otherwise have been suggested by the national tax revenue services. The operations and power of interest groups are explained in the following part.
7 Background
Interest Groups and Lobbying The term interest group, according to Roskin et al. (2017, p. 169), covers about any collection of people trying to influence the government. Meaning they can be permanent or temporary, large or small, as well as focus on specific or general topics. Interest groups are created with the purpose of influencing the government through a series of different means. Most groups work through communicating their interest and knowledge of the issues. But using money as a means to an end, is also practiced all over the world, though there is a small border between corruption and political support. Interest groups can have multiple entry points in the government in order to get their interests voiced. Swaying parliament members in order for them to vote a certain way regarding new legislation, is the main approach. Many lobbyists also contact senior civil servants in order to get beneficial treatment, regarding new interpretation and execution of already existing laws and regulations (Roskin et al., 2017, p. 169-180).
Throughout years of lobbying, Roskin et al. (2017, p. 174-9) emphasizes that the access some lobbyists have to certain civil servants are on a different level compared to other groups. And defines this as structured access. As the access for the lobbyists is structurally available. Structured access and many entry points to government officials is not available to every interest group out there. There are large differences in which groups will be listened to and who actually has the capacity to influence legislation and interpretations of rules and regulation. There are three main factors why some interest groups are more seen according to Roskin et al. (2017, p. 174-9). These are money, the intensity of the issues and the size and membership count of the interest groups. Specific issue can be more sensitive and therefore be of more interest to some civil servants. Interest groups with large member quotas, will also be more interesting as this can bring more potential voters in the future. But it is without a doubt the money and socioeconomic status of the interest groups which has the most to say when it comes access and effectiveness. As Roskin et al. mentions, interest groups representing disadvantaged people are the least likely to be heard, even though they might have larger representation than interest groups from, for example the financial sector.
There is still little empirical evidence on lobbying and the structures around it (Kjær & Ulriksen, 2019 as cited in Fjeldstad & Rakner, 2020, p. 1). But as Amundsen elaborates: "A responsible parliament can control and restrict lobbying for protection, subsidies, and preferential policies; it can reduce expenditures that favour the reproduction of politically and economically
8 Theoretical Framework dominant elites; and it can ensure "development friendly" policies through its taxation and investment policies. " (Amundsen, 2014, p.172). The capacity of the state and its institution play a vital role in how well lobbying is managed and how well corruption is fought. The questions that arise not only involve the fragility of the state, and what this does to the access for interest groups. But also, how lobbying and interest groups are continuing to affect the capacity of these institutions. Asongu & Kodila-Tedika (2013, p.15) states that "political interference, rent seeking and lobbying increase the probability of state fragility by mitigating the effectiveness of governance capacity". The power level of interest groups affects the capacity they have to push forward their own agendas.
Theoretical Framework
Studies on the role of interest groups and the analysis of power are largely from American or European contexts. This has created theories which can differ from the settings in many African countries, in terms of political, cultural and societal rules and regulations. There will not be space to evaluate thoroughly the different cultural practices in each of the cases, but just keep in mind that each case must be seen in its own light, regarding the relation of actors. The definitions and understandings of power are also nearly limitless, indicating that different tools, will generate different outcomes. The goal is to avoid the different discussions on power and be able to utilize clear concepts of power in light of the cases of Angola, Tanzania and South Africa. Steven Lukes has created a broad interpretation of power, where he captures and reflects on the older theories of power in his book “Power A Radical View” (PRV) (2005). Lukes manages to distinguish three views of power, all with their own use.
Power: A Radical View The one-dimensional view of power is created from a pluralistic approach by Robert Dahl in 1957. A Pluralistic view sees the government as the main political power but adds to the equation the interests of individuals and groups in society. Holding the normative idea that individuals and groups “should” try to affect the government in its decision-making (Roskin et al., 2017, p. 174). The definition of power created by Dahl, states that: “A has power over B to the extent that he can get B to do something that B would not otherwise do.” (Dahl, 1957 as cited in Lukes, 2005, p. 16). The basis of this one-dimensional view of power, emphasizes the
9 Theoretical Framework behavior of groups or individuals in decision-making processes. Making the approach very straight forward and entirely conflict driven.
Bachrach and Baratz in PRV (1970, as cited in Lukes, 2005, p. 20-5), argues that it is necessary to have a broader understanding of power in order to fully understand what is behind the curtains. The two-dimensional view of power is a critique of the power concept created by Dahl, as all power is not always openly expressed through decision-making. The second dimension highlights the importance of understanding the power behind nondecision-making. Realizing that nondecision-making is also a form of decision-making, by keeping certain issues out of the light. To clarify how this can be identified as power - through a simple scenario - imagine any meeting agenda. Here, the ones creating the agenda has the power to choose which issues are important. This can mean that the other actors in that meeting, would never get a chance to express their interests, unless the ones steering the agenda allowed it. Giving the meeting leader the power to control and bring value to the issues of his own interest. This can also be reflected on how someone would have the power to keep certain issues and conflicts out of the public light.
Both of these two interpretations base their concept of power on the issue of conflict, and according to Lukes: “This is to ignore the crucial point that the most effective and insidious use of power is to prevent such conflict from arising in the first place.” (Lukes, 2005, p, 27). The third dimensional view of power becomes a critique of the whole focus on behavior. Behavior seen through decision and nondecision-making leaves out the most important part of power analysis, according to Lukes. As he argues that “A may exercise power over B by getting him to do what he does not want to do, but he also exercises power over him by influencing, shaping or determining his very wants”. The power of thoughts and ideas is the ultimate dimension of power. Thoughts can be shaped through control of information, mass-media and daily socialization. Which makes this stage of power, harder to see and be aware of. As most of people’s values can be indoctrinated from the very early stages of life.
Example of Power Relations in Politics During the first power investigation of the Norwegian state in the 70’s, led by Gudmund Hernes, a similar understanding of power was established. Looking at figure 2.1, we can imagine two actors A and B, as well as two actions x and y. Visualize that actor A controls the outcome of
10 Theoretical Framework x which actor B is interested in. And actor B controls the outcome of y, which actor A is interested in. Using the theory that both A and B are rational actors, and that the situations will allow it, then A and B can change their position so that A gets what he is interested in and B gets what he is interested in. If this exchange is possible, then it can be established that A and B have a symmetrical power relation (Grimen, 2012, p. 108-9).
Action x
Control Interest
Actor A Actor B
Interest Control
Action y
Figure 1 - Model for power relations2
But if the situation differs and actor A has something which actor B is interested in, meanwhile actor B has nothing of interest for actor A. The relation would be unsymmetrical. Which is how Hernes views power, as an unsymmetrical relationship of exchange between two or more actors. Actors’ unsymmetrical relationship can be a result of many factors. And it is the unsymmetrical relationship that can push one to what he would otherwise not do, which is the same way Dahl interprets power. Relationships and positions of exchange are complex, meaning that some parts of relationship can be unsymmetrical, while other parts symmetrical. Leaving deep and complex roots of which can be hard to analyze (Grimen, 2012, p. 109).
Hernes’ (Grimen, 2012, p. 109-12) understanding of power is useful for analyzing the relationship between large organizations and institutions. The institutions in a state are created for the purpose of working towards stability and equality for all its citizens. So, what happens if some actors have different access towards these institutions, then others? One of Hernes’
2 (Grimen, 2012, p. 109).
11
main issues with the power relations within the Norwegian state, was the segmentation in the government. This segmentation happened as a result of structural access or connection that grew between ministries and private organizations and interest groups.
Hernes discovered that as a result of the government becoming more segmented there were certain detrimental effects coming to light. The first was connected to how ministries and interest groups have more expertise on their domain - compared to the members of the parliament - who need to have a broader and more general knowledge base. Second, is that the ministries themselves started functioning as interest groups as a result of them having the expertise as one, and constantly communicating with the other groups. The last issue is how these self-driven ministries started making decisions based on their own interests, rather than what would benefit the majority of the ministries and the society as a whole (Grimen, 2012, p. 112).
These findings of Hernes can reveal how interest groups can get their interests over on the members of parliament or other civil servants. The capacity of the state will determine to which degree there are rules and regulations implemented to limit the lobbying and corruption in the political sphere. As Roskin et al. (2017, p. 171) argues: “Weak states are characterized by the interpenetration of crime and politics. Not all “interest group” activity is good or peaceful; it depends on the groups’ willingness to operate within the law, which in turn requires strong states”. Therefore, one should start to question the intent of many groups. Especially among certain interest groups that continuously end up in international scandals as a result of fraud, corruption or connection to individuals acting in this manner.
In the lobbying game there are uneven power relations (Fjeldstad & Rakner, 2020, p. 16), but to which degree and among who is less certain. Interest groups are overrepresented among the elite (Roskin et al., 2017, p. 170), and as mentioned, interest groups representing the stronger socio-economic members of society will have easier access toward political processes. Using the different dimensions of power, can help shed light on the position of interest groups in the cases of Tanzania, Angola and South Africa.
12 Chapter III
Chapter III
Methodology
“[…] Empirical research advances only when accompanied by theory and logical inquiry, and not when only treated as a 3 mechanistic data collection endeavor”
Robert K. Yin
This chapter is meant to clarify the methodological approach used in this research. Which aim to bring insight into some limitations as well as to the reliability of the study. This chapter will firstly explain the research design and why a case study was conducted. The second part will clarify the data sampling and collection process. Thirdly, the methods used for analysis will be discussed before looking at the ethical considerations taken in this study.
Research Design The main job of the research design is to make sure that there is logical connection between the findings and the research questions. If the data accumulated has no/or little relevance in answering the research questions, then the design of the research must be seen as flawed or failed. The design of any research should start with an initial research question in order to conceive the necessary data for answering the question (Yin, 2018, p. 60).
Case study as a method Case studies are often used as a method in social sciences due to the ability to get an in-depth insight in the selected case. Robert K. Yin, who is one of the scholars who have written most about case study as a method (Johannessen, Christoffersen & Tufte, 2010, p. 86), has created a twofold definition of the case study design and states that:
1. “A case study is an empirical inquiry that
3 (Yin, 2018, p. 26).
13 Methodology
• investigates a contemporary phenomenon (the “case”) in depth and within its real- world context, especially when • the boundaries between phenomenon and context may not be clearly evident.” (Yin, 2014, p. 21).
Yin describes here the scope of the case study, and the relevance of choosing a case study design if the goal is to measure and investigate the phenomenon in its real-world context. In this thesis the goal is to investigate and explore the capacities and interests of the Big Four, not in one, but three countries, which will be the contexts. The second part of Yin’s definition states that:
2. “A case study inquiry
• copes with the technically distinctive situation in which there will be many more variables of interest than data points, and as one result • relies on multiple sources of evidence, with data needing to converge in a triangulating fashion, and as another result • benefits from the prior development of theoretical propositions to guide data collection and analysis.” (Yin, 2014, p. 22).
The second part covers the features of the case study. As Yin writes, it is beneficial to establish a theory to guide the research and thereby reduce the chance of side tracking and losing time on unnecessary tasks. The theory is also an important part for the analysis of the case study (Johannessen et al., 2010, p. 199). As other methods might have other structures for analyzing the data, this design relies on the content of the theory to make logical conclusion according to the findings, which will be discussed later in this chapter.
The thesis follows a linear-analytical structure with a few personal changes due to this being a multiple-case study rather than a single-case study (Yin, 2018, p. 285-286). The thesis follows a normal structure, but instead of having the literature review, before the theory. It has been implemented in the findings chapter, which allows a smoother outline of the underlying issues and misconducts by the Big Four. Therefore, a background chapter was established for the purpose of giving some insight into the issues of lobbying, tax evasion, as well as the work of interest groups.
14 Methodology
Research Questions and Propositions The initial phase of this research started out from the research done by Odd-Helge Fjeldstad and his specific research on tax and lobbying in Tanzania. In the book chapter “Capital flight, tax policy and lobbyists in Africa” he ended the chapter with questions for further research. It was here that the initial research question and the direction for this thesis came forth. Fjeldstad (2017, p. 95) asked: “How, and in which arenas, do the Big Four operate to influence tax policies in developing countries? Who are their main clients?”. These questions highlight the relevance of further research in the field, as well as how other studies have added only little information on the specific positions and work the Big Four and other interest groups do in light of lobbying, and consulting in developing countries.
Due to the size and sensitivity of the questions, there are limitations to what can be achieved in terms of accessing the necessary information on clients and their capacity of lobbying. Therefore, the research question in this thesis has been changed in order to focus more on the capacity and access of the Big Four. Which has allowed us to also analyze their interests and positions as a result of the chosen theory. So, to be able to create research questions that would allow the study to follow a clear direction and avoid any possible side tracking. An initial proposition on the operations of the Big Four was established.
The research questions and thesis have built on the proposition that the Big Four have an unequal position in developing countries, due to their global network, and therefore power and capacity. The proposition builds on the idea that any organization or private company with such a size and wealth, can have a detrimental effect when only representing the elite in any society. This proposition stemmed from the literature written by Odd-Helge Fjeldstad, Tax Justice Network, and other scholars and organizations working in the field tax evasion and capital flight. Who have over the last years documented the behavior and capacity of the Big Four all over the world.
Adding to the equation certain limitations in developing countries, the unequal position of the Big Four will only get heightened and thereby give them access and possibilities that will affect the development of these countries. The theory and background chapters are established with these propositions in mind, which also affected the data sampling and collection for this thesis.
15 Methodology
The research questions have changed multiple times as the case study findings revealed new information that changed the course of this study. Yin (2014, p. 4) emphasizes that in a case study design, the establishment of research questions should build on “how” and “why”. Which determined the final outcome of the research questions:
- How and why does the Big Fours’ operations affect the development of Angola,
Tanzania and South Africa?
o Does the Big Fours’ global network give them easy access to political leaders
and civil servants?
o To which degree is the vulnerability of the named countries affecting the access
and power of international interest groups?
Case study selection The unit of analysis in this thesis will be the Big Four. While the countries Angola, Tanzania and South Africa are the contexts that the Big Four will be analyzed within. The Big Four is a nickname for the four companies KPMG, Deloitte, PwC and EY. But not all of those four companies will be discussed in this research, as the research found different amount of data on each of these companies within these countries. Therefore, it must be expressed that EY will not be part of this research as they have not shown the same presence (as in misconducts or lobbying) as the other three companies in neither Angola, Tanzania nor South Africa. But for simplicity reasons and the reason of continuing on the track of researching the Big Four, the nickname will be continued to be used in this thesis.
This is a decision made on the idea that a continuation of the nickname will help structure and identify the role of the Big Four in future research. Today, all the current research on the Big Four have a common idea about their operations and contribution to the society, and identify them for their enormous international presence, capacity and participation. The reason for choosing these three companies, as well as using the umbrella term interest groups, is related to their global presence in tax avoidance and evasion. These three companies are the world’s biggest auditing and advisory companies when it comes to tax related issues. Their size and
16 Methodology relevance will be discussed more in the next chapter, but it is related to their capacity and their presence in recent studies which have given them the main focus of this thesis.
Mentioning that the Big Four are global actors, it must be explained why exactly the countries of Angola, Tanzania and South Africa have been chosen as the contexts in this study. In the general context of research on tax evasion and capital flight, most issues surround themselves around the concept of secrecy. Many countries choose to limit their cooperation and transparency, making it easier for multinational corporations (MNCs), to use specific tax havens in order to move their capital around and thereby evade taxes. In Tanzania, Odd-Helge Fjeldstad among other researchers, have undertaken a great deal of studies and thereby generated a considerable amount of empirical data, which have been necessary for studying the role of the Big Four. In Angola and South Africa, there is less research on the topic, but recent leaks of misconducts have opened up on the role of some of the Big Four. Enabling this study to have more empirical data for an analysis of the operation of the Big Four in those two countries. It will allow us to get a similar - and first and foremost modern - look at the work of the Big Four, and not only how they operated over a decade ago. Which might have been the case, without the recent leaks which will be explained in the next chapter. Without any access to the prior research and these scandals which are brought forward by investigative journalists, it would have been hard to gather enough primary data on this issue due to the secrecy surrounding these issues.
It must be underlined that though this a multiple and comparable case study, the background and context of these three countries differ vastly. That means that they will all be explained in their own context in the findings chapter, before a discussion and analysis will be used on the role of the Big Four in each of these countries. It is on the role of the Big Four, as well as any underlaying lack of capacities that will be compared in this multiple-case study. In this study, the goal will not be to identify the exact position of any of the Big Four individually, but rather to identify their capacity as global acting interest groups, and what this does in the context of developing countries.
17 Methodology
Data Sampling and Collection Data sampling The importance of any data sampling is to have a clear idea of who the units of analysis are, and in this case, in which contexts the units of analysis operate. These are the main building blocks for finding informants for data collection. This research has mainly operated with a purposive sampling approach (Bryman, 2012, p. 418) which has used the knowledge level of the units of analysis or contexts as the main criteria for being relevant informants. The search for informants has mainly been executed through the circles of researchers and civil servants working in either of the phenomena’s or contexts that this thesis focuses on.
But as there are a great deal of sensitivity surrounding lobbying and the misconducts of the Big Four, it has been hard to get access to relevant informants, thereby opening up for a more convenience and snowball sampling approach (Bryman, 2012, p. 201-2). The same criteria were used for these informants, meaning the informants would need to have strong knowledge of the units of analysis as well as the contexts they were operating within. But the convenience and snowball sampling approach opened up access to informants, which would initially not have been found. The rest of the data collected were collected through secondary sources like research papers and media articles.
Data collection The data collection has focused on two main sources of information. Primary sources and secondary sources. The primary sourced data have been gathered through semi-structured interviews. The semi-structured interview approach has been useful as it has enabled the data collection to stay on track, but also allowing for additional information that was initially not thought of by the researcher. In the initial period of the research, there was still lack of understanding and knowledge of the specific research field, which means that the interview guide established, might not have all the necessary questions for gathering the most relevant data. Therefore, by creating an interview guide with open-ended questions, as well as giving the informant room for pointing out additional information any unknown information might be gathered up (Bryman, 2012, p. 472).
18 Methodology
A pitfall with this approach is the extra time spent transcribing the interviews as all interviews were recorded with the consent of the informants. But it is believed that the pros outweigh the cons regarding this approach of gathering data. Secondly, it appears that conducting research and field work can be very expensive, and this research builds upon the contexts of three different countries. To take advantage of today’s technology, the interviews were therefore conducted over video-chat or phone calls through Skype or WhatsApp.
The second source of data comes from secondary sources. These sources have provided data for most of the literature review as well as major parts of the findings. The data collected on the Big Four in Tanzania, are mainly from peer-reviewed articles as well from interviews. But as the situations in Angola and South Africa are contemporary issues, especially Angola, there are less peer-reviewed data available. This has led to the fact that media articles written by investigative journalist have been a major source for the data collection. Media articles cannot be reviewed as having the same reliability as academic texts, but their usefulness comes from their availability due to this being ongoing investigations.
Methods for analysis When conducting a case study, it is necessary to have an initial idea of which direction the study will take and how the analysis of any data will be conducted. But unlike most quantitative studies, which have multiple structured analytical formulas, the analytical part of case studies is in comparison the least developed (Yin, 2014, p. 133). Therefore, case studies most often build on some form of theoretical propositions, to guide the direction of the study, as well as to have a tool for analyzing the collected data.
One of the main strategies for analyzing data in case studies is the strategy that builds on theoretical propositions established (Yin, 2014, p. 137). These propositions which were discussed earlier, have shaped the research design and the collection of data in this thesis. But as the mentioned propositions are explained in a narrow manner, a theoretical framework has been established for the sake of heightening the analytical capacity. The technique of matching a theoretical framework against the empirical findings - and thereby establishing logical conclusions - is known as pattern matching. This technique is, according to Yin, one of the most desirable analytical techniques in case studies (Yin, 2014, p. 147).
19 Chapter IV
Ethical considerations Research within social science most often involve human interaction in one form or another. In this study, personal interviews were conducted with experts in their field and who have experience and knowledge in one of the chosen countries. When gathering data through interviews it is of the highest importance to inform the informants of their rights regarding anonymity and gain their consent to use the information received through the interview (Yin, 2018, p. 126). Which have been implemented - and regarded as an important part - in the data collection in this study.
Studies can also be created with ethical bias, as every researcher has some subjective opinion before starting their research. The goal has been to openly state the proposals which have guided and structured this research and allowed for an open-minded interpretation of any data collected. Indicating that this research has not been created to push for a certain viewpoint or critical interpretation (Yin, 2018, p. 124).
Chapter IV Literature Review & Findings
This chapter combines the literature with the findings in order to create a better overview of the situations in each of the three countries. First this chapter will take a look at the Big Four while explaining how they are structured, how they operate globally and why they are of such interest in media and recent studies. Then the chosen context of each of the three countries will be described by themselves, and how the Big Four have been involved in some form of misconduct or lobbying. First the situation in Tanzania will be explained, then Angola and lastly South Africa.
The Interests of the Big Four The Big Four are the four biggest accounting and auditing firms worldwide. The nickname is an umbrella term for the following companies (stated after size): Deloitte, PricewaterhouseCoopers (PwC), EY (Earlier Ernst & Young) and KPMG (see Table 1). As
20 Literature Review & Findings
Fjeldstad et al. (2017, p. 70) explain, the two main roles of accounting and auditing firms are to provide accounting and consulting services, which might also include forms of tax planning and advise. These services are provided with the interests of their clients in mind. The second part of their work is to perform audits, verifying records and financial information. The auditing service is on the other hand seen as a necessity and duty which is in the interest of the whole society in order to limit the amount of fraud and tax evasion by other companies.
The reason these Big Four companies have been highlighted in media and research in recent years has to do with tax evasion and capital flight. The scale of capital “escaping” countries all over the world has pushed politicians, researchers and journalists into the search for answers on how this is possible. In order for tax evasion and capital flight to be possible there are some actors which are of importance. The first is the tax havens. These are jurisdictions, that operate with high level of secrecy as well as low or no-taxes for MNCs, and High Net Worth Individuals (HNWIs). Famous countries or autonomous islands regarded as tax havens are the Cayman Islands, Luxembourg and Switzerland among others. Some countries also ring fence their cities in order to establish international financial centers, like London and Amsterdam. These financial centers provide different tax laws for MNCs and HNWI, then for the rest of the countries, mainly to attract foreign direct investments (Waris, 2017, p.85). The other actors necessary for tax evasion and capital flight are the consulting firms. Which is where the Big Four come into the picture.
The Big Four started as simply accounting and auditing firms, but through decades of operations and gaining offices all over the world, more of their work focused on consultation and tax advice. Today, most of their revenues comes from the consulting part of their business (see Table 1). This consulting part is what have gotten most of these companies in the spotlight as this has included giving tax advice, which for many are seen as operating in a grey zone of legality. The issue with these operations comes from the lack of any international tax laws. Each country and jurisdiction can provide their own tax laws, and as all tax laws are only nationally determined, it is possible to have businesses operating in different tax jurisdictions, which means that many businesses choose to establish offices in low or no-tax jurisdiction. In most cases, these operations are viewed as tax avoidance, which is legal. But sometimes companies and legal advisers create shell companies and choose to operate in a manner only to evade taxes, which is termed tax evasion. A form which is illegal (Fjeldstad et al. 2017). Which were the example of the panama papers (Obermaier et al., 2016).
21 Literature Review & Findings
Activity Deloitte PwC EY KPMG US$’bn US$’bn US$’bn US$’bn Assurance/ Audit 10.2 17.3 12.6 11.2 Advisory/ Consultancy 27.7 14.4 14.3 11.9 Tax 8.3 10.7 9.5 6.6 Total 46.2 42.4 36.4 29.7
Table 1 - Revenue generated by the Big Four 4
As the Big Four have presence in most countries worldwide, they acquire a knowledge of how each of these countries operate and structure their tax legislation. Which enables the Big Four expertise on how to create tax schemes for MNCs and HNWIs in order for them to avoid or in some cases evade, taxes. The legality of some of these schemes can be seen as being in a dark grey zone, which are still hard to sanction. As the international arena are lacking the necessary tools and will for cooperation, to handle these issues. Tax havens are themselves often interested in the foreign direct investments. Making it hard to regulate the tax schemes, when not every country cooperates in these matters (Fjeldstad et al. 2017; Murphy & Stausholm, 2017).
The point which Murphy & Stausholm (2017, p. 6) highlight is that, the world as we know it, could not function without the Big Four. The capitalistic system is created with the need for independent and separate auditors to check and review the accounts of other firms. Without companies to supervise, it would be hard to ensure that firms were following the rules and regulations. The expertise and capacity they have acquired through operating in most countries and by representing the majority of the world’s largest firms as allowed them the position to also advise governments and in the international forums. Here they advise countries on which policies to implement, enabling the Big Four a double role. As on the one hand they advise countries on tax policies, while on the other, they advise MNCs and HNWIs on how to avoid
4(Deloitte, 2020; PwC, 2020b; KPMG, 2020; Diaz, 2020)
22 Literature Review & Findings taxes. Enabling them a position where they can move in and out through a revolving door, choosing the position that suit them at any current time (Fjeldstad et al., 2017, p. 71).
The Big Four are often viewed as being only four corporations, but each of the companies claim to be networks of independent legal entities. Where they are only operating under a common name and code of conduct. Thereby making them legally unrelated to one another. This legal structure is believed by Murphy & Stausholm (2017, p. 3) to be established for numerous reasons. The structures established creates images of four globally integrated firms but reduces their risks due to their legal separation. This enables the companies to ring-fence any risks and issues, creating more “protection” for their clients with the avoidance of regulatory enquiries and also limiting the transparency in their work. As everything happens in different legal zones. But the common brand continues to highlight the expertise and knowledge the companies have acquired over the years.
Though the Big Four emphasize the importance of understanding that each of the national entities are distinct legal entities, there are example which further show how they do cooperate. This shows that “PwC in Portugal, Angola and Cape Verde together has 1.600 staff and 42 partners, of which 26 are in Lisbon, 12 in Oporto and 4 in Luanda.” (PwC, 2020a). This is what is says on PwC’s Angolan webpage, which can indicate that the office in Luanda is not of a large size, but that the smaller size is compensated by the close working relationship in Portugal as well, due to the same language and historical connection, as Angola were a Portuguese colony.
In the context of: The Big Four and their operations in three countries are highlighted in this paper. The goal is to see all of the cases by themselves, and then highlight their similarities regarding how their position and operations affect these countries. The cases will first be presented by themselves, before a comparative analysis will be discussed in the next chapter. Starting with Tanzania, Angola and lastly South Africa.
23 Literature Review & Findings
Tanzania The situation in Tanzania reveals the position of the Big Four and their access to members of parliament, as part of their work as interest groups. In Tanzania the ruling party Chama Cha Mapinduzi (CCM) has governed since the country became independent5 in 1962 (Phillips, 2010 as cited in Fjeldstad & Rakner, 2020, p. 9), which casts light on the role of Tanzania as a State- party or party-state, due to the minor separation between the state and this particular party (Makulilo, 2008 as cited in Fjeldstad & Rakner, 2020, p. 9). The ruling of CCM has ensured stability over the years and enabled the party to follow its own political interests by dominating in the parliament for several decades. But a research from Fjeldstad & Rakner (2020; Fjeldstad, 2017) has shown, how the dominant governing party (CCM) has had limited abilities to instruct individual members of the parliament, who prove to be receptive when confronted by an increasingly professional group of lobbyists. Though one would have thought that a strong political party, with dominance in the parliament would be able to withstand more pressure from interest groups.
Tax situation in Tanzania According to Lundstøl (2018, p. 21), 16% of Tanzania’s GDP comes from tax collection. It is generally considered that tax collection levels, also referred to as “tax capacity”, below 15% of the country’s GDP are insufficient to provide a sufficient welfare system for most low- and middle-income states (World bank, 2017 as cited in Lundstøl, 2018, p. 9). While Tanzania lays just one percent over this mark, Tanzania is put very low on the scale of tax capacity (Tax/GDP). Indicating that Tanzania’s capacities and public services are dependent on the country capacity to collect taxes, and that losses in tax revenues can have large detrimental effects.
Tax exemptions are often an issue for tax authorities, as the tax administration is not fully autonomous from political interference. Fjeldstad & Heggstad (2011, p. xiii) point out that “In Tanzania, for instance, tax exemptions in Fiscal Year 2009/10 are estimated by [Tanzania Revenue Authority (TRA)] to represent 2.3% of GDP. A recent study by the African Development Bank suggests that exemptions and tax incentives combined in Tanzania could
5 Initially the party were named Tanganyika African National Union (TANU) before it merged with the Afro- Shirazi Party (ASP) of Zanzibar and became CCM in 1977.
24 Literature Review & Findings account for up to 6% of GDP.”. These findings indicate the real burden these exemptions can be for the Tanzanian government.
“Old Wine in New Bottle”6 The case of Tanzania focuses on the establishment of a new VAT legislation as one example of tax legislation and possible change. As a starting point, the VAT-law in Tanzania was riddled with loopholes. The first VAT legislation in Tanzania was enacted in 1998 and at that time the law was viewed as model for other African countries due to the regulations being simple and transparent, with only a few goods and services being exempted from that kind of taxation. During the following decade, the law continued being amended, changing the simple and transparent form the law started out with. Leaving full of exemptions and loopholes for the benefit of individual companies rather than sectors. Research carried out by Fjeldstad (2017, p. 94) demonstrates how tax exemptions were handed out by the Minister of Finance, mainly through discretions and corruption. Fjeldstad points out how some individual businesses were granted exemption, while other businesses in the same sector had to pay taxes.
These exemptions, with the lack of transparency made the VAT law of 1998 intricate and it was hard to operate with that kind of legislation. This led to a decision from the ministry of finance, that a new VAT legislation was necessary in order to fully utilize the tax extraction in the country. The initial idea for this change, came from the International Monetary Fund (IMF), as they saw it as more efficient to create a new law, rather than try to fix the existing one. In May 2014, a draft was created of the new VAT Bill, and was handed to the parliament shortly after. The draft had removed most of the exemptions (except some for food and agricultural products, among other necessities), as well as eliminated the power of the minister of finance to grant tax exemptions. The draft also built on the idea that all new tax exemptions should be approved by the parliament. Building on legislation and stronger institutional capacity surrounding the law (Fjeldstad, 2017, p. 94; Fjeldstad & Rakner, 2020, p. 2).
But the suggested bill led to a strong resistance among the business society. Fjeldstad (2017, p. 94-5) pointed out how private enterprises and business organizations all went against the removal of tax exemptions while stating that the removal of tax exemptions would make the country less attractive for foreign investors. Which again would thereby make national
6 (Fjeldstad & Rakner, 2020, p. 3/10)
25 Literature Review & Findings companies fall behind in the domestic and regional market. These arguments were pushed forward despite the fact that the same investors contradicted these statements saying that the Bill would not affect how they invested (Fjeldstad, 2017, p. 95).
In the following, individual enterprises started pushing for their own interests and exemptions in the law developing process. While a more organized and significant push led by business associations, and especially Tanzania Private Sector Foundation (TPSF), focused on the parliament and ministry of finance. Tax consultants from the Big Four were hired by the TPSF to lobby the interests of these businesses to members of the parliament. With consultants from PwC in the forefront. A former Deputy Commissioner General from the Tanzania Revenue Authority (TRA) were also hired to push for the interest of these companies. As the draft for the Bill were initially created behind closed doors, many industries, as well as ministries reacted when they saw that their exemptions were removed. Especially the ministries of tourism and agriculture reacted to this. Which led to the situation that the minister responsible for the tourist sector, personally lobbied for exemptions (Fjeldstad & Rakner, 2020, p. 2-11).
The Vat Law changed drastically from the initial draft to the final bill by the end of the year of 2014. Giving the minister of finance back his ability to grant exemptions, though only in emergencies and calamities. All as a result of the lobbying conducted by the Big Four, other private enterprises as well as some ministries (Fjeldstad & Rakner, 2020, p. 13). An outcome which was described as an “old wine in a new bottle” (Fjeldstad & Rakner, 2020, p. 3/10)
Angola The case of Angola is a contemporary issue, where the so-called scandal is ongoing. The data used in this case all stems from publications from investigative journalists working through leaked documents now called the “Luanda Leaks”. The International Consortium of Investigative Journalists (ICIJ) are the ones that started the ongoing cases on Isabel Dos-Santos through the Luanda Leaks in January 2020 (Díaz-Struck, Romera & Ledésert, 2020).
The Luanda Leaks key findings acknowledge how: “western consulting, accounting and law firms played a key role in helping Africa’s wealthiest woman amass and shield a fortune” (Hallman, Gurney, Alecci & De Haldevang, 2020). They continue in highlighting how PwC
26 Literature Review & Findings and other firms have helped Isabel Dos Santos and her husband take advantage of Angola’s political situation, in order to create vast amount of profit from government revenues and resources. It is further stated that western countries have looked away, when it comes to the role of international tax and consulting companies in capital flight and tax evasion (Hallman et al., 2020).
Family ownership of Angola The story of Angola is different from the one in Tanzania. Though Tanzania is one of the world’s poorest countries, the country has been politically stable, compared to Angola. Since the independence from Portugal in 1975, Angola went through a civil war lasting almost 27 years. The war was fought between the ruling political party “Popular Movement for the Liberation of Angola” (MPLA), and the “National Union for the Total Independence of Angola” (UNITA). In 1979, the MPLA leader José Eduardo Dos Santos came to power, and stayed in that position throughout the civil war and until 2017 (CIA, 2020).
The authoritarian rule he had upon Angola gave him and his family control over all the country’s revenues, which has led the county to be a class example of a crony capitalist society. Clearly exemplified by McMillan (as cited in Amundsen, 2014, p. 175): "In 2003, ten Angolans had fortunes exceeding USS 100 million (...), while another 49 had more than USS 50 million. Topping the rich list was President José Eduardo dos Santos (...), followed by a parliamentary deputy, two officials in the president's office, an ambassador, a former army chief of staff, and the minister of public works. The seven richest Angolans were all in the government.".
Constitutionally, Angola is a multiparty democracy, with a separation of power between the executive, legislative and judicial branch. During president Dos Santos’ rule, he managed to cut back on the stated division of power and thereby received more control as president. Amundsen describes that the normal balance between the legislative, executive and judicial branch are created for the purposive of having a system of checks and balances. But in Angola this division of power was basically none existing. In Amundsen’s article it is exemplified how President Dos Santos had - by law - the power to exchange the parliament members, when his interest was not met, but this same form of power was not given to the parliament members. President dos Santos could further pass laws through his council of ministers, showing a fundamental deviation from democracy where the laws and regulations are expected to be brought forward by the legislative branch and most certainly not the executive. Amundsen
27 Literature Review & Findings further states that the judicial and legislative branch received little respect for their decisions and that laws were passed without parliament members being present, which gives a full impression of how president Dos Santos held unlimited power over the state (Amundsen, 2014, p. 9-10).
Angola’s economy is mainly dominated by the oil sector, which contributes to 50 % of the country’s GDP, 70% of the governments revenues and 90% of their exports (CIA, 2020). Sonangol is the state-owned petroleum company in Angola and described by Amundsen (2014, p. 184) as the “basic rentier tool for the ruling elite”. As the national petroleum company, the purposes and tasks of Sonangol has been plenty, while serving from oil company to regulator and tax collector. Sonangol has been one of the main contributors of keeping the rule of president Dos Santos going for such a long time. As mentioned earlier, rentier states do not need the support of the people in order to get revenues, as they have a source of natural resources, to profit the country to maintain the power and protection of Dos Santos. The size and strength of Sonangol can be symbolized by what Amundsen (2014, p. 177) calls a “state within a state”.
Today Angola has the 65th highest GDP worldwide (2017 estimates), but looking at the human development index, the country is considerably lagging behind compared to their revenue. The main revenue generator in the country are from their Oil production. 30 % of the country’s GDP are also generated by taxes, but little seems to come back to the citizens as the GDP per capita are in the 160th place worldwide (CIA, 2020), indicating tendencies of how Angola has been an authoritarian rentier state for many decades (Amundsen, 2014, p. 173).
Luanda Leaks The background on Angola under the leadership of dos Santos is crucial in order to comprehend how it was possible for someone like Isabel Dos Santos to be able to profit from Angola’s revenues and resources. Isabel Dos Santos, who is the daughter of the earlier president José Eduardo dos Santos is now facing criminal charges due to leaked data, revealing corrupt actions. The leaked data, referred to as the Luanda leaks, consists of over 715 000 confidential financial and business records, as well as over hundreds of interviews. The leaks have revealed how Isabel was awarded public contracts, tax breaks, telecom licenses and diamond-mining rights from her father, president dos Santos (Freedberg, Alecci, Fitzgibbon, Dalby & Reuter 2020). In 2016 Isabel dos Santos also achieved the position of running Sonangol, acclaimed to
28 Literature Review & Findings be the second most powerful position in the country (ICIJ, 2020). Which put all of the state’ revenues and control in the hands of the Dos Santos family.
The International Consortium of Investigative Journalists (ICIJ) sent questions to the Angolan government regarding the corruption Isabel and her family have been accused for. Which resulted in the current Angolan government freezing all of Isabel and her husband’s assets in Angola and stating that the couple were responsible for the loss of $1.1 Billion of Angola’s revenues (Hallman et al., 2020). The role of PwC and KPMG continued serving Isabel dos Santos long after other companies and western banks started asking questions regarding her new and enormous wealth accumulation (Hallman et al., 2020). According to the investigation, PwC is the company among the Big Four, which played the biggest role in helping Isabel. As firms in PwC’s global network are said to have billed Isabel dos Santos $1.28 million for the work for her businesses between 2012 and 2017 (Hallman et al., 2020).
Hallman et al. (2020) also describes how Isabel Dos Santos have tried to legitimize her own wealth by using her relationship to the major consulting firms. But the Luanda leaks have revealed how PwC consulted some of the shareholders in some of Isabel’s firms on how to avoid the majority of taxes, by establishing holding companies in tax havens like Malta or Singapore. An ICIJ analysis also found that $900 000 were charged to companies operating in the financial center of Malta (Hallman et al., 2020). Which can only be understood through the purpose of capital flight, tax evasion and secrecy. But, “PwC declined to comment on services they provided to dos Santos companies.” (Freedberg et al., 2020).
In Angola, the Big Four have operated on a different level compared to the previous example in Tanzania. In Tanzania, PwC and the other Big Four firms were hired to lobby MP’s and ministries in order to push forward the interests of the Tanzania Private Sector Foundations. In this example of Angola, the Big Four have been accused of facilitation of the theft and tax evasion by Isabel dos Santos and her husband. In the next example as well, the focus lays on other operations of the Big Four and how they have helped state leaders and high positioned civil servants, engage in suspicious and illegal operations.
29 Literature Review & Findings
South Africa South Africa has revealed similar issues as Angola while having a highly corrupt leader in power. In 2017 South Africa underwent a defining transition, as president Jacob Zuma, was accused of corruption due to his secret operations with the Gupta family. As Zuma and the Guptas used their government and private positions to establish greater power for themselves.
Zuma and the Guptas The issues in South Africa involved multiple and different scandals, but they all surround the corruptions of Jacob Zuma and the Gupta family. The three Indian Gupta brothers Ajay, Atul and Rajesh Gupta moved to South Africa in 1993, at the end of the apartheid. Here they started a computer company named Sahara Computers. But today they are also active in the mining-, air travel–, energy-, technology- and media industry, which can help to explain their range of impact in South Africa. Their relationship with Jacob Zuma started over a decade ago and has grown ever since. Reports also highlight that during this time the president’s wife, daughter and son have all had close relations, such as working relations, with the Gupta family (BBC, 2018).
The Guptas position and grasp on the political power in South Africa can be said to come from their relationship with Jacob Zuma. Their economic power has given them access to some of South Africa’s highest positioned government employees - mostly though through bribery. Which can be seen in the accusations against the family. As they have been accused of offering a member of parliament and a deputy minister, the positions of ministers. All while Jacob Zuma was in the room next door, which highlights the self-worth and access the Guptas had in order to be able to appoint someone to the highest government positions in South Africa. But, Zuma and the Guptas deny any of these accusations (BBC, 2018). The connection and influence the Gupta family has over Zuma is the basis of the accusations of the Guptas interest in a state capture.
The situation above gives an example on how the Guptas had access to a large number of private and public servants. This was further highlighted when Deloitte was awarded several government contracts, which in the aftermath have been shown to be clearly overpriced as an example of corruption and misconduct. The contracts were awarded by former chief financial officer Anoj Singh and senior executive Prish Govender in Eskom, a state-owned power utility company. Deloitte charged the public company up to five times of the amount any competitors
30 Literature Review & Findings would, but still received the contracts. Leaked emails from the Gupta Family, reveal information of Anoj Singh receiving multiple trips funded by the Guptas. All being suspiciously timed, as the Guptas received other contracts by Singh, when he was former CFO in Transnet - a state-owned railroad company (Seale, Lungani & Siboniso, 2017) - indicating further corruptive measures. As a result of the leaks regarding the episode in Eskom, both Singh and Govender resigned (Sguazzin & Burkhardt, 2019; Wells, 2019), after establishing a deep connected relationship between the Guptas, Deloitte and other government employees.
Scandals and State Capture The South African Revenue Service (SARS) which is the national tax collection authority, has since its start received lot of attention, due to the authority’s ability to change the tax moral in the country and continue to bring in higher tax revenues every year. Surpassing even larger and more democratic countries like the United States in their tax capacity. Which can be said to make SARS one of the most important institutions in the government (Gebrekidan & Onishi, 2018).
In 2014, Tom Moyane, a close friend of Zuma, was brought in as head of SARS. Moyane had a reputation at the time of turning a blind eye on corruption, which can only be said to have been strengthened when he actively started shutting down anti-corruption units. But, a short time after his inauguration as head of SARS, suspicious leaks started emerging stating that the former commissioner of SARS Ivan Pillay and Minister of Finance Pravin Gordhan (Former SARS commissioner) had conducted illegal surveillance on Jacob Zuma through a so called “Rogue Unit” named by The Sunday Times who reported about these cases. As more information came forth, Moyane hired KPMG to investigate on the matter. About a year later KPMG released a report saying that the information was correct and that Pillay and Gordhan were found abusing their positions of power (Basson, 2018; Gebrekidan & Onishi, 2018; Cowan, 2019).
The Sunday Times took back their news reports a short while later, which can emphasize the lack of proof behind their accusations. KPMG publicly came forth with a statement in 2017 where they also retracted their findings, “admitting that [they] had essentially copied a memo from [their] client’s lawyers and passed off the allegations as [their] own, fully investigated findings” (Gebrekidan & Onishi, 2018; Sguazzin, 2018; Cowan, 2019). Indicating that the whole report was built on corruptive measures to remove some of the main civil servants in the
31 Literature Review & Findings
South African government. As Bobby Johnston, the former chairman of the Johannesburg Stock Exchange, who investigated KPMG said: “Whoever pays the piper calls the tune, unfortunately,” (Gebrekidan & Onishi, 2018). This scandal led the Chief executive, a chairman and six other senior members of KPMG to resign after the internal investigation revealed their work done for the Gupta family. But according to the internal investigation by KPMG, there were no evidence of illegal activity or corruption, just that the standard of procedure, fell far below that, which should have been expected from the company (Brock, 2017; Sguazzin, 2018).
Under the leadership of Moyane, hundreds of SARS top employees left to private corporations, or to tax agencies as far away as New Zealand, as a result of the continuous issue. Many of these employees also had a strong support for Pillay and Gordhan due to the highly acknowledged work they had conducted earlier (Basson, 2018; Gebrekidan & Onishi, 2018). SARS were as mentioned known for being a strong institution but deteriorated under the leadership of Tom Moyane. As "a statement released by the Presidency on Monday night said that Ramaphosa told Moyane in a letter: "Developments at the SARS under your leadership have resulted in a deterioration in public confidence in the institution and in public finances being compromised. For the sake of the country and the economy, this situation cannot be allowed to continue, or to worsen."" Resulting in the firing of Moyane (News24, 2018).
During Zuma’s reign, SARS capacity and trustworthiness were lowered, as well as the tax morality of the South African citizens dropped as a response to the corruption. As the citizens showed reluctance to comply with tax collection it led to clear gaps of revenue losses. ““Tax morality is a crucial component of a healthy democracy,” [Finance Minister] Gigaba said in his [2018] budget speech. “It has taken many years and lots of effort to build the foundation of trust that supports our tax morality. We have seen how quickly that citizens’ trust can be eroded by perceptions of poor public governance.”” (Mail & Guardian, 2018). The rule of president Jacob Zuma has cost the country a lot in terms of economic resources as well as moral and faith in the government.
Today, South African regulators are looking for the possibility to break up the Big Four after the scandals Deloitte and KPMG were involved in. But the capacity of mid-tier accounting companies, are far below that of the Big Four. Indicating the accuracy of the earlier remark that the Big Four are too big to fail. The regulators are establishing guidelines on how they can upskill mid-tier companies, to remove the reliance on the Big Four firms. KPMG states that
32 Chapter V they are no longer the same company, as they have cleaned up their senior management and implemented additional layers of accountability, to avoid similar situations in the future. But according to PwC Chief Executive Officer for Africa, Dion Shango: “The greatest challenge facing the industry is the restoration of trust and confidence […] Trust has been eroded, and more than ever before, the auditing profession needs to focus on quality, in order to earn that trust back.” (Henderson, 2020). Thus, whether the Big Four can live up to the desired trust is yet another question. The next chapter will analyze their operations in light of the established theoretical framework.
Chapter V Analysis and discussion
This chapter will bring the rationale from the background part and combine it with the findings in order to highlight and create a clearer picture of the operations of the Big Four in the chosen countries. After viewing the actions of the Big Four in Angola, Tanzania and South Africa, there are clear examples of how they operate. Though these are individual entities in three different countries, there are indicators of a global connection. Each of the companies follow a form of international code of conduct as well as other formal regulations for operating as a national entity under a global name.
An analysis is established by looking at the Big Four as interest groups. Which development issues are a result of their operations, and whether it can be said to be a lack of state capacity in their country of operations, before an analysis of the power relations between the Big Four and the government employees and leaders in each of the three countries will be executed. After the analysis a discussion is conducted in order to establish whether the Big Four have greater access to civil servants and politicians as a result of their global network, whether their operations are affected by the global code of conduct, and what this means in regards of the results and outcomes.
33 Analysis and discussion
Analysis
The Big Four as interest groups The background chapter gave an overview of the common approaches of interest groups within a state and how their role in conveying messages over to politicians and civil servants function. As earlier defined, an interest group can be any collection of people trying to influence the government.
Interest groups often have multiple entry points in the government in order to get their interests voiced and to sway parliament members in order for them to vote a certain way regarding new legislation, is often the main approach. Many lobbyists also contact senior civil servants in order to get beneficial treatment, regarding new interpretation and execution of already existing laws and regulations (Roskin et al., 2017, p. 169-180).
As a result of the research of Fjeldstad & Rakner (2020) among others, there are empirical data on the behavior of the Big Four, and how they represent rich clients in order to lobby their interests over to the politicians and civil servants. In Tanzania we have seen how PwC operated in a more visible and lobby-based approach. Their approach in Tanzania, established an example of PwC operating as a lobbyist in a development country. Though this was one case, a conversation Frederick Kato (personal communication, January 24, 2020), a tax officer from the Tanzanian Revenue Authority, confirmed that PwC and the other Big Four companies are representing up to 80% of all the largest MNCs and HNWI in Dar es Saleem and Tanzania in general. "When interest groups grow in influence, companies and business associations may have preference for lobbyism over corruption." (Fjeldstad & Rakner, 2020, p. 4). Lobbying was seen as a preferred method over bribery in Tanzania as they could achieve the same goal. Therefore, the position of international companies with broad expertise in the tax field can play strong roles as interest groups (Fjeldstad & Rakner, 2020, p. 12).
In Angola and South Africa there are less data on how the Big Four are operating in the strict lobbyist approach, but the gathered data do show us that the Big Four are representing the largest companies all over the world, while not being a different case in these two countries. Angola and South Africa are examples of how PwC, Deloitte and KPMG have been working for and representing the highest positioned state leaders in both of these countries. This position and access to other members of parliament and civil servants has to be argued to affect their
34 Analysis and discussion position of power and access to the government. Thereby enabling their capacity to lobby and pursue the interests of their clients. As the interest group theory confirmed, the strongest socio- economic groups have the easiest access.
In both Angola and South Africa, the Big Four have gone to extreme lengths to satisfy the interests of their clients, which might be able to explain why these scandals have surfaced. A contact person of mine tried to get an interview with an employee from KMPG in Boksburg in South Africa, but were declined as the employee stated that “they have a policy not to discuss these matters with anyone.”7 And though lobbying is legal, and so is representing the richest clients, the point which will be argued in the next part is how the lobbying and actions of interest groups affect developing countries, as a result of their capacity and access.
Where is the state capacity? As the background part discussed, states have different levels of functioning, all based on a state’s capacity to live up to a set of criteria. Effective states are based on the notion that they have free and fair elections, laws are mostly obeyed and the state controls and taxes all of its territory, where the tax revenue should consist of 25-50% of the GDP. In effective states there is a minimum of corruption and the government provides services and security for the whole population. The strength of a state’s institutions and the capacity to provide services for their population, are indicators of how well each state functions (Roskin et al., 2017, p. 52-3).
The issues of lobbying and corruption can be seen as a result of weakened institutional and regulatory capacity. As Amundsen (2014, p. 172) explained in chapter II: "A responsible parliament can control and restrict lobbying for protection, subsidies, and preferential policies; it can reduce expenditures that favour the reproduction of politically and economically dominant elites; and it can ensure "development friendly" policies through its taxation and investment policies. ". The capacity of the state and its institution play a vital role in how well lobbying is managed and how well corruption is fought.
Weaker states on the other hand are pervaded by corruption, poverty and crime. They lack the strength to follow up on the mentioned issues, as well as not having the capacity to gather
7 (Personal communication, January 14, 2020)
35 Analysis and discussion revenues through taxes at the same scale as effective states, which further limits their capacity to provide essential services. Weaker states can also be portrayed by their inequality, lack of social services and security. Many weak states are also rentier states, meaning they get most of their revenue from natural resources like oil and gas, while often neglecting parts of the tax collection. Which can weaken the bond between the citizens and the government, as the government is less economically reliant on the support of its citizens (Roskin et al., 2017, p. 52-3).
The three countries have very different backgrounds, as Angola and South Africa have experienced extreme changes in their institutional and political governance. Angola became an authoritarian rentier state under the long rule of President José Eduardo dos Santos, who weakened all of the state’s institutions and enhanced the power for the whole dos Santos family, which facilitated for all the theft and misuse of the state’s resources and institutions.
South Africa on the other hand is more developed than most countries in Africa, but still went through extreme misuse of power by President Jacob Zuma and other civil servants. His appointment of corrupt civil servants, and corrupt deals with the Gupta Family weakened the country’s institutions, which arguably also weakened the citizens trust in these institutions. The literature on Tanzania has shown, that also there the government have struggled to restrain the lobbying of PwC and other companies.
Based on these assumptions and ideals for the definitions of strong and weak states, each of the examples of the three chosen countries, have revealed real and serious government limitations. Angola being a very corrupt rentier state, built on crony capitalistic ideals, while revealing to have a medium high GDP, but with a very low GDP per capita, which again indicates large economic and social inequalities. Tanzania is a poorer country, with limitations in their tax capacity and therefore also the amount of public services. Research has further revealed weak regulations regarding lobbying and the access of interest groups. South Africa have also uncovered immense corruption. As mentioned, South Africa is the most developed of these three countries, but still it can be argued, on the premise of the findings in this thesis, that the institutional capacity of South Africa has enough limitations to allow for greater access for the Big Four.
36 Analysis and discussion
The development issues
The three countries revealed certain development issues as a result of the operations of the Big Four. In Tanzania, the research from Fjeldstad and Rakner (2020), revealed the impact of the lobbying against the new VAT Bill in 2014. The draft of the new VAT Bill was designed to remove the majority of all tax exemptions, as well as the ability of the Minister of Finance to grant new exemptions. It was further discussed that only 16% of Tanzania’s GDP comes from tax collection. (Lundstøl, 2018, p. 21), and that tax collection levels below 15% of the GDP are insufficient to provide a satisfying welfare system for most low income and middle- income states (World bank, 2017 as cited in Lundstøl, 2018, p. 9), revealing Tanzania’s reliance on tax to provide essential services.
As Fjeldstad & Heggstad (2011, p. xi-xiii) pointed out: “In Tanzania, for instance, tax exemptions in Fiscal Year 2009/10 are estimated by TRA to represent 2.3% of GDP. A recent study by the African Development Bank suggests that exemptions and tax incentives combined in Tanzania could account for up to 6% of GDP.”. It was argued by lobbyists that removing the tax exemptions would limit future foreign direct investments. Something which was denied by the same investors (Fjeldstad, 2017, p. 95), which indicates the real issue the lobbying for the tax exemptions have on the Tanzanian government to provide better services as the VAT Bill ended up being similar to the old one.
In the case against Isabel dos Santos, it is believed by the current government of Angola, that she and her husband caused Angola to lose more than $1 billion in tax evasion and theft, as a result of their abuse of state positions (Freedberg et.al. 2020). Though the capital flight is not necessarily a direct result of the operations of PwC or KPMG, it should be viewed as a result of the services provided by them, like the corporate tax schemes, they provided for some of Isabel’s firms. Enabling her to avoid taxes and possibly any registration as the money were moved to the tax haven Malta or Singapore. PwC and KPMG were also accused for looking away and avoiding reporting the necessary wrongdoings, which allowed Isabel and her collaborators to continue their actions for a long time.
In South Africa, KPMG «[c]onfessed to publishing a misleading report on the South African Revenue Service that led to a police probe of a former finance minister” (Sguazzin, 2018). Furthermore, Deloitte was awarded contracts on corrupt premises. All linking back to the
37 Analysis and discussion connection between President Jacob Zuma and the Gupta Family, as a part of their state capture. Behavior of this form can have an enormous impact on the society, as it involves the top leader of the country as well as some of the biggest - and maybe most trusted - companies in South Africa. When citizens see how the national leaders and HNWI’s can evade taxation, it might weaken the long-gathered tax morality in the country. “Tax morality is a crucial component of a healthy democracy,” [Finance Minister of South Africa] Gigaba said in his budget speech. “It has taken many years and lots of effort to build the foundation of trust that supports our tax morality. We have seen how quickly that citizens’ trust can be eroded by perceptions of poor public governance.” (Mail & Guardian, 2018)
This exemplifies how exemptions in tax conditions, special economic zones and other beneficiary conditions to general tax legislations has a greater impact on the size and efficiency of the tax collection compared to the isolated performance of the national tax authorities. Indicating that the issues with tax is always political and not only technical (Ananou & Houngbonon, 2015 as cited in Lundstøl, 2018, p. 27).
Securing taxes can be crucial for the future development of developing countries if done and utilized correctly (Lundstøl, 2018, p. 26). Studies by Lustig (2017, p. 28; Lundstøl, 2018, p. 10) observed that many developing countries experienced negative outcomes due to regressive taxes. Tax revenue gathered through consumption taxes like VAT (Value-Added Tax) have revealed negative outcomes towards poverty and inequality alleviation, when there are no public services to counter weigh the effects these taxes have on poorer citizens. In more effective states, public policies can help the weakest by counter-attacking the pressure of certain taxes. This is rarer in weaker states, so the collection of taxes can have more detrimental effects, if the taxation is regressive rather than progressive.
Power and Relations The idea of power has many interpretations, as it was seen in chapter II. But looking at the scandals and issues that has come forth through the cooperation of the Big Four, an analysis of their connection and access to the government are of deep interest. In chapter II we saw Hernes’ view of power, as an unsymmetrical relationship of exchange between two or more actors (Grimen, 2012, p. 109).
38 Analysis and discussion
The research of Hernes highlighted three points which were of interest in the analysis of power relations. The first was connected to how ministries and interest groups have more expertise on their domain, compared to the members of the parliament, who need to have a broader and more general knowledge base (Grimen, 2012, p. 112). This point can be related to the global capacity of the Big Four as the Big Four as they have – as a result of decades of mergers - an enormous size, incomparable to other accounting and auditing firms. They have gained the expertise on tax laws all over the world and also established global professional structures to attract the richest companies and individuals. The three countries in this thesis have all shown some institutional weaknesses, and it seen how the Big Four have affected certain aspects of their tax capacity.
A research paper written by Fjeldstad and Rakner (2020, p. 11) gives clear examples of how the Big Four had an unsymmetrical relationship to the members of parliament, regarding the new VAT legislation and the decision regarding its contents:
“The claim that MPs were being lobbied individually by representatives of the private
sector was confirmed by the private sector. According Edward Furaha of Tanzania
Private Sector Foundation: “Individual members who do not know issues are normally
made to understand issues in the process of lobbying”.” (Fjeldstad & Rakner, 2020, p.
11).
Further, their research states that “according to a senior TRA manager: “MPs listen to too many lobby groups…Allocation of responsibility is problematic… MPs are swayed by the Big Four and TPSF…. Clearly, government should have done their own explanation, as politicians were misled by lobbyists” (Fjeldstad & Rakner, 2020, p. 12).
The second and third point highlighted by Hernes, is that the ministries themselves started functioning as interest groups as a result of them having the expertise as one, and constantly communicating with the other interest groups. These self-driven ministries also started making decisions based on their own interests, rather than what would benefit the majority of the ministries and the society as a whole (Grimen, 2012, p. 112).
39 Analysis and discussion
This was also the case in Tanzania as some of the businesses in certain private sectors, like tourism, started to push the MPs to give exemptions for their businesses. In addition, the minister responsible for the tourist sectors started to lobby the other members of parliament on the premise of getting more exemptions in his own sector. This verifies the point of Hernes, that the ministries themselves take the position as interest groups after interacting with them for so long. On these premises, it can also be included that the Big Four had structured access to parliament members and other civil servants in Tanzania.
In Angola, the issues are more surrounding clear examples of corruption, such as when Isabel dos Santos were running multiple of the state companies, Sonangol as an example. She has been accused by the new government in Angola of stealing waste amounts during her years working in state owned companies. Indicating that she acted in her self-interest, rather than the interest of her country. Isabel were abetted through advice and guidance from some of the Big Four firms, who also helped her establish shell companies abroad to smuggle the money in secrecy.
Seeing these scandals and the amount of corruption and misconduct happening in the shadows of the public eye, the second dimension of power comes to mind. As Bachrach and Baratz (1970, as cited in Lukes, 2005, p. 20-5) argued, it is necessary to have a broader understanding of power in order to fully understand what is behind the curtains. The second dimension highlights the importance of understanding the power behind nondecision-making. Realizing that nondecision-making is also a form of decision-making, by keeping certain issues out of the light, seeing as the Big Four operate in all of the secrecy jurisdictions all over the world and how their involvement in scandals and misconducts are revealed though secret leaks of documents.
The Big Four had multiple possibilities to alert the government of misconduct in Angola and South Africa. Where KPMG helped corrupt government officials make false statements, and as KPMG and PwC never reported the actions of Isabel dos Santos. Considering their possibility to alarm the government of these situation, it can be identified that their lack of action is seen as a choice in itself. A choice of continuing their actions and choosing not to change the misconduct happening.
40 Analysis and discussion
Discussion
Access from the Global Network Hernes’s (Grimen, 2012, p. 109-12) understanding of power is useful for analyzing the relationship between large organizations and institutions. The institutions in a state are created for the purpose of working towards stability and equality for all its citizens. However, what happens if some actors have different access towards these institutions than others? And what happens if the states capacity lacks the strength and regulations necessary to handle the pressure from these groups? One of Hernes’ main issues with the power relations within the Norwegian state, was the segmentation of the different ministries in the government. This segmentation happened as a result of structural access or connection that grew between ministries and private organizations and interest groups. The section above analyzed the relationships and access the Big Four have in Angola, Tanzania and South Africa.
As the case in Tanzania showed a clear case of lobbying. Angola exemplified structural access through Isabel dos Santos’ claim of legitimizing her own wealth through her close connections to the Big Four. In South Africa it can be argued the same as Moyanes, one of the highest civil servants and close friend of president Jacob Zuma, chose KPMG as the state’s advisor. The global name reflects the size and the capacity of the Big Four all over the world. Even though the national office might be small, their capacity to interact with the other legal entities all over the world gives them an advantage other companies do not have. Which brings forth the conclusion that the Big Four have a structural access and stronger relationship due to their expertise in Tanzania, Angola and South Africa which is built up through their global company names. As it must be expressed that few other companies have such a renown from their global brand that the highest state leaders would choose them as their advisors.
One could also argue that any other company could be involved in the misconducts and operations like the Big Four have been. And they are probably right. But the issue at hand is that these are four of the biggest companies in the world with many hundreds of thousands of employees and higher revenues than multiple countries in the world. This form of capacity and size puts them in a different position than other companies, who might be smaller and/or maybe just operating on a national scale. Though these companies are supposedly each their own establishment, they still have international connections and cooperation, that allows them to
41 Analysis and discussion share expertise and access, which other smaller local companies would not be able to. Thereby, it seems that the capacity these companies have, are not structurally and continuously used for the benefit of the good.
As the theory on lobbying stated, most interest groups, especially the largest ones overrepresent the richest clients. And as the TRA employee Frederick Kato (personal communication, January 24, 2020) emphasized: “80/20. In the sense that the [Big Four] get 20% of the customers, but who has 80% of all tax contributions.” These companies are continuing to be revealed in more and more research as well as scandals and leaks. Putting out the question that maybe these companies are too intertwined - and thereby too big - to operate in developing countries? Which is something that regulators in South Africa are looking into.
Looking back at how interest groups operate, the access of the Big Four, can be determined to be defined as a structured access (Roskin et al., 2017, p. 174-9), due to their ability to get access to civil servants and politicians in a way other lobbyist groups would not be able to.
Global Code of Conduct How PwC and most likely the other Big Four, reflect around laws and regulations is clearly depicted in the conversation in Appendix A. Though many of these actions are not illicit, they are highly scrutinized when openly done as their tax schemes are navigating through legal grey zones. This is also the reason why most dealings and operations are held in the shadow, moving from one secrecy jurisdiction to another.
As Roskin et al. (2017, p. 171) argues: “Weak states are characterized by the interpenetration of crime and politics. Not all “interest group” activity is good or peaceful; it depends on the groups’ willingness to operate within the law, which in turn requires strong states”. Therefore, one should start to question the intent and capacity of many groups to operate within the law.
But if the headquarters of the Big Four, conduct in questionable practices, are these practices then also unconsciously or secretly transferred to national entities? We have seen that the Big Four are getting more of their revenues through consulting and tax planning, which are the practices which are often scrutinized. And using PwC as an example: “[...] member firms [of
42 Analysis and discussion
PwC] are bound to abide by certain common policies and to maintain the standards of the PwC network as put forward by PwCIL [International Limited]” (PwC, 2020c). If the headquarter does conduct in malpractices and operate parts of their businesses in the legal grey zones, the possibility that the national entities do the same are then high.
As Marx put it: “Men make their own history, but they do not make it just as they please; they do not make it under circumstances chosen by themselves, but under circumstances directly encountered, given and transmitted from the past.” (Marx as cited in Lukes, 2005, p. 26). The second dimensional view of power does establish the term of mobilization of bias (Schattschneider 1960, p. 71 as cited in Lukes, 2005, p. 20). Stating that any type of organization is the mobilization of bias, indicating that organizations choose what to include and what to leave out of the establishment. Thereby transferring “predominant values, beliefs, rituals, and institutional procedures (“rules of the game”)” (Bachrach & Baratz, 1970, p. 43-4 as cited in Lukes, 2005, p. 20-1).
Considering this to be the case of the structural organization of the Big Four national entities, their context of operations will further play a part in their establishment and code of conducts. Countries with high corruption and weak regulations can further limit the code of conduct the Big Four operate under, which can be used to explain the scandals many of these companies have been found in. Can the issues then lay in the international structure rather than in the national entities themselves? Or maybe it is the combination of contexts and lack of regulations? As less scandals of these types are found in developing countries, though rather more operations in legal grey zones are executed.
The Results and Outcomes What does the capacity and unsymmetrical power relations mean for the development of these three countries? We have already analyzed the institutional weaknesses and how this has affected each of the countries in the regards of the new VAT legislation in Tanzania, and the loss of millions of dollars in both South Africa and Angola.
The amount of risk these companies expose themselves to are dependent on the level of institutional strength as well as political will. Looking at Angola and South Africa, where
43 Analysis and discussion official state leaders and high-ranking employees are partaking in the tax avoidance and corruption. The level of risk will be smaller than when conducting corrupt actions with strong anti-corruption institutions.
The case of Angola can be harder to connect to the issues of lobbying regarding tax legislations and other issues. In Angola, the presidency of José Eduardo dos Santos and his overextended monopoly of power have limited the power of any other state institutions, as all the institutions worked in his favor and of his clients’ interests, rather than Angola’s citizens. But nevertheless, the position of the Big Four, and their cooperation with Isabel Dos Santos and her firms, highlight the companies’ interest and misuse of power as well. The companies worked in the interest of the powerful, neglecting their responsibility to report suspicious behavior, which could and possibly should be viewed as a serious misconduct. The power these companies sit with due to their international reach, give them the capacity and opportunities to bend the laws and take advantage of international loopholes. As the ICIJ findings revealed, PwC consulted some of Isabel Dos Santos’ firms in how to avoid taxes by creating holding companies in tax havens.
Also, the Tanzania-case has shown that: "In a one-party dominant state, holding a majority of the parliamentary seats, we would not expect that a law endorsed by the Government to be altered by lobbying or treatment in the Parliament. " (Fjeldstad & Rakner, 2020, p. 10), which again represents an unsymmetrical power relation.
But even though there are already institutional fragility in these countries, Asongu & Kodila- Tedika (2013, p.15) states that "political interference, rent seeking and lobbying increase the probability of state fragility by mitigating the effectiveness of governance capacity". Which can have an impact on how these countries will continue to develop in the years to come. There is little proof that the Big Four will not lobby the next tax policies in Tanzania, or that they will stop pushing for the agendas of the richest or submit to corrupt actions or misconduct. Although it must be pointed out that lobbying is legal, it is always the unsymmetrical relations which are the problem.
“As students of power and its consequences, our main concern is not whether the
defenders of the status quo use their power consciously, but rather if and how they
44 Chapter VI
exercise it and what effects it has on the political process and other actors within the
system.” (Bachrach & Baratz, 1970, p. 50 as cited in Lukes, 2005, p. 25-6).
As the Big Four are operating more as interest groups, they will continue to work in a manner which might be beneficial for their rich clients and less for the development aspects of each country.
Chapter VI Conclusion
We have seen the capacity and some of the underlaying interests of the Big Four through their involvements in misconducts and lobbying. The analysis of the three countries have enabled this research to see how the Big Four operate as interest groups in different contexts. Each context has provided very distinct settings and highlights of very different operations.
This thesis has put to light the existing capacity of the Big Four as a result of their global network, size and expertise in their field. This capacity enables the Big Four to operate on a scale much larger than any other accounting and auditing company in the world and have given them a world known renown. Being part of a global network of this size enables the national Big Four entities to gain hold of the largest clients as well as gaining structural access to government employees and politicians.
The way these four corporations operate are along the line the interests of the main headquarters, and their code of conduct. But as was acknowledged through the example of PwC, the ethical versus the legal aspect is very unclear, but through the continuity of scandals, it has been shown that the Big Four operate mainly with the interests of their clients in mind. A state’s capacity to regulate the work of the Big Four have been strongly emphasized in this thesis, but all three of the countries have been examples of failure by the government in providing the necessary regulations. The two countries of Angola and South Africa, have been through extreme corruption, leading to weakened institutions. While Tanzania has – based on the current literature – less corruption within their institutions, the country showed lack of regulations,
45 Conclusion especially among the members of the parliament who easily got persuaded by the interest groups.
Highlighting the work of the interest groups as facilitators for the richest clients. The operations of the Big Four have exemplified which detrimental outcomes that can arise in corrupt situations, or where private interests have a stronger position than the states leaders and institutions. Power relations are hard to define, but when private interests manage to put the national interest aside, for their one gain, the capacity of the state must be acknowledged as weakened.
This research has established an underlaying unsymmetrical power relation between the Big Four and the government leaders and employees in the three countries they operate in. Which can provide a theoretical roadmap for further studies on the Big Four. Analyzing how their operations affect the development capacities of other development countries.
The Big Four are four different companies, which are also individual enterprises in many different countries. Which is essential to have in mind when thinking of their operations as well as the scandals they have been involved in. However, their global connection seems to strengthen or enhance their chance of operating in legal grey zones or being reported for malpractice. The data which have been analyzed in this thesis all come from research papers or leaked documents. Fewer reported scandals, do not necessarily mean that there are less scandals, but can indicate that there are more media regulations, or that corruption has infiltrated larger parts of the media and the government. Something which is important to remember when thinking of the Big Four in future discussions.
Seeing that the Big Four have easier access to decision-makers, and that they have a strong capacity to influence the direction of their decisions. Further studies on how the Big Four advise developing countries through tax and development reports are of interest, as there is a lack of information on how concrete these reports affect decision-makers in developing countries.
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Appendix A - A conversation about laws
A conversation between investigative journalist Richard Brooks and Gaenor Bagley, earlier PwC’s head of “corporate purpose” (Brooks, 2018, p. 268-71). The exchange between them has been added as an example of what PwC interpret as malpractice, and what they seem to think is within their right to do. The conversation sounds as followed:
RB: Do you accept this [the Luxembourg operation] was tax avoidance? GB: No, because it was within the law. RB: I’m not accusing you of anything illegal. But I would say it would be tax avoidance if there were no real purpose other than tax. Do you accept that’s the case? GB: No, I don’t accept that. There are different tax rules in different countries and countries compete and have different tax systems and there are beneficial ways of doing it and they [Luxembourg] were very open about that particularly ten years ago. RB: Do you think what PwC was doing in Luxembourg was acceptable? GB: At the time it was acceptable. RB: Well, what’s changed? GB: What’s changed is the public scrutiny. RB: Are you saying that if the public aren’t scrutinizing it, it’s acceptable, but when the public look at it, it’s not acceptable? GB No, I am not saying that. I am saying that now when companies do things they need to think broader than the pure letter of the law and they need to think about the reputational impact and about how they’re going to disclose it and what long-term impact there is going to be. That has changed over time. RB: ‘Are you going to get caught?’ is what you mean. GB: No, I don’t mean that. My own experience is that you tell clients very clearly that this has to have a business purpose. If it is not within the intention of the law, we tell them very clearly that there is a risk that you will get caught, that you will have a nasty investigation and that it will damage your reputation. Faced with that, clients often don’t do it. RB: That’s what you tell them now, but going back to 2008, 2009 . . . or 2010 maybe [the period covered by the LuxLeaks papers]. Is that what you were telling clients then?
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GB: Well, it has evolved over time. I wish we weren’t part of the system that has created the sort of comments and the conversation you are having . . . We need to do better about being open and disclosing and that has changed. RB: Do you regret what PwC Luxembourg did? GB: I don’t think I can say that. RB: [After describing Pearson’s scheme in Luxembourg housed in a room containing twenty shell companies, including the supposed branch of an English one.] Are you saying you have no regrets over that? GB: I have regrets about a tax system that clearly wasn’t working. RB: Well, there was a reason it wasn’t working. It was because you were exploiting it. It would have worked if firms like yours had not decided to wheedle every possible advantage out of it. GB: Our advice is to help companies pay the right amount of tax. You can quibble about the word ‘right’. If the law allows them to do something, it is our duty to tell them, so that’s what we were doing. RB: But you’re not doing it anymore, so why have you stopped? GB: The rules change over time. RB: It would still be possible to do those things through Luxembourg; do you still do that? GB: . . . We still use Luxembourg as a territory sometimes for all sorts of reasons and you would still get a tax ruling. Most of those are done for efficiency reasons. So, you’re right, it has changed. I can’t put my finger on a watershed moment where we’re suddenly doing things differently, but we are thinking about the broader intention of the rules. We are insisting clients put more substance and business purpose around what they’re doing because we know that’s what they should be doing. We know that’s going to be expected. RB: That seems a tacit admission that you weren’t doing it properly, that what you were doing before wasn’t acceptable. GB: Well, the world has changed.
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