Opening the black box of Big 4 tax practices

Opening the black box of Big 4 tax practices

With ESSEC Knowledge Editor-in-chief

Large multinational corporations will have Big 4 affiliated companies manage their taxes, a process that has come under no small amount of scrutiny. In the shadows, however, is how these firms manage their own taxes, despite being powerful economic entities themselves. Anastasios Elemes, a professor of Accounting and Management Control at ESSEC Business School, and Bradley Blaylock (Price College of Business, University of Oklahoma) and Crawford Spence (King’s Business School, King’s College London) opened the black box of Big 4 tax planning practices in their latest research by analyzing the activities of hundreds of affiliate firms. 

Corporate tax practices in the business world and the Big 4

When we think of corporate tax practices, we’re more likely to think of large multinational corporations that are advised by the Big 4 and their affiliates, rather than the tax practices of the Big 4 network themselves. Indeed, research in this realm has focused on the tax planning activities of multinational corporations, efforts to tackle tax avoidance, or how tax professionals advise clients. This is the first study to look specifically at the practices of Big 4 affiliated firms. 

“Affiliated firms” are those that belong to a larger network, like the KPMG network and held to the same quality standards, but owned and managed by their local partner. Yet given that they are powerful corporations in their own right, we need to understand how they operate. Their opaqueness has led to criticism in the past, especially given that their services are all about transparency and accountability. However, this lack of clarity is in their best interest, as regulators may scrutinize them more heavily if they see the firms as shifting income to optimize their taxes. This could lead to increased regulation or strained relationships, bearing political and financial consequences. That being said, these firms nonetheless have ample opportunities for income shifting, such as a widespread geographical presence, including locations in tax havens, as well as the in-house knowledge of “best practices” for tax planning, as they advise their own clients on optimizing taxes. 

Cracking open the black box: the key findings

To shed light on until-now shadowy tax planning practices, the researchers retrieved for the first time the financial statements of Big 4 network firms and examined the activities of 402 Big 4 affiliated firms from 30 European countries between 2007 and 2016, using the Amadeus database, which provides information on European private companies gathered from national data providers. 

The first set of analyses uncovered evidence of income shifting consistent with efforts to optimize taxes among Big 4 local affiliates. Here are some key findings:

  • Profitable affiliates incorporated in high tax rate jurisdictions engage in outbound income shifting, whereas unprofitable affiliates often serve as inbound income shifting destinations 

  • Income shifting activities were more likely in countries with favourable tax conditions and weak tax enforcement 

  • Income shifting among Deloitte and PwC affiliates increased after the incorporation of their respective regional coordinating entities in 2012

  • Big 4 network firms often create self-serving outsourcing centers. The centers are owned by the local affiliates to which they offer services and are strategically located in jurisdictions that offer favourable tax conditions for the type of income that flows into them. Income flows into the self-serving center and then returns back to the local affiliate in the form of dividend payments which enjoy preferential tax treatment

  • These activities also impacted how debt and intellectual property were distributed among the networks 

On the flipside, interview data suggests that cross-border activities are motivated by strategic decisions rather than by tax optimization objectives. This leaves room for questions on disentangling the “strategic investment” and “income shifting” motivations, particularly for cross-border activities, and for building a better understanding of how partner compensation links to profit shifting. That being said, the findings from this study indicate that income shifting is a prevalent practice that is not independent of networks’ strategic decisions.

What does it mean?

This research is the first to study the tax planning activities of Big 4 affiliate firms themselves, rather than studying the type of firm that Big 4 tends to assist. While in no way designed to capture tax evasion, the results do suggest that income shifting to optimize taxes within legal limits is a widespread practice, and that Big 4 affiliates are not quite so independent from their network as some may have posited. Taken together, these findings demonstrate that Big 4 affiliate firms are no stranger to income shifting, and that this is especially common when regulations are less strict.

The article is available here.


Elemes, A., Blaylock, B., & Spence, C. (2021). Tax-motivated profit shifting in big 4 networks: Evidence from Europe. Accounting, Organizations and Society, doi: 10.1016/j.aos.2021.101267

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