The power of consulting : the Big Four in Angola, Tanzania and South Africa

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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

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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.

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

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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.

Signature ...

Date………..

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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!

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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.

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Figures and Tables

Figure 1 - Model for power relations ... 11

Table 1 - Revenue generated by the Big Four ... 22

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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

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“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).

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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

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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.

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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?”.

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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

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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

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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

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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.

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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

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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

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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

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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).

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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.

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Chapter III

Chapter III Methodology

“[…] Empirical research advances only when accompanied by theory and logical

inquiry, and not when only treated as a mechanistic data collection endeavor”³

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).

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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.

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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.

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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

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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.

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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).

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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).

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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

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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).

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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)

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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.

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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.

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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)

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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

The power of consulting : the Big Four in Angola, Tanzania and South Africa