Investors set to gain from tax transparency

This article is part of
Spring Investment Monitor – March 2016

Investors set to gain from tax transparency

Addressing multinational tax avoidance remains a major work in progress. The February 24 announcement by the OECD to open up participation in the base erosion and profit shifting (BEPS) process to “all interested countries and jurisdictions” will likely lead to more, rather than less, focus on reform of global tax structures.

The OECD believes national governments lose $100-240bn (£70-169bn), or 4-10 per cent of global tax revenues every year because of the tax-minimisation used by transnational corporations, while the European Union puts this figure between ¤50-70bn (£39-54bn).

Widespread public concern is unlikely to abate as the backlash over the recent Google back-tax settlement in the UK demonstrates.

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Even in far-away Australia, global brand names in resources, media, technology and energy face ongoing scrutiny over tax practices.

Aggressive tax avoidance practices can make a company vulnerable to social accusations of greed and selfishness, damaging its reputation, eroding trust and potentially shareholder value.

To try to redress the balance, at the end of January the European Commission (EC) announced further plans to combat tax avoidance, alongside investigations into the tax deals of groups such as Starbucks, McDonald’s and Fiat.

The EC noted that major corporations with businesses spanning across continents will now be obliged to report profits on a country-by-country reporting (CBCR) basis to stop them moving money across borders to save on tax.

This directive, though, will not be adopted without the unanimous consent of all member states. It remains to be seen whether this will be achievable.

The US is also taking action to clamp down on tax avoidance, particularly around the issue of (corporate) inversions, although wider measures face strong political headwinds.

For institutional and retail investors, greater transparency and disclosure of tax practices would allow investors to make better informed decisions about risk, value creation and their level of exposure to particular companies.

As Katharine Teague, senior private sector adviser at Christian Aid, noted in a 2013 report authored by Sustainalytics and commissioned by Arisaig Partners, called It’s Time to Call for More Responsibility: “An absence of transparency will be seen as a warning sign to investors and consumers that a company has something to hide.”

Last year, we at the Principles for Responsible Investment initiative published our Engagement Guidance on Corporate and Tax Responsibility document, which outlined how investors can engage with companies about their tax planning. Investors increasingly see tax as a material risk and many are concerned that aggressive tax planning may cross the line between avoidance and evasion.

The level of transparency around CBCR has also been a long-standing sticking point in the OECD BEPS process.

While there is international consensus that modernisation is needed, some argue that any CBCR data should only be shared in limited form with regulators and must remain secret, withheld from institutional investors and shareholders and especially from the public.