- Norwegian asset owners have been leaders in the area of tax transparency, while the UK’s Pensions & Investment Research Consultants launched an initiative on tax in May.
- Technology and pharmaceutical companies are laggards in the area of tax transparency, with three tech firms facing shareholder proposals this year.
- Amundi stands out as a fund manager with a strong taxation policy.
Tax is a fabulously contentious issue. Very few people like paying it and are usually split on the civic imperative for doing so.
Former US president Donald Trump famously called tax avoidance “smart”, with half of Americans agreeing with him in 2016. A quarter of the UK population consider it acceptable to legally avoid tax, according to a July 2022 YouGov poll.
Even the landmark OECD agreement of 136 countries aiming to force multinationals to pay at least 15% tax wherever they operate has hit upon stony ground and will be delayed until 2024 after opposition from US Republicans and some European Union members.
The financial sector also has a dubious relationship with tax affairs. To take one example, in 2018 Goldman Sachs was lumped with a £79m bill in a high-profile UK tax avoidance case involving commodity trader Cargill. Global finance is, of course, intrinsically linked with controversial tax havens.
Tax avoidance as a sustainability issue
And while legal tax avoidance – the act of reducing your liability – is still seen as good business practice, a growing minority of asset owners and managers see taxation as an important driver of sustainable and inclusive growth.
Following the rising interest from investors on the issue of corporate tax avoidance and tax transparency led by the Principles for Responsible Investment (PRI) five years ago, investors are beginning to start asking awkward questions about such practices. Pensions & Investment Research Consultants (PIRC), a UK-based investment consultancy, has identified 33 assets owners and managers actively engaging on tax, including the likes of British asset manager Abdrn, the New York City Comptroller and Danish retirement fund for academics AkademikerPension.
The Government Pension Fund of Norway ($1.2trn) is a good case in point. It has had an investment policy on tax since 2014 and is more than happy to act on it. In 2021, its asset manager, Norges Bank Investment Management (NBIM), divested from four companies due to their “very poor or non-existent” reporting on tax risks.
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The companies, said NBIM, also presented an elevated risk of taxes not being paid where the economic value was created. It has divested from 11 companies in total for tax reasons.
Fellow Norwegian asset owner, $80bn pension fund KLP, takes a similar stance on tax to NBIM. It states that companies should have a policy on the responsible payment of tax, including taxes being paid where the actual economic value is generated.
Speaking to Capital Monitor, Kiran Aziz, its head of responsible investments, says KLP invests pension money, a lot of the time on behalf of municipalities. Norway is also a place where the payment of tax is a core principle and grounded in the structure of the system. “Given companies use the infrastructure in the society they should pay their contribution to that,” Aziz explains.
KLP expects companies to pay taxes where the economic value is generated and frowns upon the use of tax structures linked to tax evasion. The fund says it encourages companies to publicly disclose financial key figures, including tax paid, for all related companies using a country-by-country format. KLP started a process of more systematic screening three to four years ago on the companies and has engaged with about 100 companies on tax transparency.
Aziz says the process starts with communicating its expectation on tax to the board and management of its portfolio companies. It has also mapped out the biggest sectors at risk in tax, such as technology and pharma.
Going beyond the law
Aziz, who is a former tax lawyer, says that, especially for these types of companies, the tax affairs are “quite confused”.
“There are a lot of grey zones and the company may say we are just tax planning, which is quite fair – they are compliant with law – but sometimes you have to go beyond the law on tax as it isn’t perfect.”
She adds that for the business models of large technology companies or pharmaceutical companies the tax regulations were made around 60 years ago and have not been modernised.
“A lot of governments are looking into improving their regulation, but at the same time I think investors can play a crucial role,” Aziz says. “It doesn’t make sense that as a company, if you are working towards ESG and embedding sustainability, that you don’t have a tax policy in place and it’s not an interest of the board.”
She says companies need to report on their tax affairs, calling it one of the biggest obstacles to understanding whether a company has tax havens, for example.
The engagement with companies on tax needs to be consistent and it can take multiple years to see results, she adds, but more companies are starting to publish a tax policy.
Companies having a clearly defined tax policy is one tenet of PIRC. In May, it published its recommendations for companies on their tax affairs and outlined how it thinks asset owners and managers should vote on them.
Like KLP, tax avoidance is a sustainability issue for PIRC, the pension fund clients of which typically have a responsible investor focus. “Taxes have been identified as a key driver of inequality,” says Katie Hepworth, responsible tax lead at PIRC. “It is a core issue that we engage on because we believe the growing inequality really undermines investment growth over the longer term.”
PIRC launched an initiative in December 2021 on responsible taxation in partnership with non-governmental organisation the Centre for International Corporate Tax Accountability and Research to push companies to align their tax approach to their overall business and sustainability strategies, and not just seek to optimise the amount of taxes paid.
PIRC’s tax expectation document sets out how it expects companies to act. It says a company will comply with the spirit and letter of the law and commit to paying taxes where profits are earned and should publish country-by-country reporting of tax and financial information, in line with international standards, such as the GRI Tax Standard. The board should also take into account how remuneration may influence management’s approach to tax planning.
Alongside this, PIRC is engaging with around 30 companies on tax. Although PIRC has not publicly detailed all of its engagements, it says it has escalated to shareholder proposals conversations with Amazon, Microsoft and Cisco, asking all three to produce tax transparency reports aligned with the Global Reporting Initiative tax standard.
OECD alignment on tax
Despite the political rumblings in the US and the EU, Hayworth is hopeful the OECD landmark tax agreement will prove groundbreaking.
The deal, inked in 2021, requires multinational companies with annual revenues of more than €750m to pay a “top-up tax” on profits in any jurisdiction where they operate to make sure they pay a 15% tax rate wherever they make sales in a bid to cut out profit shifting. It is estimated these tax practices can reduce tax revenues and cost governments globally between $100bn and $600bn annually.
There is a long way to go, however. A review of the top ten asset managers by PIRC has found only one, Amundi, had a public policy or voting guidelines that substantively addressed tax.
However, Fidelity’s voting policies state it will not support financial statements where it has “concerns about the transparency of key issues, including material weaknesses and fairness in the company’s tax policies”, and Allianz did participate in environmental non-profit The B Team’s development of tax reporting standards.
Still, engaging in tax affairs is both complicated, sensitive and politically charged. And while more investors are looking to engage on a subject that has a huge impact on social equality (not to mention climate and the environment), building technical expertise to handle it well will prove crucial. Something KLP’s Aziz understands very well.
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