Global corporate tax crackdown gives ethical investors a boost

A global tax crackdown on multinationals has the backing of some of the world’s biggest investors, who say the use of low-tax jurisdictions goes against the principles they are committed to.

After years of negotiations over complex deals rolled out by big business, Group of Seven finance ministers meeting in Britain on Friday are expected to declare their support for a global deal to address billions of dollars in lost tax revenue.

This push is supported by some large, often state-run investors looking at tax bills as well as profits.

“It’s not about paying more taxes, it’s about paying the right amount of taxes. We want companies not to engage in practices through transactions and legal structures that contribute to tax evasion, ”said Kiran Aziz, sustainability analyst at KLP in Norway, which manages $ 80 billion. dollars (8,770 billion yen) in pension assets.

A study by the charity ActionAid International estimates that taxing Amazon, Apple, Facebook, Alphabet and Microsoft “fairly” on their profits in 2020 could potentially generate $ 32 billion for the Group of 20 countries, while an academic study of 2018 revealed that the coffers of the world state were losing $ 200 billion. one year.

The aim of the G7 is to set rules on the taxation of cross-border digital activities, as well as a minimum tax rate above the level paid if companies channel their profits through a low-tax country like Ireland with its levy. on companies by 12.5%.

The United States cited a rate of 15%, down from its original proposal of 21%.

Norway’s $ 1.3 trillion sovereign wealth fund, which has set the tone on many environmental, social and corporate governance (ESG) issues, recently launched a public salvo against what its CEO called “planning aggressive tax ”and lack of tax transparency by selling stakes in seven companies, which she did not name.

Many funds have said they are stepping up talks with companies and, if necessary, divesting their shares.

KLP surveyed around 100 companies, including giants from Silicon Valley, joining other Nordic investors.

“We believe that taxes should be paid where real economic value is generated,” Aziz said of profit shifting, whereby companies account for income from sources such as royalties, software or patents not. where they were earned but where tax rates are lower.

While KLP currently sees engagement as more effective than abandoning investments outright, some have already gone this far.

Peter Rutter, head of equities at Royal London Asset Management, £ 150 billion (23.3 trillion yen; $ 213 billion), said he sold or failed to buy shares in some companies on the basis tax arrangements – often at the request of its retired clients.

“Companies doing the right thing through taxation is an issue we are getting more and more from,” said Rutter.

“Know the risk”

Taxation has generally played a secondary role in addressing issues such as climate, pollution and labor rights for investors, while most ESG rating providers do not assess a company’s tax planning. when calculating scores.

Many asset managers benefit from lower tax rates by domiciling funds in countries like Ireland and Luxembourg.

However, MSCI included tax transparency last November and ESG ratings can be affected if, for example, tax bills differ significantly from what a company would have paid in its country of operation, its chief executive said. Laura Nishikawa.

“We’re not saying ‘divest now’ but (urge clients) to be a smart investor. You have to know the risk and that is also a fiduciary duty, ”she added.

Many investors are preparing to investigate tax policies further, regardless of when the rules are tightened.

Dutch asset manager APG is hiring staff and considering purchasing specialist data after its main client, pension fund ABP, establishes tax and investment policy, said Alex Williams, senior governance specialist business.

Like KLP, APG asked companies about their tax policies, Williams said. The fund, which manages nearly 600 billion euros (80.3 trillion yen), recently succeeded in dissuading the new management of an issuing company from using tax havens.

Oceans apart?

Much of the investor tax burden emanates from Europe, particularly ESG-driven Scandinavia, with an apparent cultural difference among US-based shareholders.

US retirement funds CalPERS, CalSTRS and Texas TRS all declined to comment, but an official at a large US asset manager said taxation is “not a problem for investors” and should “be steered. by those who ultimately impose the taxes “.

Tech companies have long defended their tax practices. Google, whose European headquarters are in the Irish capital Dublin, says it pays taxes where the law requires it.

Sudhir Roc-Sennet, US-based ESG manager at Vontobel Asset Management, while supporting measures to narrow tax rate differentials, opposes the demonization of companies for using loopholes legally.

“It does not make sense for future retirees to reduce their fundraising by asking companies to pay more taxes,” Roc-Sennet said.

“Should businesses pay a higher tax rate just because it’s ethical?” I do not think so. As investors, we believe that companies should act in the best interests of their shareholders as long as they remain within the legal framework, ”he added.

While this view remains widespread, accountants KPMG and BDO have warned their clients of the risk to reputation and returns if tax rules are tightened.

One thing investors agree on is that only coordinated action will prevent companies from using less tax jurisdictions.

“Without regulation, it will be difficult to get businesses to move. The turkeys won’t vote for Christmas, ”said Fred Kooij, chief investment officer at Tribe Capital, an impact investment firm.

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