Harriet Parker

Corporate tax responsibility dilemma

Harriet Parker

This article was first published by Alliance Trust Investments on 4 February 2016.

Aggressive tax minimisation strategies, or tax avoidance, is the process of getting around taxation law without actually breaking it. Over the past year, we have been working with the Principles for Responsible Investment and ten global investors, exploring the issue of corporate tax responsibility.

Over the past year, we have been working with the PRI (Principles for Responsible Investment) and ten global investors, exploring the issue of corporate tax responsibility. We have researched and engaged with companies on the issue of aggressive tax minimisation and assessed our equity portfolios for tax-related risks. We realise that tax is not a cost to be minimised and that it can create a risk to earnings, impacting both brand and reputation, and can have wider macroeconomic impacts.

Aggressive tax minimisation strategies, or tax avoidance, is the process of getting around taxation law without actually breaking it – this can be used as part of a company’s ‘tax minimisation’ strategy. The question is; if companies only have an obligation to pay as much tax as they legally required to, should they not be able to make use of the tax avoidance schemes that currently exist?

As an investor, we not only have a duty to understand the likely impact of tightening global corporate tax regulations on company risk and returns, but also to understand any additional risks associated with increasing public scrutiny of corporate tax minimisation and avoidance. We believe companies that are aligned with the needs of society will be less exposed to negative impacts from consumer pressure and increased costs associated with fines for poor practice.

We have analysed the companies within our portfolios, to identify potential tax-related risks. Due to the general lack of transparency on tax, we have used an estimate of a company’s ‘tax rate gap’; the difference between the reported effective tax rate and the weighted average of statutory rates, based on a company’s geographic sales mix. A large gap could signal that the company is using aggressive tax planning, or it could be the result of using of certain incentives, such as tax credits. Many companies do not report sales figures in each country however, country-by-country reporting would allow investors to form a better view.
 
We are in the process of engaging with companies to better understand company-specific tax-related risks, how these risks are being addressed and how prepared companies are for upcoming changes in tax regulation. We encourage companies to be transparent on this issue by identifying and reporting on tax related risks and, also to explain how its tax strategy relates to the company’s wider sustainability or corporate responsibility strategy.

As part of our work with PRI, we have assisted in developing an engagement guidance document on corporate tax responsibility, setting out the case for why and how to engage with investee companies.

Source

Principles for Responsible Investment: Why and how to engage with your investee companies on corporate tax responsibility.

 

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Thursday, February 4, 2016, 12:00 PM