beps offshore investments ireland oecd uk USA inversion tax planning
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/
It is no secret that Apple, Starbucks and Amazon are among several high-profile companies that have faced political and public pressure over their tax affairs recently.
What is less well known is whether the institutional investors that back these companies share widespread consumer concern about corporate tax practices.
High quality global journalism requires investment. Please share this article with others using the link below, do not cut & paste the article. See our Ts&Cs and Copyright Policy for more detail. Email ftsales.support@ft.com to buy additional rights. http://www.ft.com/cms/s/0/
There are signs that big investors are becoming more sensitive to the risks of aggressive tax planning at the companies they invest in. Although avoidance can fuel short-term profitability, some investors – but perhaps not enough – fear this advantage may not be sustainable and could lead to reputational and commercial risks with customers, governments and regulators.
Leon Kamhi, executive director at Hermes Executive Ownership Services, which advises investors including the BT Pension scheme, the UK’s largest corporate pension fund, on their investments, says: “Our stance is quite straightforward – we want companies to pay an appropriate level of tax.
“The normal person on the street sees [excessive tax avoidance] as an issue and there is an increasing consumer backlash. The issue is not only one of business risk but also of the [BT] fund’s reputation, and we will probably increase the level of engagement on this issue going forward.”
A fund manager at a large UK fund house, who asked to remain anonymous, admits “low tax per se is not a positive reason to invest, although it might have helped [large companies that have avoided paying tax] establish dominant positions in the first place”.
The fund manager did not want to be named as these issues are “sensitive for our invested companies as well as our clients”.
But he adds: “We are taking [corporate tax practices] very seriously, talking to our big holdings such as Amazon on the subject. We would put reputation with customers and relations with governments high up the agenda for the global internet giants, not least as their competitive positions are otherwise increasingly powerful.”
Scrutiny on corporate tax affairs intensified last month following the move by President Obama’s administration to clamp down on companies that attempt to slash their tax bills by buying an overseas competitor in a lower tax domicile and shifting their headquarters to that jurisdiction.
Burger King’s $11.4bn acquisition of Canadian coffee chain Tim Hortons in August is one of the latest examples of this controversial manoeuvre, known as a tax inversion. The US crackdown on such deals has halted plans by other large corporates to follow suit, notably leading to the collapse of pharmaceutical company AbbVie’s $53bn bid to purchase UK drugmaker Shire.
Alex van der Velden, partner at Dutch investment company Ownership Capital, says: “Aggressive tax planning is an issue investors are increasingly aware of. While it is legal and routine for companies to ensure they only pay the taxes they are required by law to pay, the public ire that has been created by businesses found aggressively pursuing loopholes has been significant and led to serious reputational issues.”
The collapse of the AbbVie/Shire deal also demonstrated that tax changes do not just pose a reputational risk to companies and their investors – it can damage valuations. Shire’s share price dropped 11 per cent on the day the deal fell through, catching hedge funds with large exposure to the company, such as Paulson & Co, off guard.
Stephen Jones, chief investment officer of Kames Capital, the Edinburgh-based fund house, says: “We do not single out tax activity as the sole driver of an investment decision, but it can and does influence us alongside other things. Sustainability of any business model is key, and volatile approaches to tax management and unpredictable tax rates detracts from this.
“We expect companies to carefully manage their tax position like any other cost. However, a very low tax rate can be a red flag suggesting aggressive policies that may have reputational consequences.”
International companies used to benign tax regimes that bolster profits have experienced a number of unpleasant surprises this year.
Ireland, which has one of the lowest corporate tax rates in Europe, decided to close a contentious tax loophole known as the “double Irish” last month. The loophole allowed large technology and pharmaceutical companies including Google, Facebook, and Pfizer to route billions of dollars of profits to tax havens by exploiting different definitions of corporate residency in Ireland and the US.
The Organisation for Economic Co-operation and Development has begun a drive, known as the base erosion and profit shifting (BEPS) action plan, to end the aggressive tax avoidance by companies that it believes detracts from their home economies. Last week an OECD agreement was signed by 51 countries to share information on bank accounts, company ownership and legal structures such as trusts.
Catherine Howarth, chief executive of ShareAction, a UK charity that campaigns for responsible investment, says: “Investors have finally woken up to the risk of global and national rule changes on corporate tax that will punish firms who employ aggressive avoidance strategies. This stuff can play havoc with share prices as we have seen in recent months with pharmaceutical companies on both sides of the Atlantic.”
Ms Howarth adds that many investors still have weak visibility on the scale of corporate tax risk given the low proportion of listed companies that disclose robust tax policies. Kames’ Mr Jones agrees: “It is very hard, if not impossible, for investors to have a clear line of sight as to how a company’s tax policies operate.”
Nonetheless, shareholder pressure for improved disclosure on tax risk is growing, with some of the biggest investors around the world now pushing for more information, despite the majority remaining silent. Calpers, the largest US pension fund, and Towers Watson, the consultancy that counts some of the world’s biggest institutional investors among its clients, declined to comment on the issue. Fidelity Worldwide Investment, Vanguard, Candriam, Aberdeen Asset Management, Invesco and F&C also declined to comment.
Mr Kamhi says Hermes has begun raising the issue of tax practices with companies and is prepared to raise resolutions at annual meetings if a company’s tax affairs do not improve.
Nordea Investment Management, the biggest Nordic fund house, is willing to go one step further. Sasja Beslik, Nordea’s head of corporate governance, says he will raise tax-related concerns with a company’s board, and if that fails he will file a motion at an annual general meeting. If that still proves ineffective, the company in question may be excluded from Nordea’s investment universe.
Peter Montagnon, associate director at the Institute of Business Ethics, says: “[Investors] have an interest in companies not paying tax because that increases the money available to the company and ultimately to them as shareholders. But they also recognise that companies that go too far can damage their franchise in ways that also damage their investments. There are no hard and fast rules, but tax comes up more frequently when institutions talk to companies.”
