LONDON – A global tax crackdown on multinational corporations is backed by some of the largest investors in the world, who say that using low-tax countries is against the principles to which they are pledged.
After years of negotiating complex deals between large corporations, Treasury Ministers of the Group of Seven, which will meet in the UK on Friday, are expected to declare their support for a global deal to resolve billions in tax revenues.
This push is backed by a few large investors, often government-run, who review both tax bills and profits.
“It’s not about paying more tax, it’s about paying the right amount of tax. 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, Norway, which manages $ 80 billion (8.77 trillion yen) in pension assets.
A study by the charity ActionAid International estimates that a “fair” taxation of their profits in 2020 from Amazon, Apple, Facebook, Alphabet and Microsoft could potentially raise $ 32 billion for the group of 20 countries, according to an academic study 2018 revealed that the global treasury is losing $ 200 billion a year.
The aim of the G7 is to establish rules for taxing cross-border digital activities, as well as a minimum tax rate above the level paid when companies transfer profits through a low-tax country like Ireland with a corporate tax of 12.5%.
The United States has proposed a rate of 15%, up from its original proposal of 21%.
Norway’s $ 1.3 trillion sovereign wealth fund, which has set the pace on many environmental, social and corporate governance (ESG) issues, recently had a public volley of “aggressive tax planning” and lack of tax transparency through sales fired from holdings in seven companies that were not named.
Many funds have announced that they will escalate discussions with companies and, if necessary, sell shares.
KLP surveyed around 100 companies, including giants from Silicon Valley, who have teamed up with other Nordic investors.
“We believe that taxes should be paid where there is real economic value,” said Aziz of what is known as profit shifting, in which companies do not book income from sources such as license fees, software or patents where they were generated, but where they were the tax rates are lower.
While KLP sees engagement as more effective for now than dumping investments straight away, some have already gone that far.
Peter Rutter, head of equities at Royal London Asset Management valued at £ 150 billion (yen 23.3 trillion; US $ 213 billion), said he had sold or skipped stocks of some companies due to tax regulations – often at the behest of his retirees .
“We are increasingly facing companies that do the right thing for tax purposes,” said Rutter.
“Know the risk”
When it comes to issues like climate, pollution and labor rights, taxes tend to play second fiddle for investors, while most ESG rating providers do not evaluate a company’s tax planning when calculating the scores.
Many asset managers benefit from lower tax rates by locating funds in countries such as Ireland and Luxembourg.
However, MSCI added tax transparency last November, and ESG ratings can be impacted if, for example, tax bills differ significantly from what a company would have paid in its country of operation, its managing director Laura Nishikawa said.
“We don’t say ‘sell now’, but (ask our customers) to be an informed investor. You need to know the risk and that is also a fiduciary duty, ”she added.
Many investors are preparing to examine tax policy more thoroughly, regardless of when the regulations are tightened.
Dutch asset manager APG is hiring and planning to buy specialty data after its main client, ABP pension fund, introduces a tax and investment policy, said senior corporate governance specialist Alex Williams.
Like KLP, APG asked companies about their tax policies, Williams said. The fund, which manages nearly 600 billion euros (80.3 trillion yen), recently managed to dissuade the new management of an investment company from taking advantage of tax havens.
Most of the tax pressure from investors has come from Europe, particularly Scandinavia with an ESG focus, with an obvious cultural difference between US-based shareholders.
US annuity funds CalPERS, CalSTRS and Texas TRS declined to comment, but an official from a major US wealth manager said taxes were “not an investor issue” and should be “run by those who ultimately collect taxes.”
Tech companies have long defended their tax practices. Google, which has its European headquarters in the Irish capital, Dublin, says it pays taxes where required by law.
Sudhir Roc-Sennet, US head of ESG at Vontobel Asset Management, advocates closing tax gaps, but advocates demonizing companies for the legal use of loopholes.
“It doesn’t make sense for retirees of the future to cut their savings pot by asking companies to pay more taxes,” said Roc-Sennet.
“Should companies 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 stay within the legal framework, ”he added
Although this view is still widespread, auditors KPMG and BDO warn clients of the risk to reputation and returns if tax regulations are tightened.
Investors agree that only coordinated measures can prevent companies from using lower tax jurisdictions.
“Without regulation, it will be difficult to get companies to move. Turkeys won’t vote for Christmas, ”said Fred Kooij, chief investment officer at Tribe Capital, a boutique investment firm.
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