Skip to main content
MENU
Subscribe
  • Sign Up Free
  • LOGIN
  • Subscribe
  • Topics
    • Alternatives
    • Consultants
    • Coronavirus
    • Courts
    • Defined Contribution
    • ESG
    • ETFs
    • Face to Face
    • Hedge Funds
    • Industry Voices
    • Investing
    • Money Management
    • Opinion
    • Partner Content
    • Pension Funds
    • Private Equity
    • Real Estate
    • Russia-Ukraine War
    • SECURE 2.0
    • Special Reports
    • White Papers
  • Rankings & Awards
    • 1,000 Largest Retirement Plans
    • Top-Performing Managers
    • Largest Money Managers
    • DC Money Managers
    • DC Record Keepers
    • Largest Hedge Fund Managers
    • World's Largest Retirement Funds
    • Best Places to Work in Money Management
    • Excellence & Innovation Awards
    • WPS Innovation Awards
    • Eddy Awards
  • ETFs
    • Latest ETF News
    • Fund Screener
    • Education Center
    • Equities
    • Fixed Income
    • Commodities
    • Actively Managed
    • Alternatives
    • ESG Rated
  • ESG
    • Latest ESG News
    • The Institutional Investor’s Guide to ESG Investing
    • ESG Sustainability - Gaining Momentum
    • Climate Change: The Inescapable Opportunity
    • Impact Investing
    • 2022 ESG Investing Conference
    • ESG Rated ETFs
  • Defined Contribution
    • Latest DC News
    • DC Money Manager Rankings
    • DC Record Keeper Rankings
    • Innovations in DC
    • Trends in DC: Focus on Retirement Income
    • 2022 Defined Contribution East Conference
    • 2022 DC Investment Lineup Conference
  • Searches & Hires
    • Latest Searches & Hires News
    • Searches & Hires Database
    • RFPs
  • Performance Data
    • P&I Research Center
    • Earnings Tracker
    • Endowment Returns Tracker
    • Corporate Pension Contribution Tracker
    • Pension Fund Returns Tracker
    • Pension Risk Transfer Database
    • Future of Investments Research Series
    • Charts & Infographics
    • Polls
  • Careers
  • Events
    • View All Conferences
    • View All Webinars
    • 2023 Defined Contribution East
    • 2023 ESG Investing
Breadcrumb
  1. Home
  2. GOVERNANCE
August 12, 2014 01:00 AM

Investors should address aggressive corporate tax planning

Fiona Reynolds
  • Tweet
  • Share
  • Share
  • Email
  • More
    Reprints Print
    Fiona Reynolds is managing director of PRI Association, London, which oversees the United Nations-supported principles for responsible investment, a voluntary set of six principles for the investment management companies incorporating environmental, social and governance factors into investment decision-making.

    Sustainable, well-run businesses should pay a fair level of tax, and avoid the reputational, legal and financial risks posed by aggressive tax planning.

    From the shareholder's point of view, every dollar paid in tax is one dollar less available to the business, or to pay dividends. Ostensibly, company management is pursuing its fiduciary duty in minimizing — within the law — their company's tax burden.

    But a growing number of investors are becoming concerned about the risks posed by a too-dogged pursuit of tax efficiency.

    So what should investors do? These issues are incredibly complex. It can be difficult to differentiate between legitimate tax planning and aggressive practice.

    When Benjamin Franklin wrote that nothing in life is certain except death and taxes, it turns out he was only half right — at least as far as a growing number of multinational corporations are concerned. An army of accountants and tax lawyers now exists to help international corporations shift profits around the world, find the most advantageous jurisdictions from a taxation point of view, and put in place corporate and financial structures to ensure as low an overall rate of tax as possible.

    And the results can be dramatic.

    Take a look at base erosion and profit shifting — which the Organization for Economic Co-Operation and Development defines as “tax planning strategies that exploit gaps and mismatches in tax rules.” It can see some multinationals pay as little as 5% in corporate taxes when smaller businesses, which lack their ability to optimize their tax position across a number of jurisdictions, pay up to 30%, according to the OECD.

    To be clear, such arrangements are perfectly legal. Many governments around the world compete to make their jurisdictions as attractive as possible to international business — and corporate tax policy is a crucial battleground. This competition offers numerous opportunities for multinationals to reduce their tax burden.

    At the United Nations-supported Principles of Responsible Investment, we are analyzing the results of a new comprehensive reporting exercise. With 814 investor signatories reporting in 2014, these results are a global barometer for what investors are doing to create sustainable capital markets. These investors, who collectively manage more than $40 trillion of assets, have committed to consider environmental, social and governance criteria in their investment decisions, and to report on how they do so.

    This first-of-its-kind snapshot shows that tax is high on many of our signatories' agendas, with no fewer than 100 of them including a reference to taxation in their responses.

    What are the concerns among investors? The first is that aggressive tax planning crosses the line between avoidance and evasion. This is of particular concern in emerging market jurisdictions, where tax enforcement might be weak, offering temptation for companies to avoid paying their fair share.

    However, even unambiguous compliance with the law does not necessarily eliminate risk. In a respected survey of attitudes of the British public to corporate behavior, carried out by the Institute of Business Ethics, tax avoidance last year shot to the top of the list of public concerns. Companies that are perceived as avoiding tax too aggressively risk losing their license to operate — particularly those with consumer brands that rely on public goodwill. The Starbucks coffee chain, for example, reported last October its first drop in U.K. sales after 16 years of strong growth, during a period when it faced a consumer boycott and parliamentary criticism over its tax affairs. Activist groups are already bringing pressure to bear on companies they believe aren't playing by the rules — and this pressure is only likely to increase.

    The risk also exists of regulatory backlash — either individually or collectively. Heavy-machinery maker Caterpillar Inc. is one of the latest U.S. companies to come under scrutiny from U.S. senators, who have accused it of moving $8 billion in profits to Switzerland from the U.S. to take advantage of a low corporate tax rate the company had negotiated with the Swiss government. No company wants to find itself the subject of intense scrutiny by tax authorities or legislators.

    And surely politicians' patience is likely to be limited in the face of deals such as Medtronic Inc.'s proposed $43 billion acquisition of Covidien Ltd., which will allow the U.S. medical-device maker to shift its tax base to Ireland.

    In June, the European Union announced a probe into whether three EU countries — Ireland, the Netherlands and Luxembourg — were offering improper tax breaks to Apple Inc., Starbucks Corp., and the financial arm of Italian carmaker Fiat SpA.

    Both the OECD and the G-20 have base erosion and profit shifting firmly on their agenda. If policymakers find themselves compelled to reform corporate tax codes, it is likely that those reforms would be severe. For example, measures that are to the benefit of international companies — such as rules to prevent double taxation of corporate earnings — could be revoked.

    Many issues that companies have faced over tax do not lead directly to monetary losses: corporate lawyers and tax advisers tend to ensure their clients stay on the right side of the law. But they are not without cost, in that they serve to distract management from more important issues.

    Investors are starting to focus on tax strategy as a material risk; many PRI signatories are engaging with companies on the issue. Engagement on tax is at an early stage — in most cases, investors are simply seeking to better understand management's approach to tax planning and its impact on other business decisions.

    But this dialogue is vital. It will serve no one's interests if the debate is conducted with megaphones and rancor, rather than with a mutual understanding of the issues at stake.

    Fiona Reynolds is managing director of PRI Association, London, which oversees the United Nations-supported principles for responsible investment, a voluntary set of six principles for the investment management companies incorporating environmental, social and governance factors into investment decision-making.

    Related Articles
    CPPIB, FSBA to oppose Apple's executive pay package, support proxy access
    New Labor guidance clears way for fiduciaries to incorporate ESG
    Recommended for You
    DiNapoli_Thomas_Jan2023_i.jpg
    New York State Common asks 7 companies to disclose political spending
    ONLINE_180129955_AR_0_WARRKZGXMCND.jpg
    SSGA expands proxy-voting power to investors in certain institutional funds
    Vanguard_Logo_1550_i.jpg
    Vanguard to explore expanding proxy-voting power for retail investors
    The Institutional Investor's Guide to ESG Investing
    Sponsored Content: The Institutional Investor's Guide to ESG Investing

    Reader Poll

    January 25, 2023
    SEE MORE POLLS >
    Sponsored
    White Papers
    Show Me the Income: Discovering plan sponsor and participant preferences for cr…
    The Future of Infrastructure: Building a Better Tomorrow
    Fulcrum Issues: Equity Returns and Inflation — Choose Your Own Adventure
    What Matters Most in Considering a Private Debt Strategy
    Why pursue direct lending in the core middle market?
    Research for Institutional Money Management
    View More
    Sponsored Content
    Partner Content
    The Industrialization of ESG Investment
    For institutional investors, ETFs can make meeting liquidity needs easier
    Gold: the most effective commodity investment
    2021 Investment Outlook | Investing Beyond the Pandemic: A Reset for Portfolios
    Ten ways retirement plan professionals add value to plan sponsors
    Gold: an efficient hedge
    View More
    E-MAIL NEWSLETTERS

    Sign up and get the best of News delivered straight to your email inbox, free of charge. Choose your news – we will deliver.

    Subscribe Today
    December 12, 2022 page one

    Get access to the news, research and analysis of events affecting the retirement and institutional money management businesses from a worldwide network of reporters and editors.

    Subscribe
    Connect With Us
    • RSS
    • Twitter
    • Facebook
    • LinkedIn

    Our Mission

    To consistently deliver news, research and analysis to the executives who manage the flow of funds in the institutional investment market.

    About Us

    Main Office
    685 Third Avenue
    Tenth Floor
    New York, NY 10017-4036

    Chicago Office
    130 E. Randolph St.
    Suite 3200
    Chicago, IL 60601

    Contact Us

    Careers at Crain

    About Pensions & Investments

     

    Advertising
    • Media Kit
    • P&I Content Solutions
    • P&I Careers | Post a Job
    • Reprints & Permissions
    Resources
    • Subscribe
    • Newsletters
    • FAQ
    • P&I Research Center
    • Site map
    • Staff Directory
    Legal
    • Privacy Policy
    • Terms and Conditions
    • Privacy Request
    Pensions & Investments
    Copyright © 1996-2023. Crain Communications, Inc. All Rights Reserved.
    • Topics
      • Alternatives
      • Consultants
      • Coronavirus
      • Courts
      • Defined Contribution
      • ESG
      • ETFs
      • Face to Face
      • Hedge Funds
      • Industry Voices
      • Investing
      • Money Management
      • Opinion
      • Partner Content
      • Pension Funds
      • Private Equity
      • Real Estate
      • Russia-Ukraine War
      • SECURE 2.0
      • Special Reports
      • White Papers
    • Rankings & Awards
      • 1,000 Largest Retirement Plans
      • Top-Performing Managers
      • Largest Money Managers
      • DC Money Managers
      • DC Record Keepers
      • Largest Hedge Fund Managers
      • World's Largest Retirement Funds
      • Best Places to Work in Money Management
      • Excellence & Innovation Awards
      • WPS Innovation Awards
      • Eddy Awards
    • ETFs
      • Latest ETF News
      • Fund Screener
      • Education Center
      • Equities
      • Fixed Income
      • Commodities
      • Actively Managed
      • Alternatives
      • ESG Rated
    • ESG
      • Latest ESG News
      • The Institutional Investor’s Guide to ESG Investing
      • ESG Sustainability - Gaining Momentum
      • Climate Change: The Inescapable Opportunity
      • Impact Investing
      • 2022 ESG Investing Conference
      • ESG Rated ETFs
    • Defined Contribution
      • Latest DC News
      • DC Money Manager Rankings
      • DC Record Keeper Rankings
      • Innovations in DC
      • Trends in DC: Focus on Retirement Income
      • 2022 Defined Contribution East Conference
      • 2022 DC Investment Lineup Conference
    • Searches & Hires
      • Latest Searches & Hires News
      • Searches & Hires Database
      • RFPs
    • Performance Data
      • P&I Research Center
      • Earnings Tracker
      • Endowment Returns Tracker
      • Corporate Pension Contribution Tracker
      • Pension Fund Returns Tracker
      • Pension Risk Transfer Database
      • Future of Investments Research Series
      • Charts & Infographics
      • Polls
    • Careers
    • Events
      • View All Conferences
      • View All Webinars
      • 2023 Defined Contribution East
      • 2023 ESG Investing