Tax responsibility for investors

Investors should demand more information about the tax practices and positions of the companies in which they invest. Everyone would benefit from clear benchmarks which allow companies to communicate their practices clearly, and investors to gauge risks.

Tax and the ‘shareholder spring’ is here again, and with it fresh battles at the AGMs of Britain’s biggest companies over executive pay, boardroom diversity and much else. Perhaps surprisingly, despite the barrage of headlines about Starbucks, Google, Amazon and others, shareholders have yet to focus seriously on tax practices, and the risks they can pose to companies’ reputation and bottom line. But with calls for ‘tax justice’ going global – and governments increasingly listening – investors can no longer afford to treat tax as a secondary issue of corporate governance. 

Why should an organisation like ActionAid get involved in this debate? We have been campaigning on tax issues since 2008 because tax revenues are vital for the fight against poverty in some of the poorest countries where we work. Tax already provides the majority of public funds in most developing countries, and is the bedrock of sustainable funding for the education, healthcare and infrastructure needed by ordinary people, and also essential for successful business in those countries.

But protecting those public revenues requires a step-change in how both governments and businesses approach tax. Investors have a central role to play in generating that step-change. That’s why ActionAid has published Tax Responsibility: An Investors’ Guide. Based on discussions with institutional investors, and a comprehensive survey of the tax policies and reporting of the FTSE100, the guide aims to equip shareholders with seven criteria and clear questions to pose regarding companies’ approach to corporate tax. We hope this will be a starting-point for dialogue between investors and companies about acceptable levels of tax risk.

Of course, tax avoidance has always been a sensitive issue for corporate reputations. But two things have changed to make tax a growing issue for the bottom line, and thus for investors. First, public scandal is starting to translate into regulatory pressure. Revenue authorities are beefing up their large taxpayer audit units. Powers allowing tax authorities to cooperate on audits and actual tax collection across borders have also been growing, both in Europe and in Africa, where a new multilateral tax cooperation treaty was agreed between 21 African countries last July. The OECD will publish an ‘action plan’ in July seeking to change international tax rules to stamp out what it politely calls ‘double non-taxation’.

Secondly, reputational risks are no longer confined to European and North American consumer economies. They are becoming a global issue for multinationals in both developed and developing countries. When Tanzanian prime minister Mizengo Pinda published a list of top taxpaying companies in 2011, parliamentarians and media outlets highlighted the absence of several of the country’s largest and most profitable companies on the list. In Zambia, high-profile tax scandals involving the country’s mining sector have driven ongoing calls from Zambian voters for a windfall tax on the mines, and led to the European Investment Bank withdrawing financing from some multinational mining companies in Zambia.

Crucially, this dialogue needs to get beyond simple reporting of a company’s ‘effective tax rate’, or comparing its tax payments with its turnover. Tax responsibility is about behaviour: ruling out aggressive tax practices, setting criteria for tax negotiations, and defining levels of risk acceptable in the company’s tax planning. 91 of the FTSE100 still disclose nothing about the content of their tax policy.

It means ensuring that the performance of tax staff is measured against implementing a responsible tax policy, and not just against their success in shrinking the group’s tax bill (ActionAid’s survey found that financial services firm Legal & General, for instance, sets an explicit target each year to be included in the ‘low risk’ category of HMRC’s tax compliance risk rating).

And it means reporting enough information for shareholders to gauge whether the tax policy is working: including how much tax is being paid and where, compared to the size of their business operations (Centrica, for example, discloses how much they are paying, compared to the size of their workforce, in each country where they operate).

Examples like these show that responsible approaches to tax are starting to gain a few footholds in some of the UK’s largest companies. But there’s much further to go. With regulatory pressures rising everywhere, and G8 economies promising a renewed crack-down on tax avoidance and tax havens this summer, shareholders can’t afford to leave tax off the agenda this spring.

Mike Lewis, ActionAid tax justice policy adviser

ActionAid’s report, Tax Responsibility: An Investors’ Guide, is available via www.lexisurl.com/gpo6Y.