Taxing Times for Tech Giants

Fiscal conduct under the spotlight as policymakers and investors increase pressure on firms to face new realities.

 Asset owners and managers are increasingly keen to ensure their portfolio companies practise sustainable tax policies – but the interest is not entirely altruistic. With authorities round the world taking aim at companies with dubious fiscal stances, especially those in the information technology sector, no-one wants to be taken by surprise should the rules change and a large tax bill be presented.

A particular factor concentrating minds at the moment is the planned global minimum corporation tax rate of 15%, which has already caused portfolios to be re-balanced. Domestic businesses that always paid the full rate of tax in their home jurisdictions look relatively more attractive than those skilled at shifting their profits to low-tax jurisdictions.

In the week ending October 28, nearly US$1 trillion was wiped off the value of big US tech stocks. It would be an exaggeration to put this down entirely to the changing mood on tax avoidance, but it cannot have helped.

“Consideration of tax conduct has definitely come in from the cold,” said Paul Monaghan, Chief Executive of the Fair Tax Foundation, which uses its Fair Tax Mark accreditation scheme to encourage businesses to approach their fiscal affairs in a socially responsible way.

“A lot of ESG funds were previously overweight in tech stocks, which is where a lot of the tax avoidance is taking place.”

“Almost impossible to tax”

Dave Reubzaet, Director of Capital Markets at the Global Reporting Initiative (GRI), which develops sustainability disclosure standards for companies that support the needs of investors and other stakeholders, said: “Investors are increasingly interested in responsible or sustainable tax practices for two reasons. First, they are interested from a risk perspective; second, they want to know if they can contribute to sustainable development.”

Lourdes Montenegro, Director of Research and Digitisation at the World Benchmarking Alliance (WBA), which works to shape the private sector’s contribution to achieving the UN’s Sustainable Development Goals, said: “The reputational risk for investors is huge and can hit their bottom line.”

Monaghan added that he urges investors to look into any “uncertain tax position” among their investee companies, given these could be rapidly clarified by the relevant authorities at a cost to shareholders.

Tech companies seem particularly prone to engage in creative tax practices, shifting taxable profits to low-tax jurisdictions. In February 2021, Anup Srivastava, Associate Professor at the Haskayne School of Business in Canada, said: “The nature of business is changing; previously, all corporations were organised around labour and capital, and therefore we could figure out where the economic activity was taking place, ” he said.

“In the digital world, the means of production, as well as what is being produced, is all up in the air. Given that it’s almost impossible to identify where the economic activity took place, it’s almost impossible to tax it.”

Panama papers

In 2019, a report by Fair Tax Foundation said Silicon Valley’s “big six” – Facebook, Apple, Microsoft, Amazon, Netflix and Google – had, over the previous ten years, paid US$155.3 billion less than would have been expected, calculating by headline tax rates. It noted: “The bulk of the shortfall almost certainly arose outside the United States, given this ‘foreign’ activity accounts for more than half of booked revenue and two-thirds of booked profits.”

The report added: “Profits continue to be shifted to tax havens, especially Bermuda, Ireland, Luxembourg and the Netherlands.”

Such disclosures have fuelled growing public concern, spurring also investors’ concerns about tax avoidance, said Reubzaet. Evidence of extensive and planned tax dodging, such as that revealed in the Panama Papers, sits ill alongside growing awareness of the important role of tax and tax payments in terms of funding society, he added.

“There have been scandals that have helped change attitudes, and also crises such as the financial crash of 2008 and Covid-19. Then there is the greater focus on sustainability. Tax is an important sub-topic of ESG.”

Allocation of rights

The proposed global minimum corporation tax rate was agreed a year ago between the Group of 20 major economies and the 38-nation Organisation for Economic Co-operation and Development (OECD), the club of developed countries. The OECD said: “Major reform of the international tax system finalised at the OECD will ensure that multinational enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023.

“The landmark deal, agreed by 136 countries and jurisdictions representing more than 90% of global GDP, will also reallocate more than US$125 billion of profits from around 100 of the world’s largest and most profitable MNEs to countries worldwide, ensuring that these firms pay a fair share of tax wherever they operate and generate profits.”

In December 2021, the professional services firm EY noted that there had been attempts to clamp down on tax avoidance in the wake of the financial crisis: “However, the OECD and G20 determined that there are remaining gaps and that current international tax rules still allow large multinationals to earn significant income in a country without paying (a minimum level of) corporate income tax in that or any other country.

“In particular, the digitalisation of traditional business models and the emergence of many new business models challenged the rules for taxing international business income.”

The minimum rate is the so-called second pillar of the global tax agreement, the first being the re-allocation of taxing rights to jurisdictions in which the economic activity takes place. This is proving more difficult to implement, and Monaghan said it was unlikely to come into effect in the near future.

Tackle profit shifting

Meanwhile, profit shifting and tax avoidance continue to be practised. The WBA assessed 1,000 companies in 2021 from a tax perspective, gauging them against three criteria. The first was that a company must have a publicly available global tax strategy; the second is that there must be proper internal accountability for implementing the strategy; and the third is that the company must publicly disclose the amount of tax paid in each jurisdiction in which it operated.

“We found only 4% of the 1,000 companies met all three criteria, 9% disclosed the amount paid in each tax jurisdiction, 16% disclosed their accountability system and 25% had a global approved tax strategy,” Montenegro said, adding: “Such low levels of disclosures lower public trust in the corporate sector, especially at a time when, more than ever, people are aware that governments need revenues to pay for social services and infrastructure.

“Companies need to realise that it really helps them to have a good level of transparency.”

Monaghan agreed that “companies are still regularly booking income and profits in low-tax jurisdictions”.

In July, the UK’s HM Treasury stated of the minimum tax: “This policy will help tackle opportunities for profit shifting and aggressive tax planning by multinationals. It will also place a floor on tax competition between jurisdictions, ensuring the sustainability of corporation tax as a major source of government revenues, while leaving appropriate flexibility for countries to use corporation tax as a policy lever for supporting business investment and innovation.”

“World on a different track”

Not everyone is a fan of the minimum tax. In July, free-market think-tank the Adam Smith Institute commented: “Politicians see it as a convenient way of taxing them over there, those corporations, to provide nice things for voters. Instead of what it is, a method of impoverishing those same voters.

“Competition between nations to lower the corporation tax rate is exactly what stops that political pillaging. Which is why the politicians are so against that competition.”

Others have argued that corporate taxes are unfair because they involve taxing the same economic activity more than once, in that employees and shareholders have already paid income tax. The riposte to this is that corporate taxes are a fair price for the gift of limited corporate liability.

Beyond the question of the global minimum tax, fiscal attitudes are shifting among investors. “Investors want to avoid reputation risks and they are aware that jurisdictions are bringing in new regulations,” said Reubzaet. “Tax transparency is increasing across the globe, and entering new areas, such as the trend for companies to be transparent not just about the tax they pay but what their tax strategies are.”

Tech companies continue to be in the spotlight when it comes to investors’ using engagement tactics to improve tax transparency. Microsoft faces a shareholder proposal at its upcoming AGM calling on the company to produce a tax transparency report in line with the GRI Tax Standard.

It was also recently the subject of a report by the Centre for International Corporate Tax Accountability and Research (CICTAR), which detailed its efforts to shift its finances through a web of subsidiaries, many with no or few employees, located in low- or no-tax jurisdictions.

Monaghan said: “The worst excesses of tax havens are being dealt with. There has never been a more active set of considerations for investors.

“We will always have tax avoidance with us, but the world is on a different track even to where it was five years ago.”

The practical information hub for asset owners looking to invest successfully and sustainably for the long term. As best practice evolves, we will share the news, insights and data to guide asset owners on their individual journey to ESG integration.

Copyright © 2023 ESG Investor Ltd. Company No. 12893343. ESG Investor Ltd, Fox Court, 14 Grays Inn Road, London, WC1X 8HN

To Top
Share via
Copy link
Powered by Social Snap