Time Running Out for “Race to the Bottom”

Investor action and global reforms are combining to end the era of aggressive tax planning by major corporates.

A head of steam building behind the worldwide campaign for fair corporate taxation is set to deliver lasting change in 2023, according to those close to the issue.

From Australia, with its plans to mandate country-by-country tax reporting, to the European Union, which has agreed on implementing a minimum rate, the New Year will see big alterations in the fiscal treatment of large corporations.

“This will means a surge in tax transparency,” said Paul Monaghan, Chief Executive of the Fair Tax Foundation, “and the end of the race to the bottom.”

Time will tell whether this is an over-optimistic outlook. But what is certain is that an issue that was a niche interest a dozen or so years ago – the ability of multinational companies to avoid fiscal levies by shifting profits to low-tax jurisdictions – has moved from the margins of debate to the centre.

Furthermore, while much of the running in the past was made by campaign groups, trade unions and others outside the financial sphere, now it is just as likely to be shareholders, once thought likely to insist on tax efficiency from the companies in which they are invested, who are pressing managements to pay their fair share.

“At risk from policy shifts”

How did this happen? Pressure has been mounting for more than a decade, with notable efforts to raise awareness including the UK Uncut protests of 2010 and similar campaigns in countries, including the United States. Uncut highlighted tax avoidance by big companies, claiming a crackdown would reduce the need for unpopular public-spending austerity in the wake of the 2008 financial crisis.

Arguably the ball started rolling, in terms of tensions over tax takes, in October 1979, when Britain led the rest of Europe in abolishing exchange controls, freeing cash movements across national frontiers – including to tax havens. More than four decades later, the consequences are now being addressed.

“The topic has gained a lot of traction during the last two years,” said Dave Reubzaet, Director, Capital Markets, at the Global Reporting Initiative (GRI). “Covid-19 highlighted the need for corporations to pay their fair share to society.”

Tom Powdrill, Head of Stewardship at the Pensions and Investment Research Consultants (PIRC), said there are self-interested reasons for investors to press firms for fairness and transparency on this issue. “The more a company takes advantage of tax regimes, the more at risk it will be to a shift in policy.”

Temptation to relax

The election of US President Joe Biden in 2020 raised the prospect of a global minimum corporate tax rate, previously something of a pipe dream, becoming reality. Driven by the Organisation for Economic Cooperation and Development (OECD), agreement has been reached across 130 jurisdictions on a 15% minimum level, and in principle on shifting the tax focus to where goods and services are sold, to reduce the scope for profit shifting.

But disagreements over the finer details mean implementation has been pushed back from mid-2023 to 2024. Much work still needs to be done and major jurisdictions are moving ahead at differing speeds. The UK is on course to adopt both pillars in the spring, while member states of the European Union have agreed to implement a directive on fair taxation by the end of the year.

One question rarely asked is whether shareholders have really changed so much in recent years, and truly become so much more responsible, even altruistic. Is there no sign of a reaction from those who object to investee companies failing to minimise their tax bills?

“There has been no backlash as far as I know,” said Powdrill at PIRC, “but I suspect some folks will prefer companies to be as tax-efficient as possible.”

If anything, evidence is mounting of a stiffening of resolve among investors which could strengthen further in 2023.

In December, 27% of Cisco shareholders voted in favour of shareholder proposal, supported by PIRC among others, asking the US tech giant to publish a report in line with GRI’s tax disclosure standard. Just over a fifth of independent Amazon shareholders backed a similar resolution in May.

“These votes herald a significant shift in investor thinking on tax transparency, confirming the role it plays in strong stewardship and good governance. Tax transparency is an issue that cannot be ignored by major companies; neither governments nor their own shareholders will let them off the hook,” said Gerald Cooney, Chair of the Greater Manchester Pension Fund, which co-filed the Cisco resolution.

Too much information?

Regarding the shift to the 15% rate, a more immediate problem may be the loss of a sense of urgency among companies and their investors, according to Lourdes Montenegro, Director of Research and Digitisation at the World Benchmarking Alliance (WBA). “There would be a temptation to relax as the implementation of the global minimum has been pushed back to 2024.

“Companies now have more time to prepare.”

Montenegro added that there could be a divide between those companies that take the view that it has become less urgent and those who are keen to take the issue forward.

Regardless of the attitudes of companies to compliance with the global tax agreement, there remains a paucity of information on current tax practices. Montenegro said that of the 1,000 companies assessed by the WBA, just 9% break down their tax paid into different jurisdictions. “It really is a low number,” she said.

Unsurprisingly perhaps, some sectors are more opaque than others. Only 14 out of 150 tech businesses assessed by the WBA report a country-by-country breakdown, and they are all essentially telephone companies.

Looking forward into 2023 and beyond, Reubzaet said: “The focus is on transparency as to how companies do tax.

“The next step will be to decide what we do with this information once we have more transparency.”

Once corporations are transparent about their fiscal affairs, he said, some very interesting discussions can be had. “What do you do about aggressive tax planning? What stance do you take as investors?”

Responsibility remains a priority

To an extent, Reubzaet added, engagement and transparency on tax depends on location, with “huge differences” between, for example, the attitude in Nordic countries and that in the US.

One thing seems certain, which is that investors will increasingly raise tax issues with corporate management. Powdrill said: “We now have a standard tax resolution that investors can file. These resolutions are not asking for a change in policy but for those companies to be more transparent, for investors to have the information they need.”

In December, Monaghan’s foundation awarded its Fair Tax mark for responsible fiscal conduct to Denmark’s Ørsted green energy group, making it the first Danish multinational to be recognised in this way. He said: “It’s heartening to see Ørsted take pride in the contribution their tax makes to society as they pursue their vital vision of a world powered by green energy.”

More generally, Monaghan predicted that moves such as Australia’s plans for country-by-country corporate tax reporting and the EU’s global minimum tax would cause a “domino effect” as other jurisdictions followed suit.

Under the EU directive, the profit of the large multinational and domestic groups or companies with a combined annual turnover of at least €750 million will be taxed at a minimum rate of 15%. “The new rules will reduce the risk of tax base erosion and profit shifting and ensure that the largest multinational groups pay the agreed global minimum rate of corporate tax,” the commission said last month.

This seems likely to have raised the curtain on 12 months of activity in this field, not least among investors. Montenegro said: “Our interactions with stakeholders show responsibility continues to be a priority.”

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