US Cracks Threaten Global Tax Plan

The OECD’s corporate tax reforms promise international alignment, but investors should not take progress for granted.  

Between 2011 to 2020, the ‘Silicon Six’ – Amazon, Facebook, Alphabet, Netflix, Apple and Microsoft – paid US$96 billion less in tax than the notional taxation figures cited in their annual financial reports. 

The study, published by the campaign group Fair Tax Foundation, said Amazon collected US$1.6 trillion in revenue, reported US$60.5 billion in profit, yet paid US$5.9 billion in income taxes over that period. Amazon should have paid US$10.7 billion, the report said. 

“We regard responsible and transparent tax practices as important both from the perspective of evaluating risks in our investment portfolio and on the basis that we view tax payments as a significant contribution to society at large,” says Jens Christian Britze, Head of Tax at Danish pension fund provider PKA. 

Aggressive tax practices and avoidance by investee companies isn’t going unchallenged. Last year, investors filed a shareholder proposal calling for Amazon to disclose against the Global Reporting Initiative’s (GRI) voluntary Tax Standard (207), which includes requirements to provide country-by-country reporting of financial, tax and worker information. 

Crucially, policymakers take a similar view. The efforts of the Organisation for Economic Co-operation and Development (OECD) to finalise its two-pillared corporate tax reforms are supported by 136 countries out of the 140 members of the OECD/G20 Inclusive Framework on base erosion and profit shifting (BEPS). 

Pillar 1 aims to ensure that all jurisdictions where multinationals do business gain a fair portion of taxable earnings. Greater progress has been made on Pillar 2 of the reforms, however, which will introduce a global minimum corporate tax rate of 15%. 

The OECD currently estimates that Pillar 1 will generate US$200 billion per annum, up from its previous estimate of US$125 billion, while Pillar 2 is expected yield up to US$220 billion, or 9% of global corporate income tax, up from US$150 billion. 

“The proof of the pudding will be in the eating,” Andrew Loan, Tax and Structuring Partner at law firm Fieldfisher, tells ESG Investor. “This remains a dynamic area, and the pieces have not fully landed.”  

Despite anticipation of greater tax revenues, the complexity surrounding these reforms has some governments dragging their feet – most notably the US. Other jurisdictions are pulling ahead, looking to implement Pillar 2 by 2024, prompting concerns from investors that the hoped-for cohesion between governments on tax reforms will not come easily.  

If jurisdictions don’t move in tandem, it opens the door to a plethora of different tax rules, heightened compliance costs, and new loopholes companies could exploit, experts worry.  

“Responsible investors should support policymakers and make it clear that a fairer international tax system is in the interests of investors [and] continue to have dialogues with company boards to ensure they are prepared for the forthcoming regulatory changes,” says Sebastien Akbik, Governance Issues Analyst at the Principles for Responsible Investment (PRI), the UN-convened international investor network. 

Linking sustainability and tax  

The two-pronged tax reform will have ramifications for governments and multinationals globally, but investors are mainly focused on the impact of Pillar 2.  

“[Pillar 2] will have an impact on both our tax risk assessments and the payment of a fair level of taxes in our investment portfolio,” notes PKA’s Britze.  

Earlier this month, the OECD published technical guidance to assist governments in the implementation of Pillar 2’s Global anti-Base Erosion (GloBE) rules, a move which Britze says is “essential for the coordinated international implementation of Pillar 2”.  

The 111-page report addresses 26 issues spanning the scope, operation and transition elements of GloBE rules, such as the treatment of debt releases, accrued pension expenses, and calculating the Qualified Domestic Minimum Top-up Tax (QDMTT) 

The latter refers to the ability of participating governments to implement top-up taxes to corporate profits in countries that have lower tax rates. This means a qualifying French company paying 5% in tax in the UK, for example, could be taxed the difference. It follows OECD guidance on safe harbours and penalty relief, as well as public consultations on the GloBE Information Return and Tax Certainty.  

For investors, the benefits of the guidance are more indirect, but no less important. Britze says it will come in useful when “assessing whether a portfolio company stays within the letter and spirit of tax law in the management of their tax affairs”.  

However, Tom Powdrill, Head of Stewardship at UK proxy advisors Pensions and Investments Research Consultants (PIRC), argues that the latest OECD updates are “far too mild an acknowledgement of how multinational enterprises (MNEs) treat taxation and disclosure of tax payments and strategy”.  

“The guidelines don’t call for disclosures that would meaningfully help governments and stakeholders identify tax avoidance, such as disclosure of tax payments made, tax-related financial transactions, corporate structure, and beneficial ownership,” he says, adding that the guidelines “should move toward explicit language calling for multinationals to provide greater transparency to stakeholders on tax practices and strategy and how it impacts the goals of responsible business conduct and sustainability”. 

Dave Reubzaet, Director of Capital Markets at GRI, agrees, noting that the OECD should explicitly connect its tax reforms to the proposed updates to its Guidelines for Multinational Enterprises. 

“This is particularly important for investors who see tax increasingly as a sustainability topic, not just a technical topic,” Reubzaet says.  

He further points to the high threshold for MNEs to qualify for the minimum tax as a shortfall in ambition, with only MNEs generating over €750 million in consolidated revenues falling under scope. 

“There’s a whole world beneath that threshold that also needs to adopt responsible tax practices,” says Reubzaet. 

PRI’s Akbik says that the minimum rate of 15% – lower than the 21% once proposed by US Treasury Secretary Janet Yellen – is not high enough to compensate emerging markets, and “that most of the collected revenue will flow to developed countries”.  

“Investors should remain cognisant of these potential shortcomings,” he says. 

Big tech in the crosshairs 

Large tech firms have often been touted as repeat offenders when it comes to aggressive tax practices and opacity, attracting “intensive focus” from investors, says Britze.  

Momentum is growing, too, with 27% of Cisco and 23% of Microsoft shareholders voting in favour of shareholder proposals calling for disclosures in line with GRI 207 late last year, hot on the heels of the aforementioned Amazon vote, which secured 21% of shareholder support.  

The majority of the largest tech companies are headquartered in the US, where the wider anti-ESG movement has provided the backdrop for a recent pushback from Republicans on Pillar 2 implementation. This could muddy the waters for investors engaging with big tech on responsible tax practices, warns Powdrill from PIRC. 

One of the biggest concerns for US lawmakers is that the tech sector is incredibly lucrative. In an area where the US feels it has “a comparative advantage”, many of them feel it shouldn’t be “singled out”, notes Grant Wardell-Johnson, Global Tax Policy Lead at KPMG International. 

But by failing to implement a 15% minimum tax, the US risks losing tax revenue to jurisdictions that are forging ahead, as they can apply the Pillar 2 top-up tax to US-based companies that do business in their jurisdictions. Last year, the EU, the UK and South Korea all finalised plans to roll out Pillar 2, Japan has submitted its draft legislation, and Switzerland is holding a public vote in June. 

“If the US doesn’t move to implement the OECD pillars too, we could also see countries implementing unilateral Digital Services Taxes (DSTs) in response to political pressures regarding the belief that big tech companies are not paying a fair share of tax,” says Powdrill.  

US-based tech firms and other MNEs will then have to navigate more complicated and inconsistent tax rules, “re-introducing loopholes that ultimately undermine the spirit of the new regulations and reverse the momentum towards more responsible tax practices”, adds PRI’s Akbik. 

For investors focused on tax-related engagement, this all means there is an increased risk that investee companies will be “more reluctant to improve on tax transparency while they battle resulting increased compliance costs”, he warns. 

The OECD guidance has offered partial reprieve for US companies through to 2025, recognising the US’ existing minimum tax (known as the Global Intangible Low-Taxed Income) on companies’ foreign income and outlining how this can interact with other countries’ new taxes through the top-up scheme.  

But to prevent future overcomplexity, institutional investors now have a key role to play over the next couple of years to push for Pillar 2 adoption in the US by engaging with both potentially impacted companies and lawmakers, Powdrill and Akbik assert.  

As an investor, Britze emphasises the pension fund provider’s “strong wish for a uniform implementation of the Pillar 2 rules on a global basis [to] increase certainty both in the management of tax affairs for multinational companies PKA invests in and in its own assessment of the implications of the rules on its investment portfolio”. 

“In 2023, we expect more corporates to start getting prepared for obligatory country-by-country reporting, or to start reporting country-by-country data on a voluntary basis,” he says. “We will, as a large international institutional investor, continue our engagement and discussions with corporates on our use of tax-related data, and will further develop our analysis of the tax data disclosed.” 

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