How investors could reduce business tax avoidance

20 May 2020: responsible behaviour towards taxation is becoming a key issue for investors, who see the risk associated with tax avoidance as part of environmental, social and governance issues. Carlos Torneros explains why.

Institutional investors have recently started to look at tax avoidance as a risk and return issue in portfolio companies, beyond just ethical investment approaches. Unlike evasion, tax avoidance is legal but can still be a source of risk, with litigation and reputational damage chief among them. 

Responsible tax is a theme that could be prominent in the aftermath of the coronavirus crisis, where more tax revenues will be needed to support the economy.

Stakeholder influence

Stakeholders, as well as institutional shareholders, are becoming more demanding. Initiatives like the Fair Tax Mark and the research and campaigning of groups like the Tax Justice Network are raising the ante on tax expectations. 

The issue not only concerns the so-called responsible investors (those who integrate environmental, social and governance factors (ESG) into their decision-making). 

Some advanced ESG investors are putting the issue on the map in their attempts to avoid risks and achieve greater returns. Among them are investors such as the Norwegian Government Pension Fund Global, with $1trn of assets under management.

The Principles for Responsible Investment, the UN-supported association of investors, convenes a group of interested asset managers and asset owners to develop best practice when it comes to engaging with portfolio companies.

Investors demand tax transparency

A common concern cited by investors is the lack of transparency and accurate tax disclosures.

As a result, the Global Reporting Initiative launched a new standard this year which will help to manage the visibility of behaviour towards tax by businesses. 

The tax standard brings Country-by-Country Reporting to the fore, asking multinationals to break down taxes paid per country before profits are shifted between jurisdictions. 

Investors are gaining a greater picture of businesses’ conduct towards taxation, which could help change behaviours in the boardroom.

You can read the full article as part of the Financial Services Faculty’s Investment Management Focus May features here.