2020 got off to a good start for responsible taxation: in mid-January, the Global Reporting Initiative (GRI) launched its tax standard. Even if voluntary, the standard is supposed to plant the seeds of transparency for companies, encouraging them to disclose crucial information about their approach to tax – disclosures that would not surface by simply applying international accounting rules.
Then, COVID-19 hit. And once again, governments have had to step in. This time assistance would be required not just by financial-sector firms, but possibly vast swathes of the entire economy.
As taxpayers pick up the tab, momentum will grow for a zero tolerance approach to tax avoidance. Bailouts (or any form of corporate welfare) will make stakeholders – responsible investors in particular – question whether companies are contributing their fair share to the public coffers.
Professor Prem Sikka, accounting scholar and veteran tax expert, tells RI: “In the brave new world that is going to emerge after the coronavirus, there will be even more scrutiny of tax avoiding companies. Shareholders will have to dig deep.”
In light of this pandemic, the GRI’s standard may become even more relevant, as it brings to the fore country-by-country reporting (CbCR) – a tool to break down taxes paid per country, before multinationals shift profits between jurisdictions.
Behind CbCR, there is what economists Alex Cobham, Markus Meinzer and Petr Janský describe as “a half-century of resistance to corporate disclosure”.
The first attempts at CbCR came through the late 1960s and into the early 1980s, led by the G77 group of UN developing countries. It followed a second wave, led by civil society groups, with a milestone in 2003 when the campaign group Tax Justice Network was created.
Whether the GRI’s tax standard can pave the way for widespread CbCR adoption or not, the launch event was filled with symbolism and premonition. Firstly, it was held at the London Stock Exchange, the heart of the City of London – considered by many a haven of tax havens (the late Labour MP Tony Benn called the City “an offshore island moored in the Thames”). Secondly, a considerable number of investors got involved in the project. The consultation for the draft standard received input from a large number of long-term investors, particularly pension and union funds, including public employee funds such as the New York City Employees’ and Teachers’ Retirement Systems.
At the launch event, the Sustainability Head of Norges Bank Investment Management, Wilhelm Mohn, reminded the audience that CbCR is part of their tax transparency expectations as an investor.
And the list of investors engaging with the topic is growing. Beyond the ethical focus of investors such as those that formed the group Shareholders for Change, tax is increasingly considered a systemic governance risk – as highlighted by the Principles for Responsible Investment’s collaborative engagement on tax transparency.
The aftermath of coronavirus could see those risks multiply: disputes with tax authorities, prolonged lawsuits and boycotts from clients are among those that investors could face, according to Sikka, who suggests they “focus on requiring companies to explain why there are differences between accounting profits and taxable profits”.
“Companies generally want to report higher accounting profits because that increases executive pay, but they want lower taxable profits because that enables them to retain the cash flow and pay out dividends and share buybacks, thus maintaining the share price, which also feeds into many executive pay schemes.”
Attitudes towards tax avoidance started to change in the last decade, fuelled by high-profile scandals such as the Panama Papers, the Lux Leaks or, more recently, the Luanda Leaks.
Another testament to the shift is the creation of the Fair Tax Mark, an initiative that certifies companies that display responsible tax behaviour.
It has now proposed what it calls a ‘Fair Tax Lockdown on bailouts’, arguing that public financial help should be provided only to companies not actively involved in tax avoidance.
According to its CEO Paul Monaghan, bailouts should be subject to conditions such as publishing a binding anti-avoidance tax policy at board level and disclosing tax payments on a CbCR basis.
But the growing momentum behind CbCR threatens a lucrative tax avoidance industry. The firms that facilitate, design and sell tax avoidance schemes tend to be a blind spot for investors: RI has been unable to find evidence of any investor engagement campaign in this field.
“The Big Four accountancy firms, all well documented tax avoidance enablers, have been generally hostile to the Fair Tax Mark from inception,” Monaghan tells RI. “They are rather averse to anyone marking their homework – except themselves.”
He says that several tax avoidance schemes from the ‘Big Four’ (financial services giants EY, PwC, KPMG and Deloitte) have been deemed to be unlawful by the courts, and that PwC was at the centre of the Lux Leaks and Luanda Leaks affairs.
Another initiative, which some years ago would have seemed unthinkable, is the US organisation Patriotic Millionaires. This group of high-net worth Americans supports higher taxation for people and businesses like themselves, and it is chaired by a former BlackRock Managing Director.
As the US administers its $2trn (€1.8tn) coronavirus rescue package, Sam Quigley, spokesperson for Patriotic Millionaires, tells RI that many of the companies receiving bailout funds “will be corporations that have taken part in some level of tax avoidance, just because of how widespread that type of behaviour is”.
He says that, in particular, any potential bailout of the cruise ship industry, as President Trump has proposed, would be “ridiculous”.
“Most ‘American’ cruise companies, despite the fact that they operate primarily to serve an American clientele, moved their official headquarters to countries with low tax rates to avoid paying American taxes, and hire predominantly foreign workers because they can pay them less than American workers,” he says.
“These companies have done everything possible to avoid their responsibilities as American corporations, and giving them a bailout without extensive conditions would be absurd.”
As reported by US media, among listed cruise companies that might require financial assistance as a result of the crisis are Carnival Corporation, incorporated in Panama; Royal Caribbean Cruises, incorporated in Liberia; and Norwegian Cruise Line Holdings, incorporated in Bermuda.
Tax-related controversies have also caught up with companies whose business models allow them to better weather the crisis.
The industry group TechUK, whose members include a number of multinationals with a poor track record on tax including Alphabet’s Google, Amazon, Apple and Facebook, has called on the government to rethink plans for a Digital Services Tax – a levy that was introduced in the UK this month to compensate for the pervasive tax avoidance practices within the digital industry.
George Turner, Director of the think tank Tax Watch UK, tells RI: “These companies shouldn't be seeing this as an opportunity to cash in on the crisis. The [UK] government is under a huge amount of pressure fighting the virus and it doesn't need the additional pressure of resources being taken to support already very wealthy and profitable companies.”
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