Who wouldn’t want to buy a picture of the world in a decade’s time when all the 17 Sustainable Development Goals (SDGs) of the UN Agenda 2030 have been successfully accomplished? Everyone, including investors, have succumbed to the charms of the shiny little SGDs pin badge promising a fixed version of the world at the other end of its rainbow. But who will pay for it is a different matter.
As much as what happens with the Paris Agreement, it is acknowledged that public coffers won't suffice to square the bill of climate neutrality and the just transition. Private capital flows will also need to be reoriented to fulfil the SDGs.
This assumption, however, can be a red herring. It is like looking for pennies down the sofa when, in reality, the riches to pay for all the SDGs are stashed in tax havens. Government finances have been looted by decades of white-glove tax avoidance – a totally legal practice, but one that is questionable on moral grounds, as well as from an ESG integration perspective.
Some figures can put things into perspective. In the EU context, the European Green Deal estimated that the current 2030 climate targets will require €260bn of additional annual investment sustained over the decade.
Meanwhile, researchers from the University of California, Berkeley and the University of Copenhagen estimated that in 2017, more than $700bn (€593bn), or about 40% of annual multinational profits, ended up in tax havens.
Such profit shifting deprived governments of more than $200bn in revenue, or 10% of global corporate tax receipts, according to the researchers (Gabriel Zucman, Thomas Tørsløv and Ludvig Wier).
More recently, the Tax Justice Network (TJN) estimated that total profit shifting into tax havens can amount to $1.3trn each year and direct corporate tax losses of $330bn. TJN’s estimates are based on analysis of more granular data from 15 countries provided by the OECD.
Specifically, TJN was able to track $467bn worth of corporate profit shifted by multinationals, with associated corporate tax losses of $117bn. Four countries – the UK, Switzerland, Luxembourg and The Netherlands, dubbed by TJN as the ‘axis of tax avoidance’ – are responsible for 72% of the corporate tax losses the world suffers.
But, despite being instrumental to their success, fighting tax avoidance is an explicit part of the SDGs. Why?
Prem Sikka, a TJN Co-founder, accounting scholar and a Labour Life peer at the House of Lords, believes the UN might have wanted to avoid controversy and get as many states as possible on board, including those that don’t levy competitive income or corporate taxes.
He tells RI that the SDGs require resources and therefore taxes are implicit, particularly for developing countries that are already losing vast amounts from illicit financial flows.
“Whilst supportive of the SDGs, I fear they will achieve less than they should because the shareholder-centric model of corporate governance is not challenged,” Sikka says. “We need alternatives to capitalist organisational structures, but the UN does not promote them.”
Aurélie Baudhuin, President of investor coalition Shareholders for Change (SfC) and Deputy CEO of Meeschaert Asset Management, tells RI that the addition of an eighteenth SDG dedicated to tax justice is “necessary and appropriate”. To some extent, she says, fighting tax avoidance “could be considered as the precondition of all SDGs, in particular SDG10 [Reduce Inequality].”
SfC is a €25bn network of values-based investors that launched in December 2017, with 11 members for whom tax avoidance is a key theme in their engagement activities.
Likewise, Erik Alhoej, CEO of Copenhagen-based firm Engagement International, tells RI he supports the idea of making responsible tax the eighteenth SDG.
“Tax payment from the world's largest companies is a prerequisite to meet the SDGs in 2030. Covid-19 has made that crystal clear,” he says, adding that the starting point of Engagement International’s corporate dialogues is that “aggressive tax planning should be handled by investors as other ESG risks like bribery and corruption”. “But,” he notes, “it would make even more sense to consider responsible tax as the new SDG.”
Senior accountants argue: ‘We are paid to make as much money as possible for our shareholders. If we pay tax, that’s less dividends for our shareholders. It is not my job, it is the government’s not to give me the loopholes to be used’, says Epworth’s Palmer
SfC and Engagement International are among the few examples of investor engagement on these issues. The Principles for Responsible Investment (PRI) has also devoted more attention to the topic in the last three years, considering it as a relevant governance matter.
Fiona Reynolds, CEO of the PRI, tells RI that tax can be viewed as an “enabler” in achieving the SDGs. She says: “Tax revenues determine the level of capital available for sustainable development and have a bearing on investment, competition and growth. The tax system, depending on its effectiveness can impede or facilitate progress on a number of globally relevant sustainability issues.”
Alex Cobham, TJN’s CEO, says the idea of an SDG18 is an interesting one, and “would make sense because of the centrality of tax to the SDGs overall, and the specific role of corporate tax abuse”.
Cobham sees some positive aspects in the current SDGs’ literature compared to the predecessor framework, the Millennium Development Goals, where tax was totally absent.
He explains that “tax is identified as the primary means of implementation” in the SDGs (see target 17.1 regarding tax revenue collection). In addition, addressing the issue of profit shifting by multinationals is understood to be part of target 16.4 to reduce illicit financial flows. “This has now been confirmed by the UN statistical expert group responsible for setting indicators,” Cobham says.
Tax havens and investors
Epworth became last month the first asset manager to join the Fair Tax Mark, a UK initiative that certifies companies that display responsible tax behaviour. Epworth manages £1.2bn (€1.3bn) for churches and charities, and is wholly-owned by the Central Finance Board of the Methodist Church.
David Palmer, CEO of both entities, tells RI that tax justice is at “the core” of Epworth’s ethical engagement work, and is not just a target, “but a solution to many inequities in our world”.
He acknowledges that the securing a Fair Tax Mark is a “symbolic” move rather a big milestone for Epworth – it was a straightforward process due to the size and simplicity of Epworth’s business (all its investments are in the UK, for example) – but, he says: “If we don’t get it, how can we campaign for it? So, we are now telling our investee companies: ‘Come on, it is time for you to look at this.’”
Palmer says the counterargument from engaged companies often comes from the financial directors and CFOs. Senior accountants, he continues, will argue: “We are paid to make as much money as possible for our shareholders. If we pay tax, that’s less dividends for our shareholders. It is not my job, it is the government’s not to give me the loopholes to be used.”
Palmer agrees that governments need to be more active, but he also feels there is a moral obligation to follow not just the letter but the spirit of the law.
“That means you should be paying your fair rate of tax. You benefit from being part of your community, you get the security of the police, the education for the workforce, health service. You have a moral obligation to make a contribution towards that.”
Palmer finds it particularly “offensive” when an entity in a tax haven is used to book revenues purely to avoid tax, calling it a “red flag”. But is there a working definition of ‘tax haven’ that investors can use?
“I worked in Guernsey for 10 years, so I’m pretty familiar with tax havens,” he says, but stresses that it isn’t just offshore islands – that there are plenty of countries “that deliberately set tax rates”, encouraging a widespread race to the bottom.
Sikka says that, like other social constructs, tax havens are hard to define in a precise way, although they have some common characteristics such as secrecy, opacity, low or no tax and lax enforcement. He explains that most tax havens do not require companies or LLPs (as well as trusts) to publicly file their accounts, or make their ultimate beneficial owners known.
PRI’s Reynolds says that, in the absence of a global agreement on what tax havens are, each of the lists that are currently available have their own set of pros and cons.
“Different investors use these lists differently – some to identify red flags and initiate a conversation, others to screen out investments. We will be looking to unravel some of the issues here, potentially through the next stage of our work on tax.”
Baudhuin says that for its ongoing engagement with European telecom companies (called Bad Connection), SfC is focusing on "conduit countries”, as defined by the International Monetary Fund (i.e. countries widely perceived as attractive intermediate destinations in the routing of investments, whether for tax or other reasons). The IMF identifies Bermuda, Ireland, Luxemburg, The Netherlands, Singapore and Switzerland among them.
Beyond this, SfC would normally refer to the Financial Secrecy Index of the TJN, which takes into account the factors above mentioned by Sikka. The TJN also has a Corporate Tax Haven Index.
But Cobham says it is business behaviour that matters most.
“If businesses publish their country-by-country reporting, then they and the public can see immediately why jurisdictions are obtaining disproportionate levels of profit compared to their share of the multinational’s economic activity; and whether it is also subject to low or no tax.”
There is another dimension to the issue of tax avoidance which might be making investors shy away from being more vocal about it. Many institutional investors who market funds internationally use offshore or onshore centres traditionally regarded as tax havens. For instance, one of the most well-regarded firms in the ESG industry, Generation Investment Management – co-founded by former US Vice President Al Gore – lists six entities in the Cayman Islands (including Generation IM Climate Solutions II), four in Guernsey, one in Jersey and one in Luxembourg in its annual accounts filed with the UK Companies House.
Its tax strategy can be found here.
Palmer said that, although investors using financial centres included in the loose definition of tax havens, would face a barrier in trying to obtain a Fair Tax Mark, there could be reasons for using those jurisdictions that aren't motivated by tax avoidance practices.
“A fund doesn’t pay tax itself. If they still declare taxes in their own domestic jurisdictions, you don’t want to give them an extra tax burden.”
He adds that Epworth’s clients are all UK-based, and therefore all funds are in the UK. If Epworth were ever to sell around the world (“that wouldn’t happen, let’s be frank”), Palmer says he would choose London or New York.
RI understands that some asset managers choose jurisdictions like the Cayman Islands in order to put clients in the same position as if they invested directly in the underlying assets.
Asked about its links to these jurisdictions, a spokesperson for Generation tells RI: “While it is true that funds in such jurisdictions are not subject to taxation, that is also true of most pooled investment vehicles (such as UCITS Funds) across the world including in the European Union (notably Luxembourg and Ireland) and the United States. As a matter of public policy across the world, tax systems do not typically tax the pooled vehicle that brings savings together for the benefit of retirees, savers etc. As a result, there are no tax advantages of funds being based in these administrative centers but there are potential operational benefits.”
At the PRI, Reynolds says that some asset owners have begun to articulate their own tax principles and implications for their listed and unlisted investments.
“There is a lot of thinking that needs to go behind this – from considerations relating to double taxation, to a position on the so-called tax havens, to degrees of influence they are able to exert on investment structures. So, this is certainly a welcome development and PRI will look to support investors in their commitment towards responsible tax in the coming years.”
SfC’s Baudhuin believes there should be a distinction between funds' domiciles that are chosen for mere regulatory reasons (that’s the case for many funds domiciled in Luxembourg, she says), and those that are chosen “with the clear intent of avoiding taxes or, worse, to avoid transparency of operations”.
“In any case, institutional investors domiciling funds in jurisdictions such as the Cayman Islands, should clearly explain to the public why they are doing it, to avoid any misunderstanding.”
Box 1: Tax-related references in the current SDGs
|Goal 10. Reduce inequality within and among countries||10.4 Adopt policies, especially fiscal, wage and social protection policies, and progressively achieve greater equality.|
|Goal 12. Ensure sustainable consumption and production patterns||12.c Rationalize inefficient fossil-fuel subsidies that encourage wasteful consumption by removing market distortions, in accordance with national circumstances, including by restructuring taxation and phasing out those harmful subsidies (…)|
|Goal 16. Promote peaceful and inclusive societies for sustainable development, provide access to justice for all and build effective, accountable and inclusive institutions at all levels||16.4 By 2030, significantly reduce illicit financial and arms flows, strengthen the recovery and return of stolen assets and combat all forms of organized crime.|
|Goal 17. Strengthen the means of implementation and revitalize the global partnership for sustainable development||17.1 Strengthen domestic resource mobilization, including through international support to developing countries, to improve domestic capacity for tax and other revenue collection.|