2016 Methodist Conference Fringe Event
The Joy of Tax: How Investors Can Address Tax
Bill Seddon, 6 July 2016
Back in the mid 1980s, at the height of the antiapartheid campaign, I was discussing the call to disinvest from Shell due to its part ownership of a South African oil refinery. I questioned why it was only against Shell that the campaign was directed and not BP, when the two companies had equal shareholdings in the refinery. The answer was that as campaigners, they had to direct their limited resources to where it would have the most impact, which in this case meant targeting the larger company. I commented that the CFB felt it was important to be evenhanded in its response and to treat all companies equally, a view I have not subsequently changed. I accept that it is legitimate for a campaigner to target a company because of its high profile, even if it is not the worst offender. However, for the ethical investor, it is important to make fair comparisons between companies before reaching our judgements. To do this we need to have an accurate understanding of the facts. Why do I raise this in relation to tax justice you may ask? The reason is that it is extraordinarily difficult to know the facts when it comes to tax.
Nobody likes paying too much tax and it is no different for companies. Consequently, they employ teams of specialists to ensure that this does not happen. In many, if not most cases, the approach of a company will be entirely appropriate. There is recognition of a duty to pay a fair rate of tax in exchange for the social license to operate. However, in other cases a line is crossed in which a company seeks to withhold more than its fair share, breaking the spirit whilst obeying the letter of the law. Although sometimes the injustice will be clear, we do not know at what point the line is crossed and whether one company is worse than another. Even if JACEI was able to advise the CFB where that line lies the CFB does not have the resources to analyse companies in sufficient depth to make the appropriate comparisons. Even if we had, is this matter primarily for engagement or is there a point at which disinvestment becomes the appropriate response?
One thing that we have to recognise is that Governments often incentivise some behavior by reducing taxes. For example, individuals can shelter their savings in ISAs, charities are allowed to avoid taxes in recognition that their activities are for the public benefit, whilst companies are encouraged to domicile in a particular country through low tax rates. Only this week, the Chancellor announced plans to cut UK corporation tax from 20% to under 15%. At what point, you may ask, would it be considered ‘aggressive tax avoidance' for companies to relocate to the UK? It is not good enough for the position of the Church to be determined by the volume of public reaction to a ‘media revelation.' Many of the arguments in relation to appropriate taxation for companies are more properly addressed in the public domain through the Church lobbying governments on issues such as ‘Base Erosion and Profit Sharing', which relates to the artificial shift of profits to low or no tax locations where there is no economic activity. That has to be where the bulk of the effort of campaigning bodies such as the Methodist Tax Justice Network should be directed. However, what I have been asked to speak about is what investors can do to address tax justice as we pursue our prime objective of earning good investment returns on the monies that trustees entrust to our keeping.
According to the Christian Aid tax campaign the investor has three roles in relation to company taxes:
- First, to assess whether companies with intellectual property located in low-tax jurisdictions model the financial implications of having to locate such assets in the countries in which they were developed. I would interpret this to mean encouraging companies to produce such models, although it is difficult to see the benefit unless they were to enact them.
- Second, to seek to understand a company's reliance on tax incentives and the impact should these be withdrawn. Again, having gained the understanding it is difficult to see the benefit.
- Third, to encourage companies to be more transparent in relation to tax, including publishing a tax policy and ensuring that ‘treaty' shopping has not been used in structuring tax arrangements. I am far more sympathetic with this as greater transparency is a tried and tested tool of the ethical investor.
Working with others is likely to have a far greater impact than being a lone voice, although this too may be necessary, particularly for the Church investor. The CFB often works with other Churches on ethical issues relating to investment through the Church Investors Group, which provides an efficient way of learning from and helping each other in the field of ethical investment. A good example of this was seen in 2013, when the Church of England published a policy on engagement related to corporate tax ethics. I will pick out just some of its recommendations:
- That tax should be a subject for ethical engagement where it appears a company's approach is blatantly aggressive or abusive.
- Payment of significantly lower levels of tax than its peers may indicate that a company is an outlier and should be the subject of engagement.
- It is a particular concern if companies extract profits without paying tax in the country where the economic activity took place.
- Good practice includes Board level reviews of tax policy, voluntary public disclosure of tax paid and the provision of information to help interpret the data disclosed.
It is worth noting that the policy was not intended as a tool for recommending disinvestment.
However, tax is not just a matter for the Churches, it now has wider resonance and work on the subject has been done by a number of organisations. I would like to highlight three initiatives that may be of help to the responsible investor in relation to tax.
In 2014, the Fair Tax Mark was launched, which provides companies with a standard at which to aim, and investors with assurance that certain standards have been met. To achieve certification, a company needs to have provided sufficient data to show it has put a fair tax policy into practice. This means that it can be considered to be seeking to pay the right amount of tax in the right place at the right time, where right means that the economic substance of transactions coincides with the place and form in which they are reported for taxation purposes. This may develop into an extremely useful tool, but at present only two companies in the FTSE 350 Index have achieved certification, the utility company, SSE and the transport company, Go-Ahead.
In 2015, FTSE4Good introduced tax transparency into an ESG ratings model using seven indicators: a commitment to tax transparency and alignment of tax payments with revenue generation; a commitment to comply with the spirit of the law in all operating countries; demonstration of Board oversight of tax policy; demonstration that corporate tax payment oversight is part of the audit committee remit; a public statement on tax transparency by the CEO or CFO; verification of tax data; and disclosure of corporation tax paid. The limited findings produced to date do not make happy reading.
Last year the UN supported initiative, Principles for Responsible Investment, produced a guide for engagement on corporate tax responsibility. This stressed the importance of investors engaging with companies on tax matters and to ask them for better disclosure on their tax practices. Questions have been divided into six subjects: Tax Policy; Tax Governance; Managed Tax Related Risk; The Effective Tax Rate; Tax Planning Strategies; and Country by Country Reporting. Each subject has one key question and a number of supplementaries.
I will conclude by saying something about where the Methodist Church is on the subject. In 2012 a Memorial on tax justice was accepted that among other things reiterated the Conference support of the campaign seeking disclosure by companies on the amount and location of tax paid. A resulting discussion paper prepared by JPIT for JACEI concluded that a Methodist stance on tax justice would include an expectation that companies should be "transparent around their corporate tax affairs and pay what they owe". It also highlighted ‘tax avoidance' as the morally grey area between tax compliance and illegal tax evasion. The Fair Tax Mark was mentioned as a potentially helpful tool that should be monitored. Engagement was recognised to be the appropriate way forward for the CFB, although an issue that was perhaps less for investors and more for the Church as a whole to lobby the government.
In 2014 the Methodist Tax Justice Network produced a pamphlet, Investigating our Investments, which examined the tax arrangements of twelve UK companies in which the CFB had shareholdings. This was not intended to be critical of the CFB, recognising as it did that all portfolios would look very similar, but rather to raise awareness and stimulate debate within the Methodist Church. David and I did meet to discuss the report, which of course highlighted the difference between the campaigner, for who raising awareness of the issue is important in itself, and the ethical investor, who needs to find a consistent approach to engagement on the subject.
Last year another Memorial was brought to the Conference, which amongst other things called "upon JACEI in conjunction with the CFB urgently to develop a position paper leading towards a policy statement on tax justice in order to address companies in which the Church invests."
The reply included a direction to the Methodist Council to ensure the Connexional Team continues to work on the subject as resources allow and report back to the 2018 Conference. Since then the CFB has been laying the foundations for progress, with CFB Chair John Sandford, a former partner of KPMG, taking a particular interest. We are seeking to distil the PRI questions into a more digestible format that can be used when engaging with companies, but until we can analyse companies systematically and hold them up to the same standards, it will be difficult to embark on a tax engagement programme. The resources necessary to do this properly would preclude other work that has a greater priority. Consequently, we will look for ways of collaborating with other investors. It would also be helpful if we could use a tool such as the Fair Tax Mark, but as yet the take up by quoted companies has been disappointingly small. One connected area of engagement we have recently begun has been to encourage greater transparency in respect of corporate lobbying. We are also involved with a Church of England project to develop a tool to analyse the effectiveness of company engagement. This is currently directed at climate change, but could in time be used on other issues.
To sum up, the CFB position on tax justice is that:
- It is a matter where change in government policy is needed, and which the Methodist Church should encourage through its public policy work, supplemented by company engagement as an investor;
- It is a legitimate subject for an ethical investor to address;
- It does not yet have a standard that distinguishes between acceptable and unacceptable policies;
- It is a matter principally for engagement rather than disinvestment, although this could change if a cost effective method of comparing companies became available; and
- It believes that to be effective, work will need to be pursued in collaboration with others.
6 July 2016