The Panama Papers have re-ignited debate around tax avoidance by multinational corporations and high net worth individuals, a debate that has been gathering momentum since the global financial crisis.

Banks, audit companies, legal firms and tax authorities have all come away with their reputations tarnished. Prominent brands and many of the world’s largest corporations are often seen by the public at large to be serial tax avoiders.

Piecemeal responses by governments to each new scandal in the form of restricting an individual loophole or more recently, the slow moving OECD BEPS project, have failed to assuage public concern.

The widespread view that national and international tax rules allow the wealthy and powerful to get away without paying their fair share of taxes is, unfortunately, grounded in reality.

In Australia, the level of tax avoidance has escalated to embarrassing heights, with two recent Australian Tax Office (ATO) tax transparency reports on big business revealing that more than one third of the largest public companies and multinational entities in Australia paid no tax in 2014-2015, and that one third of ASX 200 companies have an effective tax rate of less than 10 per cent.

More than half those ASX companies also have subsidiaries in tax havens. Whether they are there for legitimate purposes or not is hard to tell.

The lack of disclosure and secrecy that shrouds so many aspects of international financial practice around corporate structures and tax affairs, naturally leads to the worst of conclusions. It also begs the question: Why does international tax reform and the modernisation of global taxation rules remain an unfinished business, even though the G20 has been pursuing this agenda since the global financial crisis?

Measures to introduce ‘Google tax’

The Australian government finally has been feeling the same public pressure that has long been evident in the UK, EU and US.

The latest budget contains measures to introduce a diverted profits tax or ‘Google Tax’, as implemented in the United Kingdom, strengthening protections for whistleblowers who report tax avoidance and increasing penalties for multinationals that fail to meet their compliance and disclosure obligations to the ATO.

The politicians deserve applause for ignoring business calls to take no individual national measures on tax avoidance outside of the OECD process and timetable.

The government has also noted that the tax a company pays should reflect the “commercial reality” of operating in Australia.

Ahead of the May budget, Google Australia announced it had restructured and vowed that in the future it will count its lucrative advertising revenue locally on its tax bills. Google’s Australian 2015 tax bill reached $16 million, but still remains a fraction of its locally generated profit.

But Google has said this will change in the future. “Effective January 1, 2016, Google Australia Pty Limited restructured its business such that it will recognise revenue from the marketing and selling of certain services and products to Australian based customers,” the accounts state. “In 2016, the company will recognise revenue from the marketing and settling of certain services and products to Australian-based customers.”

Google is among a number of technology companies – including Apple, Microsoft, BHP Billiton and Rio Tinto – that are under audit by the Australian Taxation Office for their use of marketing hubs in Singapore.

All of which brings us back to the question of transparency.

At an international level, the opposition to country-by-country reporting (CbCR) being made public tells us some companies and regulators would prefer tax matters to remain behind closed doors; that reform only goes so far.

Not happy with dirty ‘tax linen’ being on display

At a national level, hiding behind poor disclosure in accounts or the lack of a corporate tax policy; and any transparency over and above the absolute minimum shows some companies are not comfortable with all their tax linen – clean, dirty or in-between – being on display.

To be fair, corporations will structure their tax affairs as far as the laws allow. The current overly complex international structure of tax agreements and protocols that rests atop various domestic laws leaves a lot of wriggle room.

Tax arbitrage and creative processes to game the system have long been seen as an accepted corporate practice. Short term thinking and quarterly or annual performance often hold sway over longer term value creation. Much of the blame can be laid at the feet of investors whose attention remains fixed on the next return, rather than the next decade or beyond.

At the PRI, we focus on encouraging investment for the long term, taking into account sustainability, climate, and the environment on one side and fiduciary duty, good governance and transparency on the other, as the fundamentals for value creation and positive returns.

Financial market participants have a responsibility to change how global markets and companies operate in the coming years. The PRI sees the next ten years as an opportunity for responsible investment to be part of that change. A way that provides positive returns but also ensures the long-term health and viability of financial markets.

While governments worldwide are voicing their consternation about tax avoidance, investors should also be concerned about the risks around this issue.

Some investors have already voiced their views. UK local government pension funds called on the G20 to implement robust global tax reform and improved transparency in 2014. French fund ERAPF identified corporate tax practices amongst its top five governance priorities in 2015. Other UK and European funds have also been pushing for increased disclosure of tax practices and risks from companies they invest in.

Last year, in response to growing unease on the part of a number of our signatories, the PRI published its Engagement Guidance on Corporate and Tax Responsibility, which outlined for investors a strategy for engaging with companies on their tax planning.

Investors are increasingly seeing tax issues as a material risk and many are worried that aggressive tax planning crosses the line between avoidance and evasion. And they understand that every day a company board or senior management spends trying to avoid “tax” is a day they are not spending on building a company that creates long term value and sustainable returns for shareholders.

This is of particular concern in emerging market jurisdictions, where tax enforcement might be weak, offering temptation for companies to avoid paying their fair share. Excessive financial secrecy leads to other sins.

It is to be hoped that over the coming months, Australia will take additional steps in enforcing tax avoidance measures and reiterating its support for international reform, including improved transparency.

We also hope to see Australian investors recognise the very real risks that tax avoidance presents and actively engage with companies on their tax practices, rather than waiting for further actions from the government. The investor voice also needs to be heard to ensure that modernising the global taxation system includes robust disclosure and transparency.

Transparency is the foundation upon which international tax reform will be measured. It’s time opaque financial structures are discarded, tax havens closed and corporate tax information was out in the open. In this way, investors can make better informed decisions about whether or not they want to invest in particular companies, and markets will respond accordingly.

Fiona Reynolds is the managing director, Principles for Responsible investment (PRI).

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