Corporate taxation practices are attracting growing scrutiny. What are the investment implications?
- Over the last decade or so, corporate taxation practices have attracted growing scrutiny from the media, civil society and the broader public.
- More recently, the shareholder primacy model has been challenged, while governments have taken action against large multinational corporations in relation to tax practices.
- We believe that an excessively aggressive approach to taxation, or one that is not aligned to the expectations of regulators and the public, has the potential to result in lasting damage for companies.
The introduction of comprehensive laws relating to international taxation took place around a hundred years ago. Principles were established by the League of Nations in the 1920s as a result of pressure to avoid the double taxation of corporate profits as multinational corporations began to emerge. While relevant at the time, these principles are increasingly criticised as ineffective in the modern-day, globalised and digitalised economy. It is estimated that 40% of multinational profits (US$600bn) are shifted through tax havens. Furthermore, a study of 379 Fortune 500 companies found that the average tax rate paid was 11.3%. This is the lowest level since analysis began in 1984, and is almost 10% lower than the statutory US corporate tax rate of 21%.
Growing tax tension
Over the last decade or so, corporate taxation practices have attracted increasing attention from the media and civil society, as well as from the broader public. This may be owing to a number of factors, such as increased globalisation, the shift to business models with considerably higher levels of intangible assets, and the increasing use of automation and flexible working for employees.
During periods of increased social tension, for example in the aftermath of the global financial crisis, such issues have also been more heavily scrutinised. We also expect this to be the case following the coronavirus pandemic, particularly as governments look to offset drastically increased levels of government spending, and the public sees how taxpayer funds are extended to corporate actors via various means of government support.
Moreover, in recent years, the shareholder primacy model that has dominated corporate and academic thinking since the 1970s is facing increasing challenge. In August 2019, the Business Roundtable (the largest business group in the US) redefined its notion of corporate purpose, moving away from a long-standing model of shareholder primacy towards a commitment to a more sustainable and inclusive (multi-stakeholder) form of capitalism, taking account of the interests of all stakeholders – including customers, employees, suppliers, communities and shareholders. Such developments have highlighted the symbiotic role that corporations have in society: businesses can have many impacts on society and the environment, and are also heavily dependent on these in order to exist and flourish.
Even more recently, in July 2020, the General Court of the European Union (EU) ruled in favour of Apple in relation to a claim brought in 2014 regarding its taxation practices. This case is significant for a number of reasons. First, the litigation has been complex and costly, and the claimants have ultimately failed. However, the EU’s resolve does not appear diminished, and instead it appears highly motivated to look towards other means of addressing tax practices.
Ultimately, we think best practice with regard to corporate taxation is that arrangements should reflect the economic realities of the business, and be aligned with both the letter and the spirit of the law. In practice, this has several key components including a relevant and robust corporate policy, as well as transparent taxation reporting.
When analysing a company’s management of environmental, social and governance (ESG) issues, we seek to understand a company’s approach to taxation, as we believe an excessively aggressive approach, or one that is not aligned with the expectations of regulators and the broader public, has the potential to result in lasting damage. This may be owing to regulatory action or involvement in costly litigation, which has the potential to increase the rate of taxation paid by companies, ultimately affecting their bottom lines. Alternatively, the impact may occur via damage to a brand’s reputation, as we have seen with consumer boycotts of certain companies where tax practices have been aired by the global media, particularly as consumers are increasingly driven towards spending on ‘authentic’ brands.
 https://www.forbes.com/sites/bobeccles/2020/04/15/the-time-has-come-for-tax-reporting-transparency-thank-you-global-reporting-initiative/#57e7af57168f 15 April 2020
 https://www.businessroundtable.org/business-roundtable-redefines-the-purpose-of-a-corporation-to-promote-an-economy-that-serves-all-americans 19 August 2019
 https://www.ft.com/content/1c38fdc1-c4b3-4835-919d-df51698f18c4 15 July 2020
This is a financial promotion. These opinions should not be construed as investment or other advice and are subject to change. This material is for information purposes only. This material is for professional investors only. Any reference to a specific security, country or sector should not be construed as a recommendation to buy or sell investments in those securities, countries or sectors. Please note that holdings and positioning are subject to change without notice.
Issued by Newton Investment Management Limited, The Bank of New York Mellon Centre, 160 Queen Victoria Street, London, EC4V 4LA. Registered in England No. 01371973. Newton Investment Management is authorised and regulated by the Financial Conduct Authority, 12 Endeavour Square, London, E20 1JN and is a subsidiary of The Bank of New York Mellon Corporation. Newton Investment Management Limited is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940. Newton’s investment business is described in Form ADV, Part 1 and 2, which can be obtained from the SEC.gov website or obtained upon request. ‘Newton’ and/or ‘Newton Investment Management’ brand refers to Newton Investment Management Limited.
This material is for Australian wholesale clients only and is not intended for distribution to, nor should it be relied upon by, retail clients. This information has not been prepared to take into account the investment objectives, financial objectives or particular needs of any particular person. Before making an investment decision you should carefully consider, with or without the assistance of a financial adviser, whether such an investment strategy is appropriate in light of your particular investment needs, objectives and financial circumstances.
Newton Investment Management Limited is exempt from the requirement to hold an Australian financial services licence in respect of the financial services it provides to wholesale clients in Australia and is authorised and regulated by the Financial Conduct Authority of the UK under UK laws, which differ from Australian laws.
Newton Investment Management Limited (Newton) is authorised and regulated in the UK by the Financial Conduct Authority (FCA), 12 Endeavour Square, London, E20 1JN. Newton is providing financial services to wholesale clients in Australia in reliance on ASIC Corporations (Repeal and Transitional) Instrument 2016/396, a copy of which is on the website of the Australian Securities and Investments Commission, www.asic.gov.au. The instrument exempts entities that are authorised and regulated in the UK by the FCA, such as Newton, from the need to hold an Australian financial services license under the Corporations Act 2001 for certain financial services provided to Australian wholesale clients on certain conditions. Financial services provided by Newton are regulated by the FCA under the laws and regulatory requirements of the United Kingdom, which are different to the laws applying in Australia.