Ethical Screening is a "FairTax" company, meaning that we, along with some 60 other companies and organisations across the United Kingdom, have opened up our books for additional scrutiny, to ensure that our approach to tax is as transparent as possible.
For us, this is about practising what we preach - as a research agency which endeavours to provide accurate insights into the non-financial and CSR performance of companies and funds, we strive for clear, accessible and socially responsible information to guide ethically-orientated investment decisions. As such, an open and accessible tax environment for companies is a cornerstone of the sustainable economy we want to see, where public and private actors can be seen to work in unison for shared societal goals.
Tax and Ethical Investment
Having said that, the distinct issue of tax has had a strange relationship with the ethical investment world. In many ways, both screened and unscreened investment policies have shown interest in a greater scrutiny of corporate governance, with a potential asset that is seen to be under pressure from tax authorities and auditors likely proving unpopular from either perspective. But while 'ethical' investment has evolved from discrete issues, such as the avoidance of "sin stocks" in the earliest, often faith-based, ethical investment policies; to now encompass a range of detailed, exposure-linked and nuanced criteria in the more thorough ethical offerings today, the issue of tax within such portfolios remains often under-developed.
This is often as much down to the complexity of tax as an ethical issue as it is a transparency issue.
- Are tax revenues ethical if they are used to fund the acquisition of armaments and controversial weapons; to pay for subsidies in extractive industries; or for the re-decorating of a politician's apartment?
- Would a low-tax environment that encourages free-market processes drive greater efficiencies across the economy, with targeted corporate philanthropy replacing the wastefulness of state-led projects?
- How much tax should a company pay anyway, if operating across international borders or diverse sectors means the maximum tax liabilities of an entity are too hard to calculate?
- Isn't tax avoidance better for shareholders anyway, if it doesn't contravene any legal requirements?
However, it is worth not losing sight of the how core concepts of sustainable communities and active, prosperous economies, may be underpinned by public institutions: equality of access to healthcare and educational outcomes may be best served by state actors with increased buying power[1]; nationalised sectors may mean economies of scale savings, cost reductions for consumers and over-employment, which puts additional disposable income into more households; and the kind of hard regulation required to reverse climate change may be better enabled by well-resourced state regulators[2].
Tax, Research and Norms
Importantly in terms of insight, legal definitions take precedent over more multi-faceted, emotional or political considerations. In the absence of regulations which outlaw the practice, it is unsurprising that the norms of corporate behaviour include levels of tax avoidance, which are often supported by auditors and law makers[3]. Underlining this 'normalisation', researchers[4] have also pointed out that tax behaviour poses fewer reputational risks to companies than those associated by environmental or rights-based violations, which underlines the need to hold businesses to account across a range of non-financial metrics which are of interest to consumers. As much as an ethical investor may be concerned with full tax transparency, they may place a higher priority on other issues such as excessive executive remuneration, habitat loss and inadequate remediation, or underpaying suppliers in emerging markets.
Nevertheless, it is clear that tax avoidance as a norm is widely accepted as a bad norm. Tax-shaming of companies such as Amazon and Starbucks have clearly shown that pressure from various campaigning organisations is encouraging the closing of legitimised tax loopholes. More than societal pressure, it appears the legal-norm needs shifting, and again outside pressure is evident, with recent moves by governments, including the traditionally free-market United States, to push for better processes for calculating international and off-shore revenues[5], as well as pressure from business groups themselves, with friction between online and high-street retailer over sales tax liabilities[6] having been exacerbated by the COVID-19 pandemic.
In perfect timing for FairTax Week, the G7 is also looking to develop mechanisms to improve tax transparency across borders, and increase the tax revenues from some of the world's largest corporations, but with so many moving political and economic parts, arriving at a solution that truly satisfies all stakeholders may yet prove illusive[7] [8] [9]. By achieving agreement on a global minimum rate of corporation tax, both investors and researchers can hope to access a reliable threshold for compliance on trans-national business taxation, a fantastic starting point for tax transparency to become a core element of ethical investment moving forward.
As the norm shifts it is important that the responsible investment community uses its inclination towards ingenuity and creativity to capitalise on consumer needs. In this respect, tax is an interesting issue to place more in the area of the emergent trend towards impact investing - a conceptual shift from asking investors what they would like to avoid to what they would like to endorse. Following the norm - avoiding tax evasion, and accepting tax avoidance - is one thing, choosing to endorse "FairTax" or uncompromised Corporate Social Responsibility is another. Embracing FairTax and rewarding positive corporate tax behaviour is a vehicle through which investors can encourage this shift to a better norm.
References
[1] https://healthbusinessuk.net/features/nhs-buying-power-can-save-public-sector-millions
[2] https://www.theweek.co.uk/101318/the-pros-and-cons-of-nationalisation
[3] Sikka, P. and Willmott, H. (2013), "The tax avoidance industry: accountancy firms on the make", critical perspectives on international business, Vol. 9 No. 4, pp. 415-443.
[4] Baudot, L., Johnson, J., Roberts, A., & Roberts, R. (2020). Is Corporate Tax Aggressiveness a Reputation Threat? Corporate Accountability, Corporate Social Responsibility, and Corporate Tax Behavior. Journal of Business Ethics. https://doi.org/10.1007/s10551-019-04227-3
[5] https://www.theguardian.com/business/2021/apr/08/biden-proposes-global-reforms-to-end-profit-shifting-to-tax-havens
[6] https://www.theguardian.com/business/2021/feb/07/online-sales-tax-aims-to-shift-balance-as-uk-high-streets-struggle
[7] https://www.theguardian.com/technology/2021/jun/06/global-g7-deal-may-let-amazon-off-hook-on-tax-say-experts
[8] https://www.ft.com/content/95dd0c00-7081-4890-bcef-b9642312db4d
[9] https://www.politico.eu/article/g7-tax-global-google-facebook-amazon/