What is your view on tax avoidance by international corporations? There is some debate about what constitutes good governance according to the principles of ESG investing. I mean legitimate tax avoidance, often called tax efficiency, as distinct from tax evasion which is of course illegal.
Many international firms take advantage of tax efficiency measures through registering a company in a zero or low tax jurisdiction. In this way more revenue is returned to the company as profit, which in turn is either invested in the business or returned to shareholders as a dividend. Leading international law and accountancy firms derive a considerable fee income from advisory services relating to tax efficiency. This is both legal and lucrative but is it poor governance?
Local markets where goods are consumed or traded suffer from being denied much needed taxation income. This could pay for infrastructure development: schools, hospitals, energy and transport projects. How does this then get scored for ESG points against the 17 SDGs of the Paris agreement? Is this fair or morally justifiable? If the ESG bandwagon is driven by investors demanding more sustainable behaviour, then tax efficiency should be a red flag on governance quality.
Corporations that practise tax efficiency will gladly take revenue from consumers in local markets but be reluctant to pay taxes due in them, taxes which rival smaller businesses cannot avoid. This is how corporations like Amazon create competitive advantage, they will appear better value to consumers because their operating costs are reduced through tax efficiency. The international tax efficient corporation is able to stifle local competition through translating tax efficiency into operational efficiency and thus reduce consumer prices.
Measurement of ESG is a controversial subject anyway, but governance is especially tricky, it covers more than simply the board structure or accountability systems, it should also include fiscal impact on society and the wider business environment. Securing a good rating for governance should take account of tax avoidance as a long term benefit denied to consumer markets. While it is clearly a short term benefit to shareholders, true ESG compliance is about long term sustainability. Good governance should be about paying tax where it falls due not diverted to somewhere it can be minimised or negated.
The World Economic Forum white paper on ESG published last year addressed many of the challenges facing ESG accreditation. Despite being titled ‘Measuring Shareholder Capitalism – Toward Common Metrics and Consistent Reporting of Sustainable Value Creation’, it failed to mention the question of whether tax efficiency was indeed poor governance. This is hardly surprising as the paper was authored by a consortium of international the audit and advisory firms, all of whom profit from devising tax efficiency schemes for their clients.
Governments cannot control an international firm that choses to locate its registered head office in a benign foreign tax jurisdiction; they can kick their heels and lobby furiously, but the only party the corporation will listen to is the shareholder body. Not all shareholders take a long term view on sustainability or responsibility, especially when offered short gain. Governance and tax are both fiscal and moral issues. How do you conduct your due diligence on good governance?