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City fund managers waking up to the risks of tax opacity

07 February 2014

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You might not expect City fund managers to feature very prominently among the growing ranks of tax activists, but times are changing, writes Mike Lewis of ActionAid.

As ActionAid has been arguing for some time, aggressive tax practices are beginning to pose not just a reputational risk for businesses, but also real uncertainty at the level of their bottom lines. And that’s when bondholders, not just activists, start to care.

We’re seeing the first inklings that even major fund managers are starting to consider putting their money where their mouth is. Monday saw Royal London Asset Management (RLAM), a leading UK fund manager with some £50 billion ($82 billion) of assets under management, reveal that in recent months it has been pushing the online retailer Amazon to publish more meaningful information about their tax affairs, showing shareholders and the public how much tax they pay, and where.

Investors examining more closely the tax behaviour of the companies in their portfolios could be a powerful tool for better transparency, and more open tax policies within companies. Investors’ influence has long been a propellant for other socially responsible business practices, from environmental standards to labour rights (RLAM has also asked Amazon to account for its reported opposition to collective bargaining by its employees). Tax is a new but growing part of this agenda.

ActionAid has been exploring how investors might promote responsible tax practices for some time. During last year’s AGM season, we published an investors’ tax guide: a toolkit for shareholders to push companies to clean up how they manage, constrain and report their tax practices. RLAM were among those who took part in our discussions with investors, and informed our wider engagement with decision-makers and others.

What’s interesting is that while RLAM may be an ethical investor, its concern is not only ethical. It’s also a hard-nosed business issue. As RLAM points out, big companies’ opaque and complex tax arrangements make it difficult for their investors to gauge the riskiness of their investments. In the unsentimental view of investors, as some tax authorities around the world become more sure-footed in their pursuit of large companies, tax can generate major, unforeseen contingent liabilities on the company’s balance sheet, and future cash-flow risk. The Financial Times recently reported that major tech firms including Amazon, eBay and Facebook have issued shareholder warnings in anticipation of being hit by international efforts to fix the broken international tax system. And these risks aren’t just in big economies. The Zambian government, for instance, with assistance from Norway has established a dedicated international team of tax auditors to audit major multinational mining companies. Their pursuit of high-profile FTSE100 companies has already had knock-on effects on investor confidence. The draft tax audit findings from one mine owned by the London-listed metals giant Glencore were cited in a decision by the European Investment Bank, which had previously financed the company’s Zambian copper smelter, that it would refuse further financing requests from Glencore or its subsidiaries.

In a world of governments and publics newly intolerant of unethical tax behaviour, the financial stakes of the tax game have never been higher. When ActionAid last year highlighted the (entirely legal) role of banking giant Barclays in marketing the use of tax havens to multinational companies operating in some of Africa’s poorest countries, we pointed out that the test for such activities was no longer simple legality. The rules of the game are changing in rapid and unpredictable ways that may generate reputational problems among investors as well as customers. Of course, we shouldn’t overestimate the appetite of mainstream investors for a tax crackdown. And with Amazon, RLAM haven’t – yet – deployed the ultimate sanction of divestment.

We’re in strange new territory though. There may be few common causes between the big beasts of the City and those threatening to beat down their doors. But it’s just possible that cracking down on tax avoidance could be one of them.

International Correspondents