PI Partnership
ness models with considerably higher lev- els of intangible assets, and the increas- ing use of automation and flexible working for employees.
Rebecca White is a responsible investment analyst at Newton Investment Management
TAXING TIMES
Corporate taxation practices are attract- ing growing scrutiny. What are the invest- ment implications?
The introduction of comprehensive laws relating to international taxation took place around a hundred years ago. Princi- ples were established by the League of Nations in the 1920s as a result of pres- sure to avoid the double taxation of corpo- rate 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 ($600bn/£463bn) 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 taxa- tion practices have attracted increasing at- tention from the media and civil society, as well as from the broader public. This may be owing to several factors, such as increased globalisation, the shift to busi-
During periods of increased social ten- sion, 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 vari- ous means of government support. Moreover, in recent years, the shareholder primacy model that has dominated corpo- rate 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 com- mitment to a more sustainable and inclu- sive (multi-stakeholder) form of capital- ism, taking account of the interests of all stakeholders – including customers, employees, suppliers, communities and shareholders. Such developments have highlighted the symbiotic role that corpo- rations 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 litiga- tion has been complex and costly, and the claimants have ultimately failed. However,
the EU’s resolve does not appear dimin- ished, and instead it appears highly moti- vated to look towards other means of addressing tax practices.
Investment implications Ultimately, we think best practice with regard to
corporate taxation
is that
arrangements should reflect the econom- ic realities of the business, and be aligned with both the letter and the spirit of the law. In practice, this has several key com- ponents including a relevant and robust corporate policy, as well as transparent taxation reporting.
When analysing a company’s manage- ment of environmental, social and gov- ernance (ESG) issues, we seek to under- stand 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 com- panies, 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 cer- tain companies where tax practices have been aired by the global media, particularly as consumers are increasingly driven towards spending on ‘authentic’ brands.
Important information: 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 infor- mation 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. 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 In- vestment Management’ brand refers to Newton Investment Management Limited.
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