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Should investors boycott tax-avoiding companies?

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28/01/2013
Headlines about tax-dodging companies have led to a new wave of ethical investors.

David Cameron’s speech at the G8 summit last week warned companies that avoid paying tax to ‘come out and smell the coffee’.

At a time when public purses are being squeezed and moral outrage is at an all-time high, that message would have struck a chord with the British sense of fair play.

Whether the PM was having a dig at Starbucks – which was caught having paid a mere £8.6m in tax in 14 years – companies that avoid paying tax will likely rile investors with a ‘socially responsible’ mandate.

Last year, Christian Aid estimated that tax dodging by multinationals and other businesses trading across borders in poorer countries costs the exchequers of those countries around US$160bn a year, as they lack the expertise and revenue capacity to fight back, making it nearly one and half times what they receive in aid.

While British politicians have cited the likes of Google, Starbucks and Amazon as notable tax dodgers, experts say aggressive tax planning is so widespread it is having grave consequences for developing economies around the world.

Charles Mosley, Co-operative Wealth director, says recent headlines are making the ethical investor sit-up and take notice: “We have seen a shift in recent weeks from our clients as they are asking more probing questions regarding ethical investments. They want to know in greater depth the company’s engagement and social responsibility policies.

“With more people using social networking sites than ever before, they are becoming very aware of these issues and they are proactively looking at companies in greater depth.”

Tax evasion now costs the UK Treasury over 15 times what benefit fraud does, and although it is difficult to know exactly which companies are aggressively avoiding tax until it hits the headlines – there are a few things investors can do to filter out companies that do come to light.

Mark Robertson, head of communications at EIRIS – a not-for-profit outfit setup to provide research into corporate environmental, social and governance performance, says investors are taking different approaches to shun tax offenders:

“Some investors are just screening out these companies from their investments. But more commonly, investors are voting against these companies at AGMs and or engaging with them. That means they are using their influence as investors to put pressure on companies to change their practices in relation to taxation. This is far more common instead of berating a company and pulling away from it – which is not always possible if you are an investor.

“For a big global pension fund, where they are taking a whole of market approach and investing billions, or they are following their benchmark, what they can do or should do is to engage with these companies.

“This will help with risk management, and while some argue that by not paying tax companies are avoiding additional costs to their bottom line, there is a moral imperative for companies to pay taxes.

“Investors need to also consider that there are negative issues that arise from tax avoidance – like reputational damage and fees and fines from watchdogs. Some companies could also get hit with having to pay tax retrospectively.”

As it stands, there are loopholes in the tax system that big businesses can exploit – and critics say that is part of the problem. Companies spend a lot of money in lessening their tax burden, and some see that as a prudent way of operating.

While tax evasion is illegal, tax avoidance is not; therefore it becomes a moral question rather than one of law.

Robertson adds: “If things are to improve, companies need to look at what is the most responsible choice around taxation and what risks they are facing in avoiding tax.”

Currently, there are three hot topics for ethical investors – tax avoidance, executive remunerations and unethical behaviour in high street big banks.

There are combinations of other factors that investors are now considering but tax avoidance is dominating questions to advisers as investors review their financial decisions.

The change in the last few years has meant that ethical investments are now becoming more mainstream. Robertson says: “As these single issues hit the headlines, and even when people might not realise it, they are making everyday decisions due to scandals that certain companies have been involved in.

“People imagine tree huggers when they think of ethical investors. It’s possible to be part ethical when managing your finances. Increasing numbers are looking at ethical investments, not just because it fits their moral compass but also because it fits their business ideals too.”

Brigid Benson, Chair of Gaeia, one of the UK’s leading responsible IFAs , says: “The business of tax avoidance is interesting as it has actually struck a code with everyone, not just investors – it has struck a chord with people’s sense of fair play. It’s heartening to see that this is coming into the public domain. So what can investors to do?

“Some of the funds that we use, particularly the funds we use through stockbrokers, have been doing research on this as well. It will now be added into questions asked to companies. It will mean tough conversations and asking the difficult questions to companies like Vodafone.

“There has been a significant increase in clients raising this as an issue. These clients are very indignant and better informed.”

Benson says that it is becoming increasingly important that consumers consider where they invest their money: from where they bank, where they save, their pension fund, where they buy their coffee and or even what they buy: “Sometimes you can’t avoid buying things as there might not be that many alternatives, but we should use consumer pressure points to get people aware and encourage people to invest as carefully as possible,” she says.

“There isn’t just one route to making changes. Where you invest your money or with people who are actually going to engage on your behalf on the issues that really count, like tax avoidance, is a really powerful way of changing the way companies behave.”

 The firms that came under fire for dodging UK tax

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