Corporate tax risk: poking the bear

23 Nov 2016

Corporate tax is increasingly in the news, but are investors guilty of complacency over the risks it poses? Emma Cusworth investigates.

“As shareholders we want companies to pay as little tax as possible, but we don’t want those companies to be too aggressive with their tax policy as that creates unsustainability.”

Richard Marwood, Royal London Asset Management

If you poke a bear with a stick too many times, eventually it will turn and bite you. In a world of rising government debt and social inequality, in which institutional investors are increasingly struggling to find sustainable returns, that bear is the tax man. And, as the mood begins to change, corporate tax risk is on the increase.

Companies including Apple, Facebook, Starbucks, Amazon and Vodafone have all come into the firing line in one way or another over their tax policies in recent years and the sums in question are not negligible. In August the EU ordered Apple to pay €13bn to the Irish authorities after it found the company was the beneficiary of illegal state aid.

Yet, despite the eye-watering sums and the scale of brands facing questions over their tax policies, Richard Murphy, director of Tax Research UK warns of a “deep complacency” about the dangers rising corporate tax risk could pose to institutional investors.

MOOD CHANGE

The mood in the outside world has clearly shifted when it comes to corporates paying their fair share of tax.

Starbucks has been at the sharp end of a sentiment shift among consumers and governments. In 2012 it became the poster child for corporate tax avoidance after it was revealed how little tax the company paid. Over 14 years between its 1998 UK debut and 2012, Starbucks paid only £8.6m in tax despite £3bn in sales over that period. In 2015, in the wake of a customer boycott and strong criticism concerning the company’s use of complex tax structures to shift profits into low tax jurisdictions, the company paid £8.1m – a corporate tax rate of 24% – on a pre-tax profit of £34.2m for the year to the end of September.

The consequences won’t stop there for Starbucks. The European Commission ruled some elements of its tax structure were unlawful last October, resulting in fines likely to stretch into the millions.

Tax issues, which are always going to be worse for consumer brands because of their ability to affect consumer behaviour, gives rise to asymmetric risk for investors. According to Murphy: “It is the company that behaves badly, but it is investors who bear the brunt.”

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