Pay your way: assessing corporate tax strategies

Several high-profile cases have shown how intricate schemes for legal but socially unacceptable corporate tax avoidance have led to a backlash. It can lead to severe reputational damage and litigation risk, and present a value threat for investors.

Such is the importance of having an acceptable tax strategy that it has been included in RobecoSAM’s annual Corporate Sustainability Assessment since 2014. The findings have been summarized in a report, ‘Five Years of Pushing for Change: Assessing Corporate Tax Strategies’, published in the RobecoSAM Yearbook 2019.

“Corporations are currently incentivized to minimize their tax burden in order to maximize profits, says the report’s author Eleanor Willi, Sustainability Specialist for ESG Ratings at RobecoSAM. “Yet in the long run, tax-shirking behavior proves to be short sighted, as it exposes a company to policy and litigation risk, generates reputational risk amongst stakeholders, and promotes distrust.”

“Companies pursuing overly aggressive tax avoidance strategies exacerbate existing inequalities based on company size as well as industry. We recognized early on that a company’s tax strategies could put it at risk in terms of reputation, regulation and ultimately financial performance. Since 2014, we have captured material tax-related data in our CSA.”

One very positive finding has been that tax strategy disclosure is increasing among CSA participants, as nearly half (47%) of companies meet RobecoSAM definition of a sustainable tax strategy – a five-fold increase since 2014.

Meanwhile, an increasing share of companies are showing a commitment to sustainable tax policies, eschewing opportunities for tax optimization in favor of clarity, transparency and disclosure. Regional comparisons of tax sustainability results, however, show higher scores for Europe and Asia-Pacific companies, whereas North American firms scored lower.

“We are moving towards a new era of sustainability in which we look beyond companies’ policies and reporting towards their impact on the world around them,” Willi says. “Taxes are a critical link between companies and their surrounding societies – they provide the means for communities and countries to build the physical, social, and educational infrastructure needed to support future growth and development.”

“Furthermore, aggressive corporate tax optimization is often seen as a contributing factor to rising levels of inequality. Developing countries lose around USD 100 billion in annual tax revenues due to multinationals shifting their profits to tax havens.”