By Thomas Kostigen
It is said that two things are certain for people: death and taxes. For corporations, those two things are less certain. Companies can live on ad infinitum. One Japanese construction company, for example, has been continually operating since 578 AD. And numerous companies utilize aggressive tax strategies to avoid paying taxes altogether. Nike and FedEx, for example, paid no federal income taxes last year.
When it comes to continuity, investors often celebrate stability and longevity. When it comes to aggressive tax strategies, however, more and more investors (and countries) are taking issue with dodgy moves. US Treasury Secretary Janet Yellen is calling for a minimum global corporate income tax. And the European Union, through the European Commission, has adopted mandatory disclosures of aggressive tax planning schemes.
The heightened attention to tax planning, which can often involve arcane strategies leaving many tax professionals, and regulators for that matter, scratching their heads, is due to a widespread belief that there has been a 30-year “race to the bottom” for corporate taxes; meaning that countries have lowered and lower and lowered corporate taxes in bids to attract them domiciling on their shores versus another, higher taxing country. Indeed, Yellen said the Biden administration would work with other advanced economies in the Group of 20 to set a minimum tax rate in order to buck the trend of shifting assets from one country to another to avoid or reduce tax payments.
The rise of environmental, social, and governance (ESG) investing is also spotlighting corporate taxes. And this is where it becomes important for investors to pay attention to how much, as well as how the companies in which they invest pay taxes. Aggressive tax strategies could run afoul of regulators and institutional holders, which means there is a risk of fines and penalties having to be paid. Fines and penalties can affect share prices. Share prices, of course, equate to better or worse returns.
KPMG, one of the Big Four accounting firms, advises that investors should consider the following: “Does the entity have a tax risk statement? Is tax risk included as part of the board’s risk oversight function? Is the entity’s tax function adequately staffed? Does the entity make use of complex structures? Are tax risks adequately disclosed? Does the entity’s tax risk seem reasonable?”
A company’s tax risk statement details transparency and accountability efforts, as well as its decision-making process on risk mitigation measures such as accepting, reducing, avoiding or transferring risk.
To be sure, a good financial advisor can help investors assess whether the companies they own stock in are paying their fair share of taxes or are at risk of scrutiny and/or penalties. Such analysis is starting to be baked into ESG standards, too. That means a company’s ESG rating can be affected by disclosing a particularly aggressive tax plan. As more investors pay attention to ESG ratings, the ratings become more critical to shareholder value.
Companies are surely paying due attention to their tax risks and how they report their tax strategies in light of recent scrutiny. Paying taxes may even become a sure thing for them. The only worry they may have then, like the rest of us, is death. Corporate age limits?
Thomas Kostigen is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Thomas is a best-selling author and longtime journalist who writes about environmental, social, and governance issues.