The COVID-19 crisis may become the “tipping point” that makes tax havens and aggressive tax avoidance as controversial as bribery and corruption.



In the 1990s, it was broadly accepted that large international companies used bribery in parts of the world to sell their products. In Denmark, the expenditures for bribery could even be deducted from tax. But especially since anti-corruption and -bribery became the tenth principle of the UN Global Compact in 2004, it has become increasingly clear that it only makes criminals rich and destroys fair competition.

Now it seems something similar could happen with the corporate use of tax havens and other kind of tax avoidance schemes. NGOs have been criticising the situation for many years. Politicians have long been talking about addressing the problem as well. However, it has not changed the fact that many of the world’s largest and most known companies openly use tax havens such as Bermuda, Cayman Island, Ireland, Switzerland and Luxembourg, thus evading paying what is equivalent to 600 billion USD in corporate tax each year, according to IMF.

But there are indications that the COVID-19 crisis is now making it even clearer that this situation is unacceptable. All over the world, governments are creating enormous debts to provide financial support to private companies to help them survive and preserve as many jobs as possible. Against this background, it may seem grotesque that many of the companies with the highest earnings, even in these times of crisis, are far from contributing their share of the public budgets. And that some aggressive tax companies even ask for a share of public crisis support.

Pascal Saint-Amans, French Director of the Western World’s International Cooperation Organisation, OECD, told the newspaper Politiken last week: ‘I had a conference call the other day with colleagues from the International Monetary Fund, the World Bank and the United Nations in what we call the platform for cooperation on tax, and everyone who spoke said now is the time to finish the work because the tolerance of tax havens will be zero.” It would not be morally sustainable if some of the world’s largest and richest companies did not contribute, it was stated.

Let’s hope that the OECD will succeed in bringing together politicians as planned to reform international tax rules even before the end of this year, discouraging the use of tax havens. But experience shows that it is a slow process for international politicians to agree on taxation policies, and often it ends up with a slightly watered-down version even with the strongest ambitions. An example would be the EU’s blacklist of tax havens, which exempts member states such as Ireland, Luxembourg and the Netherlands, although figures clearly show that they are among the main hosts for corporate tax avoidance.

Institutional investors are pushing

Fortunately, however, we do not have to wait for politicians to tighten up the legislation. More and more institutional investors agree that the use of tax havens and tax avoidance are a systemic issue that they can and should fight against, just like bribery and corruption, global warming and other so-called ESG risks.

The UN PRI has recently released a report on corporate tax engagement. GRI has also issued the world’s first voluntary reporting standard for companies to disclose their tax affairs. The two initiatives add to the OECD’s work in the field and Maersk’s, Unilever’s and other companies’ guideline, called B-Team. They can all be used as guidelines for responsible tax behaviour, and thus also by institutional investors in their engagement dialogue with companies.

At Engagement International, we have collaborated with among others Danish municipalities to develop a “Responsible Corporate Tax” assessment model with 20+ KPI’s and aligning with the most recognised international norms and best practices in this area. And we have tested the model in practice through engagement dialogues with ten of the listed companies that are known for the most significant controversial tax cases. These are Apple, Google, Microsoft, Amazon, Credit Suisse, UBS, Deutsche Bank, Societe Generale, Royal Dutch Shell and Procter and Gamble.

Poor tax management – but improvement on its way

The next step is engagement dialogue with an additional 20 listed companies, which according to MSCI ESG Research can be associated with the most controversial corporate tax cases and are present in the most controversial tax havens or have a very low effective tax rate.

Our first tax engagement round indicated that the vast majority of companies have a very low level of tax management, which is miles away from international recommendations. Typically, they do not recognise their obligations to act as responsible taxpayers, let alone all kinds of risks that can be associated with tax planning; nor does the majority have clear intentions to live up to the most basic principles of responsible taxation. These can be, for example, avoiding tax havens and artificial tax structures and paying tax where they actually do their business, complying also to live up to “the spirit” and not just “the letter” of tax regulations.

Most of the companies we have so far engaged with also do not involve their boards in the overall control of their tax practices. They typically also don’t report on what they pay in “country by country” taxes. And often their actual tax payment in cash is significantly below 20 percent of their pre-tax profits.

The positive, however, is clear improvement from many of the companies. Several of the financial companies have clearly decided to improve their preparedness in this area and are open to concrete proposals from their shareholders. Oil and gas company Royal Dutch Shell is leading the way with a brand new “Responsible tax report”, which is among the best we have seen so far, although there is room for further improvement. But it requires further pressure from shareholders and, as always, the right timing. There are a lot of indications that it is now.