The T-Word

While some libertarians might weep at the suggestion, tax underpins our modern societies. Once a tool for medieval kings to raise funds for wars in far-off lands, tax proceeds are used for more useful purposes today.

They are a fiscal foundation upon which our public services and infrastructure is built. They are the oil in the engine that works for the benefit of all citizens, regardless of sex, race, or creed. Allow those foundations to weaken, and that oil to run low, then the building will crumble, and the engine will struggle.

For example, UK government spending statistics published in May this year show that public expenditure (in real terms) between 2023-24 totalled GBP 1,112.9 billion, with:

• GBP 364.6 billion (32.8%) going to social protection
• GBP 163 billion (14.6%) going to general public services
• GBP 222 billion (19.9%) going to health

By contrast, only GBP 56.8 billion (or approximately 5.1%) was spent on defence. Most likely a much smaller proportion than that spent by those hawkish medieval kings.

But what do good corporate tax practices look like, and what can you do as an investor to encourage more companies to pay a fair amount of tax on their earnings?

According to a 2024 report by the Fair Tax Foundation, there are a number of “green flag” and “red flag” activities that can help in determining whether a company’s tax practices are responsible or not. For example:

(i)    Commitments regarding tax should go beyond just stating a commitment to regulatory compliance, and include clear and explicit commitments to declare profits in the jurisdictions where their economic substance arises, and avoid the use of “tax havens”.

(ii)    Financial statements should include a complete list of subsidiaries, and this list should clearly indicate both the jurisdictions in which subsidiaries are incorporated, and their tax residency.

(iii)    Country-by-country reporting of corporation taxes paid should be provided, and should include disclosures explaining any asymmetries (such as substantial income in a country, but few staff and assets).

These are just a selection of actions that companies can take to demonstrate responsible tax practices, but now you have an indication of what good practice looks like, how can you leverage your influence as an investor to encourage change?

The first thing you can do is consider who you want to look after your money - your investment manager. As outlined in ourYour Money Makes a Difference guide, the way money is invested can drive change, but you must ensure that your money is invested by a manager that seeks to use money for good.
When it comes to tax, this means seeking a manager that considers tax practices when it comes to selecting investment opportunities, be this in relation to individual companies included in their own funds, or its method for selecting third-party funds included in its model portfolios.

Similarly, you can also aim to choose a manger that engages with investee companies regarding their tax practices, or offers model portfolios consisting of funds provided by fund managers that engage on the topic. As is also outlined in our guide, engagement is a core tool in the responsible investor toolbox; as owners of company equity (and representatives of their clients), managers have the right to a say in how these companies operate.

If enough pressure is applied, and companies are made aware of how much certain issues are important to their shareholders, they can be encouraged to change. Often, engagement efforts by investment and fund managers are focused on topics such as climate targets and diversity, but if enough demand from their clients is there, then tax can also become an area for engagement.
 
In summary, if tax practices are something you care about, then ask the question of your adviser and your manager. You almost certainly won’t be the only one who ever has, and the more people push tax as an issue of importance, the more attention will be drawn to the topic, and the more influence investors like you can have.

Never underestimate the power of your money.