Amundi Asset Management

2019 Top 400 ranking: 9

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Aggressive tax optimisation: what is the best ESG approach?

Between 100 and 240 billion euro per year. This is what aggressive tax planning costs governments in lost revenue.

Such practices, designed to enable companies to avoid tax by using and abusing the legislation in place, have flourished in recent years. They have been supported by globalisation of communications and the growing dematerialisation of the economy. These practices have also become more complex and industrialised, with the help of tax advisory companies that are increasingly professionalised. Companies today are therefore encouraged to create financial flows that enable profits to be transferred to zones with tax advantages, for example by creating companies that hold patents or brands or by using asymmetry between local legislation to benefit from double non-taxation.

Although these practices are usually legal, the size of the amounts in question makes them increasingly unacceptable in a context of austerity. For governments as much as people. Aggressive tax optimisation practices therefore represent a risk for investors if international tax regulation changes. Moreover, this is exactly what is happening at the European level with, for example, the implementation of a package of measures designed to strengthen fiscal transparency, such as the Common Consolidated Corporate Tax Base (CCCTB) or the fight against abusive tax rulings whereby companies manage, on an exceptional basis, to be subject to a particularly accommodating tax regime. Similarly, implementation of the conclusions of the OECD working group on base erosion and profit shifting (BEPS) should soon affect companies that use aggressive tax optimisation. Asset management companies should factor this risk into their investment decisions, as a fiduciary responsibility.

But taking these practices into account also raises moral questions. As a responsible management company, we should be interested in practices that mean companies benefit from a country’s riches without paying their fair share, circumvent legal requirements to contribute to government budgets and thereby question the role of public bodies in setting taxation levels. It is worth noting here that the governments most affected by these practices are emerging countries as they cannot turn to income tax of physical persons to rebalance their income.

We therefore wanted to put in place a specific analysis criterion for this question. As with other criteria used to measure companies’ Environmental, Social and Governance (ESG) performance, we used our data suppliers’ ratings to create a consensus on aggressive tax optimisation. This criterion covers more than 2,000 stocks in our reference universe. If this criterion meets a best-in-class policy, like all ESG criteria used by Amundi, a best-inuniverse calculation shows that the software and pharmaceutical industry sectors have the least good practices.

Finally, to put this criterion into perspective, we have developed an internal model to measure tax risk exposure, based on companies’ presence in risky countries. We have also analysed statistically the media controversy on this subject. Although such approaches are limited by the quality of information available, they have enabled us to put in place a list of stocks that seem risky at first glance, to which we could then apply more detailed qualitative analysis.

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