The $82bn listed-company tax gap

Listed companies in developed markets are avoiding at least $82bn of tax a year by using tax havens and other minimisation strategies, according to detailed analysis of more than 1,000 businesses.

The revelation comes as campaigners and investors have increased their focus on the impact of corporate tax avoidance on public finances at a time of widespread austerity.

The analysis, conducted by MSCI, the index provider, suggested companies in the healthcare and information technology sectors were among the biggest tax avoiders, in line with anger over the level of tax paid by the likes of Apple, Google, Microsoft and Amazon.

Linda-Eling Lee, global head of environmental, social and governance research at MSCI, said companies with a large "tax gap" faced reputational risks, as well as the prospect of lower post-tax profits if these gaps are plugged.

"Tax avoidance is an issue investors are increasingly aware of," said Alex van der Velden, founder and chief investment officer of Ownership Capital, the Dutch asset manager. "The public ire that has been created by businesses found aggressively pursuing loopholes to pay abnormally low taxes has been significant and has led to serious reputational issues. Such risks can have material long-term financial implications."

Kieran Quinn, chairman of the UK's Local Authority Pension Fund Forum, which last month wrote to every FTSE 100 company asking for details of their tax planning practices, added that "some of the [examples of tax minimisation] we have heard about recently are not just about clever accountancy - in our view it is very close to criminal activity."

MSCI estimated the size of the global corporate tax gap by calculating the average annual tax rate paid between 2009 and 2013 by the 1,505 companies in the MSCI World index, which accounts for about 85 per cent of stock market capitalisation in 23 developed countries.

Stripping out lossmaking companies, miners and property groups, MSCI then estimated each of the remaining 1,093 companies' potential tax rate by calculating the weighted average tax rate in the countries where they derive their revenues. The tax gap is the difference between these two figures.

MSCI found that 243 companies had a tax gap of at least 10 percentage points. If these companies, which had an average tax rate of 17.7 per cent of pre-tax profits, instead paid tax at the 34 per cent rate typically incurred by the remaining 850 companies, this would have raised their tax bills by $82bn a year, an average of $337m a company, MSCI said.

This in turn would have reduced the aggregate post-tax profit generated by these 243 companies by 20 per cent.

Jolyon Maugham, a barrister specialising in tax law, said investors were not paying enough attention to the impact that global tax reform could have on corporate profits.

Citing the OECD's Base Erosion Profit Sharing initiative, due to be outlined in September, he said: "The effect of the BEPS project will fall most heavily on companies that engage in more aggressive tax planning strategies. I do not sense sufficient investor concern about the likely effect of the BEPS project on the post-tax returns of the companies in which they invest."

MSCI's Ms Lee said investors were viewing the aggressiveness of a company's tax planning as a proxy for accounting risks and the company's broader management style.

More than a third of healthcare and technology companies are among those with large tax gaps, MSCI found, along with a quarter of those in the energy and materials sectors.

At least 40 per cent of MSCI World companies domiciled in Bermuda, Ireland, Belgium, the Netherlands, Switzerland, Canada, Hong Kong and Luxembourg were found to have large tax gaps, along with 27.1 per cent of US companies and 22.5 per cent from the UK. Japan came bottom of the list, with just 7 of its 193 companies in this camp.

Just under 11 per cent of companies had at least one majority-owned subsidiary in a "tax haven" in which it is not domiciled, MSCI said, with the Cayman Islands and Luxembourg the most popular such countries.

Richard Murphy, founder of the Tax Justice Network, a campaign group, said MSCI's estimate of the size of the global tax gap was "reasonable", although it may understatement the true figure, given the tax deferral activities many companies use to lower their bills.

Mr Murphy estimated corporate tax avoidance in the UK alone amounted to £12bn in 2008, although this figure is likely to have fallen since given a cut in the corporation tax rate from 28 per cent to 20 per cent.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation