Get the right experience for you. Please select your location and investor type.
Tax Approaches
We consider the tax rates paid by companies that we might invest in on behalf of our clients important because it impacts our assessment of Quality of Management, Franchise and Financials.
Download PDF versionTo our simple freight forwarder mentality, the difference between the exorbitant amounts of money required to pay the ‘gaggles of accountants and prides of lawyers’ to perpetuate the Byzantine and complex, wildly intricate, tax avoidance schemes and the amount of taxes you’d pay if you just did straight forward, reasonable tax computations isn’t worth the anxiety of what will happen when laws or interpretations change.
Chairman of one of the world’s leading freight forwarder
We consider the tax rates paid by companies that we might invest in on behalf of our clients important because it impacts our assessment of Quality of Management, Franchise and Financials.
Firstly, given the range of legal and accounting gimmicks available to companies, we view the effective tax companies pay these days as voluntary. One of our favourite examples comes from the US, where Toys R Us set up a Delaware holding company to reduce its tax burden.
This scheme involved registering the corporate mascot, Geoffrey the Giraffe, as an asset of that Delaware entity and then charging every store in the US a royalty for its use, effectively shifting profit to that low-tax jurisdiction.
Since tax rates are something of a choice, they can thus be a very useful metric to help us evaluate Quality of Management. We believe that a management team that goes to lengths to minimize tax is cutting a corner in order to boost profits in the short-term at the expense of the long-term. This might also indicate they are likely to do the same elsewhere in the business, whether that be manifested as a safety issue, a balance sheet risk or an accounting scandal that would have severe impacts on long-term returns.
Secondly, we believe tax forms part of a company’s obligation to society. In our view, each company must earn and nurture its social license to operate. This is done through providing socially useful products and services, acting in a responsible way and looking after all stakeholders not just shareholders. We have seen time and again companies endanger their license to operate through gross negligence of the environment, wilful damage to public health, and deceptive marketing practices; it often results in more onerous regulation, loss of trust of customers, and legislative obstacles to continuing that business model. Tax is the most visible and quantifiable way a company can be accused of failing in its broader duty to society. Yet we continue to meet with company executives who obsess about lowering their tax rate as far as is possible.
In the context of increasing societal pressure on corporates to pay their fair share, we feel that any company aggressively avoiding tax risks endangering their social license to operate and thus long-term returns for shareholders. In contrast, we were particularly struck by the CFO of a family-owned building materials company which originated over 100 years ago in Zug, one of the lowest tax cantons of Switzerland. This steward felt that “it would be silly to take a short-term view on these things as governments will eventually get it back from you.” While it would have been very easy to transfer profit home to Zug, with a tax rate of 15%, the company understands that paying reasonable tax is part of earning the right to do business in the many countries it operates in, and so has paid on average 28% over the last five years.
Lastly, we consider a low tax rate to be a very material risk to earnings. A number of years ago we ranked Indian pharmaceutical companies on tax rate paid. We were attracted to the companies paying the highest tax rates. This was because those companies have materially lower risk income statements. India has a fiscal deficit, dire infrastructure and millions of malnourished people; its most globally competitive companies routing profits through Mauritius is unlikely to be tolerated in the long-term. Those companies avoiding tax and paying far below the statutory rate are likely at some point to be forced to comply, meaning the prompt loss of up to 30% of profits! We do not want to be holding shares in those companies for our clients when that happens. For all of these reasons, we continue as a team to monitor tax closely as an issue across the companies that we consider investing in on behalf of clients. We use it as a tool in our analysis and have commissioned bespoke research pieces to look in depth at how listed consumer businesses are able to shift profit to mitigate tax, with an emphasis on identifying those paying a reasonable rate. We continue to actively engage with management where we feel there are issues on tax, to convey the message that as long-term shareholders we would prefer they pay a reasonable rate and sacrifice some profits today in order to protect the business and its profits in the future.
First published in Second Quarter 2016 - ‘Stewart Investors Sustainability Strategies Quarterly Client Update: Second Quarter 2016’
Investment terms
View our list of investment terms to help you understand the terminology within this document.
Subscribe to our updates
To get regular updates and content from Stewart Investors, please register here.
Important information
This material is for general information purposes only. It does not constitute investment or financial advice and does not take into account any specific investment objectives, financial situation or needs. This is not an offer to provide asset management services, is not a recommendation or an offer or solicitation to buy, hold or sell any security or to execute any agreement for portfolio management or investment advisory services and this material has not been prepared in connection with any such offer. Before making any investment decision you should consider, with the assistance of a financial advisor, your individual investment needs, objectives and financial situation.
We have taken reasonable care to ensure that this material is accurate, current, and complete and fit for its intended purpose and audience as at the date of publication. To the extent this material contains any measurements or data related to environmental, social and governance (ESG) factors, these measurements or data are estimates based on information sourced by the relevant investment team from third parties including portfolio companies and such information may ultimately prove to be inaccurate. No assurance is given or liability accepted regarding the accuracy, validity or completeness of this material and we do not undertake to update it in future if circumstances change.
To the extent this material contains any expression of opinion or forward-looking statements, such opinions and statements are based on assumptions, matters and sources believed to be true and reliable at the time of publication only. This material reflects the views of the individual writers only. Those views may change, may not prove to be valid and may not reflect the views of everyone at First Sentier Investors.
To the extent this material contains any ESG related commitments or targets, such commitments or targets are current as at the date of publication and have been formulated by the relevant investment team in accordance with either internally developed proprietary frameworks or are otherwise based on the Institutional Investors Group on Climate Change (IIGCC) Paris Aligned Investment Initiative framework. The commitments and targets are based on information and representations made to the relevant investment teams by portfolio companies (which may ultimately prove not be accurate), together with assumptions made by the relevant investment team in relation to future matters such as government policy implementation in ESG and other climate-related areas, enhanced future technology and the actions of portfolio companies (all of which are subject to change over time). As such, achievement of these commitments and targets depend on the ongoing accuracy of such information and representations as well as the realisation of such future matters. Any commitments and targets set out in this material are continuously reviewed by the relevant investment teams and subject to change without notice.
About First Sentier Investors
References to ‘we’, ‘us’ or ‘our’ are references to First Sentier Investors, a global asset management business which is ultimately owned by Mitsubishi UFJ Financial Group. Certain of our investment teams operate under the trading names FSSA Investment Managers, Stewart Investors, Realindex Investments and Igneo Infrastructure Partners, all of which are part of the First Sentier Investors group.
We communicate and conduct business through different legal entities in different locations. This material is communicated in:
Australia and New Zealand by First Sentier Investors (Australia) IM Ltd, authorised and regulated in Australia by the Australian Securities and Investments Commission (AFSL 289017; ABN 89 114 194311)
European Economic Area by First Sentier Investors (Ireland) Limited, authorised and regulated in Ireland by the Central Bank of Ireland (CBI reg no. C182306; reg office 70 Sir John Rogerson’s Quay, Dublin 2, Ireland; reg company no. 629188)
Hong Kong by First Sentier Investors (Hong Kong) Limited and has not been reviewed by the Securities & Futures Commission in Hong Kong. First Sentier Investors, FSSA Investment Managers, Stewart Investors, Realindex Investments and Igneo Infrastructure Partners are the business names of First Sentier Investors (Hong Kong) Limited.
Singapore by First Sentier Investors (Singapore) (reg company no. 196900420D) and this advertisement or material has not been reviewed by the Monetary Authority of Singapore. First Sentier Investors (registration number 53236800B), FSSA Investment Managers (registration number 53314080C), Stewart Investors (registration number 53310114W), Realindex Investments (registration number 53472532E) and Igneo Infrastructure Partners (registration number 53447928J) are the business divisions of First Sentier Investors (Singapore).
Japan by First Sentier Investors (Japan) Limited, authorised and regulated by the Financial Service Agency (Director of Kanto Local Finance Bureau (Registered Financial Institutions) No.2611)
United Kingdom by First Sentier Investors (UK) Funds Limited, authorised and regulated by the Financial Conduct Authority (reg. no. 2294743; reg office Finsbury Circus House, 15 Finsbury Circus, London EC2M 7EB)
United States by First Sentier Investors (US) LLC, authorised and regulated by the Securities Exchange Commission (RIA 801-93167)
other jurisdictions, where this document may lawfully be issued, by First Sentier Investors International IM Limited, authorised and regulated in the UK by the Financial Conduct Authority (FCA ref no. 122512; Registered office: 23 St. Andrew Square, Edinburgh, EH2 1BB; Company no. SC079063).
To the extent permitted by law, MUFG and its subsidiaries are not liable for any loss or damage as a result of reliance on any statement or information contained in this document. Neither MUFG nor any of its subsidiaries guarantee the performance of any investment products referred to in this document or the repayment of capital. Any investments referred to are not deposits or other liabilities of MUFG or its subsidiaries, and are subject to investment risk, including loss of income and capital invested
© First Sentier Investors Group
