This month our FS Insight has been provided by Hansuke, a London-based professional advisory firm dedicated to enhancing tax integrity across the financial services sector. Author, Ali Kazimi is the Managing Director of Hansuke. He has over 25 years of financial services industry experience, having held successive leadership roles within the ‘big four’ firms and as head of tax at Barclays Global Investors (now BlackRock).
Institutional investors and funds are increasingly demanding their investments to be engaged in sustainable and ethical business practices. There is debate over whether taxation is a constituent ESG factor; what should investment managers be considering in respect of taxation?
Environmental, Social, and corporate Governance (ESG) investing has evolved from socially responsible investment philosophies into a distinct form of responsible investing. While earlier approaches used exclusionary screening and value judgments to shape their investment decisions, ESG investing has been spurred by shifts in demand from across the finance ecosystem, driven by both the search for better long-term financial value, and a pursuit for better alignment with values.
Given the ubiquity of the taxation debate, investment houses need to ask themselves whether it is ethically possible for an investment strategy to be labelled ‘ESG-compliant’ whilst at the same time seeking to aggressively reduce the tax bill in an unsustainable manner. Tax planning had until recently been seen as part of the fiduciary mandate to deliver financial returns to investors with the least amount of tax leakage.
Undoubtedly, enhanced tax transparency efforts and Corporate Social Responsibility (CSR) have sought to bolster trust and are conducive to a more sustainable society. Within Europe, market participants are duly incentivised to adopt sound tax strategies so as to not jeopardise the benefits afforded through the EU’s fundamental freedom of free movement of capital.
It remains to be seen whether tax transparency regimes, namely in the form of FATCA, CRS, Country-by-Country Reporting and DAC6/MDR will result in responsible taxpayer behaviour, or whether the investment management sector will do just enough to comply, with no fundamental change in tax practices and behaviours.
Obviously, to treat tax as a cost to be avoided has a short-term financial advantage. The downside risk to such fiscal short-termism is irreparable damage to reputation and brand, as aggressive behaviour is by definition highly unsustainable. In HMRC’s high-profile ‘No Safe Havens’ tax strategy document, taxpayers are warned that the ‘the balance of risk’ is against them and in favour of the tax authority. Indeed, tax authorities are now in an unprecedented stage in their history with vast swathes of data pouring in from myriad of sources. Tax authorities have invested in advanced data analytical systems and are recruiting data scientists to be tax officers of the future.
Enlightened fund houses gripped by ESG fervour, are opting for a tax enlightened approach, where tax is no longer just a side thought but a lens through which firms view their societal contribution. Indeed, good citizenship is about having in place a well thought through ‘Tax Integrity’ strategy that harmonises the investment house’s financial aspirations with governance and stewardship.
In assisting investment firms to implement the Tax Integrity Compliance Programme, TICP©, we start at the highest level by assessing the level of tax integrity maturity of the organisation and aligning the key stakeholders’ expectations to articulate a unique ‘Tax Integrity Statement’ that harmonises the organisation’s cores values. The shift from tax short-termism toward the long-term is not driven solely by organisational altruism, rather it is about the commercial sustainability of the business.
Institutional investors have shown a deep interest in tax and consider sustainability-related risks as an essential part of their due diligence process. Indeed, the pervasive nature of searching tax related questions and representation is testimony to tax being squarely on the agenda. RFP teams responding to questionnaires issued by leading sovereign investors, endowments and retirement institutions are being asked to comment upon complex customised tax matters. High profile tax failures such as the ‘cum-ex’ fraud, often involving fund vehicles, have not helped.
Tax is now a front-of-house matter and unless a coherently articulated ‘Tax Integrity Statement’ can be put forth, investment mandates will be lost.
Contact Ali Kazimi, Managing Director of Hansuke here:
Email: alikazimi@hansuke.co.uk
Tel: 07818 522 779
