16 March 2015
Tax avoidance ‘accusations’ generally have no long term impact on companies’ share prices, new report finds.
Tax avoidance ‘accusations’ generally have no long term impact on companies’ share prices, new report finds
- However, news that a firm is involved in a tax-related activity that may be unacceptable to the revenue authorities does result in steeper and longer-lasting falls in share prices
- Widespread perceptions of mass tax avoidance by UK firms cannot be substantiatedbut trust in corporations regarding tax is low among public bodies
- General agreement in both business community and among public bodies that the UK tax system is fair
- But disagreement about whether large companies are paying an appropriate amount of tax and contribute enough to society
A new study from Henley Business School, part of the University of Reading, has found UK companies that are reported in the newspapers in a negative way in relation to their corporate tax payments do not suffer falls in their share prices unless they are linked with a more serious issue that may be unacceptable to the revenue authorities. However, all else equal, companies that have high effective tax rates will be perceived as less risky investments by shareholders.
As part of a wider multi-stakeholder study, the authors examined newspaper stories of tax avoidance over the period January 1991 – October 2014 and linked them with the share prices of the firms in question for a period of three months after the breaking news. Whilst the following two to three days after the story saw a fall in price, the general trend was an upturn of 0.8% in the two-week period following the news story.
The authors offer two possible explanations: first that share prices are positively influenced by any kind of news (good or bad) and, second that heightened public relations and marketing efforts by the firms involved more than cancel out the effects of bad publicity.
The report also examined the rate of total corporate tax payments in the UK since the early 1990’s and found that they have remained more or less at the statutory rate, indicating that the common public perception of endemic tax avoidance in the UK is unfounded.
Henley’s research involved qualitative analysis (structured interviews with over 60 people from industry, business, consumer bodies and NGOs) in addition to a quantitative analysis of key financial metrics relating to tax and share prices. This disparity between actual tax activity by UK companies and the public’s perception of it revealed by the interviews demands greater transparency from UK companies, the authors argue.
Being labelled as a tax avoider may cause reputational damage among some stakeholder groups, and is most likely to be frowned upon by consumer bodies and NGOs. Interestingly, respondents across stakeholder groups (business leaders, industry representatives, NGOs and consumer bodies) feel strongly that ultimately, responsibility for the setting, implementation and policing of issues of fairness regarding tax lies with the government. Respondents also feel that the international tax system introduces complexity and contributes to a feeling of an unfair playing field between UK companies and multinationals domiciled elsewhere.
Henley Business School Professor of Organisational Psychology, Carola Hillenbrand, said “A key message from our findings is that firms must acknowledge their long-term reputation depends on more transparency and simpler communication about their tax activities. We find that there is a sense of mistrust from public bodies toward business and tax has become a key part of that mistrust. Companies have a unique opportunity to engage with the public and demonstrate that stakeholder views do matter in business.”
Trust in business is a key issue and to mitigate issues of mistrust brought about by tax avoidance stories, the authors recommend a framework for a tax engagement process that encompasses a range of stakeholders in the corporation tax question: investors, government, policymakers, NGO’ s, consumer bodies and the public. Their framework outlines how companies can lead on tax initiatives that are stakeholder relevant, evidence-based and aligned with corporate values, and can use this framework to report on corporate tax strategy in a transparent and simple way.
Commenting on this model, Professor Hillenbrand says “Meaningful engagement and communication with stakeholders is not just about telling your story – it is also about listening and responding to issues that matter to stakeholders. Companies often see themselves as the centre of the universe. Instead, they could see their role as facilitators of conversations between groups. The public is more likely to build trust if there are genuine opportunities to engage with multiple stakeholders and the purpose of the dialogue is well intentioned and not controlled by the firm.”