You don’t often see the words “tax” and “interesting” in the same sentence, but the topic has been making more and more headlines of late. Starbucks was one of the companies to gain the most (unwanted) attention after it emerged that despite the millions of lattes bought from its ubiquitous coffee shops, it had not actually sold enough of the milky brew to necessitate the payment of any corporation tax. The fact that the justification for the low UK profitability was payments to a Dutch subsidiary for image rights and premium purchases from a Swiss subsidiary for its coffee beans, not surprisingly, did not engender much sympathy from the Great British public. In the end, the company “volunteered” to pay an extra £20m to the UK exchequer.
 
Meanwhile, in the United States “tax inversion” has become the favorite phrase in the investment banking lexicon. This is a financial wheeze where one of the main pillars of the economic logic of an acquisition is the ability to re-domicile the new combined company in the (lower) tax jurisdiction of the target. Hence the recent deals between Abbvie/Shire, Burger King/Tim Hortons et al. Not surprisingly, this strategy has not found much favor with the legislators on Capitol Hill. In fact their huffing and puffing has given some executives cold feet, as evidenced by Abbvie pulling its bid for Shire, the UK pharmaceutical company.
 
Tax, and the imaginative ways that companies find to avoid paying it, was top of the agenda at the G20 meeting in Brisbane – a meeting that has previously highlighted the public’s growing hatred of multi-national corporations.
 
Despite the outrage expressed by politicians about the lack of tax paid by big companies, when they return home from these global talking shops they all seem keen to compete with each other to be “business friendly.” Ireland remains at the vanguard of low corporation tax rates in an attempt to re-awaken the Celtic Tiger, much to the chagrin of their Eurozone “partners” who continue to seek some economic awakening themselves. So politicians seem to have a bit of a split personality when it comes to taxation, arguably a type of behavior not unusual amongst our elected elite.
 
However, what seems certain as we look into 2015 is that the debate about what is a “fair” rate of tax should continue to rage. The anger directed towards global multi-nationals is real and widespread. Their voluntary tax payments would seem to suggest that they acknowledge this and worry about it – particularly those who are vulnerable to the wrath of the end consumer (àla Starbucks).
 
This debate as to what is “fair” also chimes with the discussion raging on both sides of the Atlantic as to where the spoils of the nascent economic recovery currently reside and where they should be directed. It’s our belief that the lack of real wage growth will remain an issue in 2015, particularly when many see economic growth as having been fuelled by a massive wealth transfer from the public to the private sector in the form of quantitative easing. It would appear that the majority of the populace who are seeing their living standards fall is not feeling that the word “fair” is one that chimes with their situation. Expect their elected representatives to do something about it.
 
This debate featured in the mid-term elections in the United States and we believe it is certain to be one of the subjects at the core of the UK election in May. So expect 2015 to herald further debate about what is a “fair” rate of tax, the responsibilities of multi-nationals to the countries in which they do business and the appropriate distribution of the fruits of any economic recovery.
 
Richard Dunbar, CFA, ASIP, is an investment director on the global strategy team at Aberdeen Asset Management. He joined Aberdeen as part of the acquisition of Scottish Widows Investment Partnership (SWIP), where he had been part of the investment solutions team. Before joining SWIP, Dunbar worked with Blairlogie Capital Management as a portfolio manager for the UK and Europe. He started his career as a UK portfolio manager with Murray Johnstone. Mr. Dunbar also serves as chair of CFA Society UK.