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Tuesday, February 27, 2024

Oil Fund pumps up new tax principles

Norway’s huge sovereign wealth fund, which has become a powerful investor around the world, is now launching what some call “a little revolution” in tax principles and transparency. Popularly known as the “Oil Fund,” it has released an “expectation document” that basically asks the companies in which it invests to improve their tax morals and pay more tax where they actually do business.

As chief executive officer of Norges Bank Investment Management, which runs Norway’s huge sovereign wealth fund, Yngve Slyngstad is a powerful player in international finance and investment. Now he and fund are using some of the fund’s clout to boost tax morals and encourage companies to pay more tax where they generate their profits. PHOTO: Norges Bank

The document has been praised for encouraging more openness and an end to “aggressive” tax planning that can amount to legal tax evasion. It has also been chided in Norwegian media, though, because many of the Oil Fund’s own real estate investments are based in Luxembourg and Delaware, where low tax rates and tax exemptions ease the fund’s own tax burdens.

Newspaper Aftenposten reported just before the Easter holidays how the Oil Fund, which is governed by an ethics committee tied to the Norwegian Finance Ministry, was embarking on a new ethical campaign of its own. Oil Fund chief executive Yngve Slyngstad put forth the new document just before the Easter holidays, and it outlines the fund’s new expectations for the nearly 9,000 companies in 77 countries in which it invests.

The expectation document (external link) is meant “to express” how Norges Bank Investment Management (NBIM), which runs the Oil Fund as a financial investor, “expects multinational enterprises to exhibit appropriate, prudent and transparent tax behaviour.” The expectations rest on three main principles, according to NBIM: Taxes should be paid where economic value is generated, that company tax arrangements are a board responsibility and public country-by-country reporting is a core element of transparent corporate tax disclosure.

Seeking a better balance
The goal is to find a better balance between companies’ obligations to their shareholders and their obligations to the communities where they do business. Slyngstad acknowledged to Aftenposten that companies and investors, including the Oil Fund itself, “will of course try to not pay more tax than necessary.” He stressed, however, that such attempts “must not be seen as unreasonable and far from the intention of tax laws.”

Problems arise when companies shift revenues generated in one country to another country where the company also operates, because that other country has lower tax rates. No specific companies were named, but there’s been lots of criticism in Norway, the UK and other countries when large companies like Google and Starbucks, for example, were found to have paid minimal taxes locally because they’d transferred revenues internally to lower-tax countries. That’s legal, but morally objectionable, in the Oil Fund’s eyes.

Asked to define what he views as “unreasonable,” Slyngstad told Aftenposten that the companies themselves (more specifically, their boards of directors) need to develop a policy on that. “We have our policy for this,” he said. “The first thing you look for is what is normal market practice and what the regulators in the countries involved view as normal tax practice.”

Asked where the line should be drawn on “aggressive” tax practice, Slyngstad said it must be “within acceptable, normal practice and what the countries (where revenues are generated) believe are reasonable means of handling tax questions.”

Slyngstad defended the Oil Fund’s own practice of owning real estate in France, Germany, Switzerland and other European countries through subsidiaries based in Luxembourg, while real estate investments in the US are registered in the state of Delaware. Both Luxembourg and Delaware have liberal tax policies and tax exemptions. He called that “acceptable market practice” and he doesn’t view it as overly aggressive.

“Our starting point in our (new expectation document) is of course that companies can minimize their taxes,” Slyngstad told Aftenposten, “but not go so far in their tax planning that it would be called ‘aggressive.'”

Initiative praised and chided
That may appear a bit vague, but Sigrid Klæboe Jacobsen, leader of the Norwegian chapter of Tax Justice Network, praised the Oil Fund’s initiative in urging new tax standards. “It’s a little revolution when one of the world’s biggest institutional investors is now sending a clear signal that investors demand more openness,” Jacobsen told Aftenposten. “We know that the Oil Fund is well-regarded by many rsponsible investors around the world. We think this new expectation document will have a major effect.”

The Oil Fund mostly thinks companies should pay tax where values are created and profits generated, even if it’s legally possible to move those profits to places with lower tax rates. The bottom line is that companies should not abuse the law or situations when tax agreements aren’t developed quickly enough.

The Oil Fund based its initiative on the premise that national states depend on companies paying taxes that can help maintain the countries’ economic development. Aftenposten editorialized that the initiative was a good one, “even though many companies will likely believe that the Oil Fund is now moving into the world of politics and morality.” It’s also potentially sitting in “a glass house,” Aftenposten noted, given its own tax-reduction efforts.

Slyngstad nonetheless believes there’s a difference between “acceptable tax planning” and “aggressive tax planning that deserves criticism.” The Oil Fund’s own use of low-tax areas like Luxembourg and Delaware is “practical, occurs in full openness” and is in line with EU norms, he said.

The Oil Fund’s new expectations are primarily directed at company and corporate boards, the document notes, “and intended to serve as a starting point for our interaction with multinational enterprises on the topic of tax and transparency.” Berglund



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