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Oil Fund targets tax dodgers in portfolio

Norway’s enormous sovereign wealth fund known as the Oil Fund is once again flexing its financial muscle around the world, pouncing this time on companies like Nike and Apple. It dislikes how such multi-nationals in which it invests have been avoiding taxes in countries where they do business, even when the practice is legal.

Asset managers of Norway’s powerful Oil Fund, which holds stakes in around 9,000 companies around the world, don’t like aggressive tax planning and strategies that result in international companies paying very little tax in the countries where they create value and generate profits. PHOTO: Norges Bank Investment Management

Oslo newspaper Aftenposten reported over the weekend that the Oil Fund has sent letters this autumn to the 500 largest companies in which it owns shares. The letters contain a clear message about what the fund expects from the companies in terms of openness and tax policy.

Aftenposten cited the example of taxes paid in Norway by the multi-national sportswear giant Nike in comparison to those paid by Norwegian sportswear company Stormberg.  The newspaper, which has been active in revealing tax evasion cases as part of its participation in the Panama- and Paradise Papers projects, reported that Nike has been paying only half the amount of tax in Norway that Stormberg does, even though Nike’s revenues in Norway are double those of Stormberg’s.

Nike is among international conglomerates that have been legally getting away with the practice of internally shifting revenues across borders to avoid tax liability in Norway and other European countries. The practice can legally include sending revenues to countries known as tax havens. As a result, Nike, Apple and many other multi-nationals pay very little tax in Europe even though they earn huge amounts in the European market.

‘Important that companies pay tax…’
The Oil Fund, set up to finance pensions for future generations of Norwegians,  doesn’t like that, even though its own earnings are at stake if the multi-nationals start paying more tax. Oil Fund officials, who must answer to an ethics commission set up by the Norwegian government’s finance ministry, want the practice of shifting revenues across borders with the goal of cutting tax liability to end.

“It’s important that companies pay tax in the countries where they’re creating their value,” Carine Smith Ihenacho, chief of the ownership division at the Oil Fund’s asset management unit (Norges Bank Investment Management, NBIM) within Norway’s central bank, told Aftenposten.

The fund issued a document last spring describing its principles for tax policy and payments at the roughly 9,000 companies in which it has invested over the years. The oil fund has a stated goal of aiming for the highest returns possible but it also has ethical responsibilities, is under constant scrutiny and even tax haven criticism itself, and engages in so-called “active ownership” and active management of its shareholdings. It has, for example, been dumping shares in coal companies, it recently announced plans to pull out of oil companies and has pressured large companies like Wal-Mart to improve employment policies.

The fund’s new tax practice expectations revolve around three main principles:

*** Companies should pay tax where their wealth creation occurs. It’s not acceptable for companies to move money internally so that profits are booked in countries where taxes are low.

*** Company boards of directors are responsible for tax practices, and board members thus can’t claim that they weren’t aware of them.

*** Companies must be more open about their country-by-country reporting, and routinely publicly declare exactly how much tax they actually pay in each country where they do business.

“We believe it sends an extremely clear signal when we (now) send these expectations in the form of a letter to 500 of the companies (in which the Oil Fund invests),” Ihenacho told Aftenposten. She wouldn’t comment on Nike’s and Apple’s practices in particular.

Tax avoidance can boost investment risk
Returns on the Oil Fund itself can of course rise if the companies in which it invests maximize profits by minimizing the taxes they pay. Ihenacho claimed, however, that aggressive tax planning can also increase investment risk if or when tax regulations and laws change. “In the letter we sent out, we point out that companies with structures that are set up only with regard to tax planning can become more vulnerable,” she told Aftenposten.

The fund has received replies from 45 of the 500 companies to which it wrote so far, with tax and tax planning bound to be a central theme in ongoing dialogue between them and the Oil Fund. Ibenacho stressed that its expectations and letters are part of the fund’s own long-term asset management.

Tax policy and practice is currently not included in the guidelines set out by the finance ministry’s ethics commission for the Oil Fund, which has kicked companies out of the fund in the past. The Oil Fund is thus so far acting on its own, but the pressure it’s now exerting is aimed at getting results. Fund managers themselves can sell off shares at any time, if the feel companies are not meeting investment expectations, also those that go beyond sheer profit and loss. Berglund



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