A quarter of companies in the MSCI All Country World Index have a large tax gap, paying an average rate of 14.3 per cent versus the 31.8 per cent that would be expected, based on the jurisdictions where they generate revenue.
A new report from MSCI ESG Research shows that MSCI ACWI Index constituents with a tax gap would have faced additional annual tax liabilities of up to $220 billion if the entire tax gap had been plugged by regulatory reform.
In the report, MSCI ESG Research states it has seen growing demand from institutional investors for data and metrics to assist in understanding their exposure to emerging risks from global tax policy shifts. In response, it has addressed tax transparency under the corporate behaviour theme and developed a new data set and scoring mechanism within its ratings framework.
This will be rolled out in phases over the next few years. The first phase is focused on flagging companies potentially facing high regulatory, legal and reputational risks on tax-related matters, based on MSCI ESG Research’s assessment of the gap between the companies’ reported tax rate and the estimated statutory rate based on where a company generates revenue.
Investors can use this tax-gap analysis for possible engagement and to develop a more targeted set of companies from a broad, diversified universe for further due diligence.
The research also outlines the attributes that would make a company place poorly in rankings from the analysis: a high estimated tax gap; a lack of transparency around the geographical breakdown of revenue (for example, if less than 50 per cent of total revenue is disclosed in country-by-country form); and involvement in tax-related controversies in the last three years, such as regulatory fines or ongoing litigation.