Responsible Investment : Taxes and Paradoxes

This is an electronic reprint of the original article. This reprint may differ from the original in pagination and typographic detail. Author(s): Title: Year: Version: Please cite the original version: All material supplied via JYX is protected by copyright and other intellectual property rights, and duplication or sale of all or part of any of the repository collections is not permitted, except that material may be duplicated by you for your research use or educational purposes in electronic or print form. You must obtain permission for any other use. Electronic or print copies may not be offered, whether for sale or otherwise to anyone who is not an authorised user. Responsible Investment : Taxes and Paradoxes Knuutinen, Reijo; Pietiläinen, Matleena Knuutinen, R., & Pietiläinen, M. (2017). Responsible Investment : Taxes and Paradoxes. Nordic Tax Journal, 1(1), 135-150. https://doi.org/10.1515/ntaxj-20170010 2017 Open Access. ©2017 R. Knuutinen and M. Pietiläinen, published by De Gruyter Open. This work is licensed under the Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 License Nordic Tax J. 2017; 1:135–150 Article Reijo Knuutinen* and Matleena Pietiläinen Responsible Investment: Taxes and Paradoxes** https://doi.org/10.1515/ntaxj-2017-0010 Received Jun 01, 2017; accepted Oct 30, 2017 Abstract: Taxes have become an issue of corporate social responsibility (CSR), but the role of taxation is to some extent an ambiguous and controversial issue in the CSR framework. Similarly, another unclear question is what role investors who are committed to sustainable and responsible investment (SRI) see taxes as having on their environmental, social, and governance (ESG) agenda. Corporate taxes have an inverse relationship with the return of the investors: taxes paid directly affect what is left on the bottom line, reducing the return of investors. However, investors are now more aware of tax-related risks, which can include different forms of reputation risk. Corporate tax planning may increase the returns, but those increased returns are riskier. This study focuses particularly on the relationship between SRI and taxation. We find that tax matters are considered to be on the ESG agenda, but their role and significance in the ESG analysis is unclear. Keywords: corporate taxes, sustainable and responsible investment (SRI), ESG, corporate social responsibility (CSR), aggressive tax planning, corporate governance 1Introduction Traditionally, corporate social responsibility (CSR) has been divided into economic, ecologic, and social elements. One of the best-known theoretical models exempli- *Corresponding Author: Reijo Knuutinen: Professor (Business Law), Turku School of Economics at the University of Turku; Email: reijo.knu[email protected] Matleena Pietiläinen: M.Sc. (Econ.), Jyväskylä School of Business and Economics at the University of Jyväskylä; Email: [email protected] ** This article is a part of the Sustainable Market Actors for Responsible Trade (SMART) project (smart.uio.no). Reijo Knuutinen is a member of the SMART project and Matleena Pietiläinen has collaborated with the project. The SMART project has received funding from the European Union’s Horizon 2020 research and innovation program under grant agreement No 693642. fying these elements, is Elkington’s (1997) triple-bottomline framework, and many researchers have adopted this framework to evaluate CSR from the perspective of different stakeholders. For example, society expects companies take into account the economic, environmental, and social effects of their businesses and operations.1 In many ways, sustainable and responsible investment (SRI) is a mirror image of CSR. When making their investment decisions, investors evaluate how companies (whether current or prospective investments) handle their responsibilities (Hyrske et al. 2012; Sparkes and Cowton 2004). Regarding responsible investments, the key letters are ESG, referring to environmental, social, and governance factors used in measuring the sustainability impact of an investment in a company or business (e.g., Hoepner 2013). Two first letters mirror the two elements of CSR, namely environmental and social, very well. However, “G” standing for governance is not conceptually equivalent to economic responsibility. In this context, governance refers to corporate governance (see Bebchuk and Weisbach 2010). This mismatch can be explained by the fact that from the viewpoint of responsible investments, an investor as a shareholder is self-evidently the primary stakeholder. The main (or often only) reason for an individual or an institutional investor like pension funds or asset managers to invest in a company is economic return. Investors seek returns for themselves, to finance the pensions they manage, or for their clients. For many institutional investors, ESG analysis is a means to achieve a better risk-return profile (Clark et al. 2015; Hoepner 2013). However, in CSR discussions and argumentation, the shareholder is only one stakeholder, albeit a very important one.2The company and its directors have to be aware of a range of expec1The terms ‘company’ and ‘corporation’ are often used interchangeably. In this article we primarily use the term ‘company’ when speaking about them as legal entities and investment objectives. The term ‘corporate’ is used in the context of CSR, as well as speaking about corporate taxes, as it is established. We view terms like ‘firm’, ‘enterprise’ or ‘business’ to primarily refer to something which is physical, like production facilities, operations, or actions. See also Posner 1992, p. 409. 2Regarding the shareholder/stakeholder debate, see e.g. Clark et al. 2015. Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM 136 |R. Knuutinen and M. Pietiläinen tations and requirements among the company’s different stakeholders. The review and evaluation of responsibilities is not in the same way locked to one stakeholder only. Taxation has become a real CSR issue during the last decade or two, though with some vague features.3In the framework of 3P (“planet, people, profit”), it is natural to perceive taxation as a part of economic responsibility, albeit very often it is considered a self-contained issue. It is also possible to look at taxation from the broader perspective, since taxes allow many social goals to be achieved through public finances and operations. Despite the increasing awareness, the role of taxes is to some extent ambiguous and that can make it a controversial issue. This is demonstrated by the fact that many companies reporting on their CSR do not include tax issues on the reporting list. Furthermore, the concept of CSR is defined in many different ways in different contexts, and sometimes it may be difficult to see tax issues to be included in the definitions.4One of the aims of this study is to gather information on whether taxes are a similar (or an even more) ambiguous issue within SRI. How do investors committed to SRI view tax issues on their ESG agenda? In their ESG analyses, investors use public information about environmental, social and governance issues. First, tax matters are clearly involved in any governance agenda. Second, taxation has an indirect impact on how society can fulfill its tasks and obligations. Therefore, tax issues can be included on the social factors agenda as well. Furthermore, taxation is one of the most important tools in environmental protection as well. Although this link is very strong at the level of tax policy, it is harder to see that in ESG analyses taxes would have any particular role when assessing a company’s environmental responsibility. 3According to survey by FIBS (Finland’s leading corporate responsibility network), 37% of the largest Finnish companies have actively worked for tax transparency and tax reporting within their CSR activities. The survey was executed in January–March 2017 by interviewing 200 CEOs and CSR directors among the top 1000 companies in Finland. In 2015 the respective share was 25%. 4See e.g. COM(2011) 681 final (A renewed EU strategy 2011-14 for Corporate Social Responsibility), p. 3 (referring further to COM(2001) 366): “The European Commission has previously defined Corporate Social Responsibility (CSR) as ‘a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders on a voluntary basis.”’ See also http://ec.europa.eu/growth/industry/ corporate-social-responsibility_en: “Companies can become socially responsible by: following the law; integrating social, environmental, ethical, consumer, and human rights concerns into their business strategy and operations.” The current study attempts to clarify and understand the role played by corporate taxes in the context of SRI. First, while the relationship of SRI and taxes is an almost unexplored area of research, we initially approach the issue by reviewing the relationship of CSR and taxes. Although this matter is not very well studied either, there is literature available to refer to. Second, we investigate the issue through empirical interviews with Finnish institutional investors. Our article structure is as follows: Section 2 deals with previous research on the relationship between taxation and CSR or taxation and SRI. Section 3 deals with the role of corporate taxes within CSR, which is used to refine the research questions in Section 4. Section 5 examines the methodological issues of the empirical part of our study. In Section 6, the results of our empirical research are presented and analyzed. Section 7 concludes. 2Prior research and setting the research questions This section reviews prior research on the relationship between CSR and taxation and the relationship between responsible investing and taxation. The review informs our choice of research questions and the approaches and research methods we adopt. Approaches to and perspectives on the research on the relationship between CSR and taxation vary. Studies are typically sited in the economic and legal interface disciplines. Some studies concern the boundaries and limits of the law, while others relateto business ethics. It is alsopossible to take a purely economic perspective and, for example, look at the issue from a risk-return point of view. Some studies on CSR and taxation have approached the issue from the standpoint of company law, or even more precisely, the theory of company law and the essence of the company. That viewpoint involves accepting that how we understand a company may be decisive in how we see its responsibility to pay taxes (Avi-Yonah 2006). As a topical theme, the aggressive tax planning of corporate taxpayers, especially of multinational enterprises, and the assessment of its impact on society has been of interest to researchers for some years (see e.g., Shafer and Simmons 2008; Sikka 2010; Preuss 2012; Finér and Ylönen 2017). Some studies have been very critical of tax planning by corporations (see, e.g., Ylönen and Laine 2015), while others have emphasized the legality of taxation as a main criterion for companies to make use of tax planning options; according to this approach, responsibility Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM Responsible Investment: Taxes and Paradoxes |137 lies mainly within the framework of tax legislation (HJI Panayi 2015). The issue has also been examined from the perspective of law and philosophy, and research has addressed, inter alia, the moral obligations of the company in relation to tax standards (Ostas 2004; Knuutinen 2014b; Gribnau 2015). In addition, at least one monograph has been written examining the relationship between corporate responsibility and taxation more widely from a variety of perspectives (Knuutinen 2014a). In contrast, the relationship between SRI and taxation is an almost unexplored area of research; an exception being Scholtens’ (2005) study of special tax regulations relating to responsible investments. The aforementioned study finds that a lightened form of tax regulation applied to the investments has positively affected the growth of SRI in the Netherlands. Indirectly, the relationship between SRI and taxation has been examined somewhat more frequently. Studies are linked, for example, to increasing transparency and reporting requirements (Fernandez-Feijoo et al. 2014), to the investment activity in connection with changes in tax legislation (Moore 2014), compliance with corporate tax laws (Alon and Hageman 2013), or assess the connection between national corruption level and foreign investments (Robertson and Watson 2004). Beyond the examples provided above, the link between SRI and taxation seems to have rarely been directly or even indirectly addressed in earlier research, either from a broader perspective or from the specific perspective of investors. However, in SRI guidelines, factors and practices, tax issues have begun to take their place during the last years (see e.g., UN PRI 2015a; Berry and Junkus 2013). But what is the precise role of taxes? What is the relevance, weight, or effect of tax issues? Is the role of taxes controversial on the ESG agenda and in practice? What kind of role could or should taxes have on the ESG agenda and in practice? According to the definition of Eurosif (2016)5 Sustainable and Responsible Investment (SRI) is a long-term oriented investment approach, which integrates ESG factors in the research, analysis, and selection process of securities within an investment portfolio. It combines fundamental analysis and engagement with an evaluation of ESG factors in order to better capture long-term returns for investors, and to benefit society by influencing the behaviour of companies. However, this definition of SRI does not specify exactly which factors should be included in the ESG analysis. Therefore, it prompts the question of whether tax matters 5Eurosif 2016, 9. are among the required ESG factors and, if so, in what way, and for what purpose. If tax issues are there on the ESG agenda, how are they being explored and analyzed, and how do they influence investment decisions? SRI strategies6including influencing, such as engagement and voting and impact investing are popular ways for institutional investors to affect the ESG issues in investments. For example, according to Eurosif (2016), impact investing, as a strategy of SRI combining economic productivity and social impact has recently been adopted by Finnish institutional investors.7Has this kind of influence been in some way reflected in tax issues, and what form might that influence take? As the role of responsibility becomes more important in the activities of institutional investors, it can be assumed that Finnish (and other) institutional investors will at least to some extent proactively (i.e., not only reactively) take account of corporate taxation practices in their investment activities. After all, taxation is vital to the functioning of society. In addition, among the key players in the SRI arena, corporate tax issues have been raised as one of the most important global themes for SRI in the foreseeable future (see e.g., UN PRI 2015b). This motivates us to look at taxation as an analysis criteria and factor for SRI, specifically from the point of view of Finnish investors, and examine whether, and if so to what extent, taxation is a part of the SRI activities of Finnish institutional investors. This study seeks answers to the questions raised above. In particular, the questions are examined with regard to institutional investors managing the funds, not those private investors investing for their own benefit, or who have transferred their funds to an asset management firm. The various research questions posed above can be combined to form a single question: How do institutional investors committed to SRI see the role of tax matters in their responsibility analysis, and how does this analysis of tax matters affect their investment decisions or other activities? This study can be located at the interface of the legal and economic disciplines. From a legal research point of view, however, the question is not a matter of dogmatic legal research, but rather one of setting the boundaries of law. From an economic research point of view, this study could be located mainly in the accounting and financing realm, as it involves clarifying information use and the 6See Eurosif´s (2016) categorization of all SRI strategies and their definitions. 7According to Eurosif (2016, 67) “impact investment has also reached the Finnish market. There have been product launches and other events linked to this topic.” Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM 138 |R. Knuutinen and M. Pietiläinen needs of institutional investors, and evaluating the links between CSR reporting and ESG analyses. Consequently, the study responds to identifications to incorporate accounting aspects into taxation research (Boden et al. 2010; see also Finér and Ylönen 2017). The current research is also multidisciplinary in terms of the methods used. The research is conceptually based and justified, and the research questions or statements formulated in a way that may be more typical of legal research. The research questions are refined in the form of statements and then evaluated through data elicited from empirical interviews and supporting documents used to assess how clearly the empirical and the other available material validates the set statements. The execution of the empirical part may be closer the methods of qualitative research used in the accounting discipline. 3What are the arguments made for CSR generally and especially regarding tax issues? Since corporate social responsibility and responsible investment can be seen as mirroring concepts, we next look at what are the arguments made for CSR generally and especially regarding tax issues. The main arguments for CSR are very well-known: sustainability, a moral obligation, reciprocity (companies’ “license to operate”), and the reputation of companies (Porter and Kramer 2006). Nevertheless, the relevance of these arguments in the context of taxation is not equally obvious and accepted. We next offer a brief overview of these arguments generally, while also suggesting how they can be interpreted in the context of taxation, not only for CSR but also for SRI.8 The best-known definition for the term sustainability was developed in the 1980s by the World Commission on Environment and Development, headed by Norwegian Prime Minister Gro Harlem Brundtland, it describes sustainability as: “Meeting the needs of the present without compromising the ability of future generations to meet their own needs.”9Sustainability is often connected to environmental development, but sustainable development requires socially and economically sustainable solutions and actions as well. In turn, companies are expected to op8Regarding the argumentation, see also Knuutinen 2014b, pp. 53– 58. 9World Commission on Environment and Development: Our Common Future (1987). erate in ways that secure long-term economic performance by avoiding short-term behavior which is environmentally wasteful or socially detrimental (Porter and Kramer 2006). Sustainable development is also related to taxation. Tax havens, for instance, distort the inter-nation equity (Musgrave and Musgrave 1972). Profit shifting and base erosion as a result of aggressive tax planning activities have been one of the main concerns occupying OECD and G20 countries in recent years.10 A company that acts in a way so as to secure sustainable development can be considered a responsible company. But is there any moral obligation for the company to bear this kind of responsibility? The first morality aspect is that the company as such, as an abstract legal phenomenon, cannot have any real and independent moral thoughts and views; only natural persons can. All natural persons certainly have some basic idea of right and wrong. In the case of the company, the natural persons making decisions include the Board of Directors, the CEO, and also the shareholders or their representatives. This observation does not mean, however, that the company cannot formulate, as a part of its corporate culture, some kind of collective perceptions of right and wrong. Similarly, institutional investors as a legal entity do not have moral considerations, but the investment managers and portfolio managers as natural persons may have. The relationship between law and morality is a classic legal philosophy issue. From the perspectives of legal history and philosophy, the question is also about the relationship between natural law and legal positivism. Further, this relationship is dissimilar in different legal fields. For example, fundamental human rights are considered to be valid everywhere, regardless of the legal system and jurisdiction, while tax law is based on the rule of law and legal positivism, and consequently tax systems differ from one state to another. States are also engaged in tax competition, which can at least to some extent be considered both acceptable and desirable. It would however be considered unacceptable if countries were to compete over the establishment and investments of companies without regard to occupational safety and health regulations, or by having no environmental protection regulations, for example. The idea of reciprocity is based on the fact that any enterprise or company needs public goods and infrastructures, or at least the legal system, to continue to exist. In 10 OECD/G20 Base Erosion and Profit Shifting Project. See Addressing Base Erosion and Profit Shifting (2013) and Actions 1–15 Final Reports, OECD/G20 Base Erosion and Profit Shifting Project (2015). Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM Responsible Investment: Taxes and Paradoxes |139 return, companies pay corporate income taxes. As a result, it can be argued that companies have corporate social responsibilities when society can be seen as a partner or even as a class of investor in a company through the influence of the public infrastructure (see e.g., Kanniainen 2003). Companies have to pay for their “license to operate” (Porter and Kramer 2006). Regarding tax behavior, reciprocity may be considered as requiring companies to comply not only with the letter of law, but also with the principles of fair tax compliance. The strongest argument is that the company’s way of operating and acting in relation to the requirements and expectations of society may significantly affect the company’s reputation. Today, tax planning activity is a relevant issue. In practice, taxation matters can be assessed with respect to CSR from the point of view of whether a certain type of tax planning is not only lawful but also generally acceptable. Tax planning that is lawful but generally frowned upon, is often called aggressive tax planning. However, aggressive tax planning is not a legal concept so the term has no legal definition. From the CSR point of view, aggressive tax planning can be defined as actions taken by taxpayers that accord with the legal requirements of tax law, but that do not meet the reasonable and justified expectations and requirements of the stakeholders involved (Knuutinen 2014b). Adopting aggressive tax planning can help a company improve its financial position in the short term, but in the longer term, the approach could harm the company’s financial interests. Actions or omissions that negatively affect a company’s reputation are risk factors affecting the company’s success and value. One of the tasks of management is to identify and evaluate the various risks involved and to seek to eliminate or hedge them if necessary. This risk assessment might incorporate the overall acceptability of tax planning activities and any potential reputational risks arising from it. If corporate tax planning activity passes beyond a critical point (which could be called L1) in the eyes of a company’s stakeholders, it moves into the realm of aggressive tax planning where such activity risks having adverse impacts, for example, in the eyes of customers or potential employees. The area beyond L1, can be called the critical area of tax planning (Knuutinen 2014b). From this point forward, it may still be possible to secure tax benefits through aggressive tax planning, but at the same time the action may trigger reputational risk. Theoretically, the company should seek further tax planning opportunities until the point L2, where the advantages of tax planning (i.e., tax savings) equal the expected losses due to reputational risks.11 However, responsible companies are unlikely to be willing to go that far. These are the main arguments for the requirements and expectations of CSR. However, it is worth noting that these are not legally binding arguments. Instead, they are moral and ethical justifications, arguments for equity and justice. However, the emergence of reputational risk broadens the scope of the issue, in that the question has come to involve economic and financial arguments as well. Consequently, CSR, at least in view of the reputation risk, may not conflict with shareholder value thinking (see Friedman 1970). Responsibility can also confer direct or indirect economic benefits. There is at least some evidence that CSR has a role in attracting good employees, reducing undesirable employee turnover, increasing customer satisfaction, and generally improving corporate reputation (see e.g., Weber 2008 and Galbreath 2010). However, the results do not seem completely unambiguous. In particular, the benefits of adopting responsible tax behavior are not necessarily clear. In the first place, taxes paid always and immediately come out of the company’s earnings and assets. It is also quite obvious that companies operating in different business sectors may see completely different potential reactions on the part of employees and customers. 4Refining and focusing the research questions The research statements of this study are derived from the general discussion on the subject of the research, the research reports and publications of civil society players like NGOs12, the juridical and economic literature, and preliminary expert interviews. It is interesting to note that these statements contain what are close to paradoxes or inconsistencies. If the empirical evidence confirms these statements or some of them, it gives reason to consider the investors’ views regarding the tax issues in the SRI frame11 The critical area can either be defined as an area between points L1, and L2, or it can be defined to proceed until the limits set by the norms of the expressly stated law. 12 For example, the Finnish NGO Finnwatch (see https://www. finnwatch.org/en/) has published several research reports concerning responsibilities in the area of corporate tax behavior and responsibility for tax payments. See the example from the disquisition about Finnish state-owned companies’ tax reporting practices and their shortcomings (https://www.finnwatch.org/en/news/336-country-bycountry-reporting-lessons-from-finland). Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM 140 |R. Knuutinen and M. Pietiläinen work somewhat inconsistent and vague. On the other hand, that kind of criticism may provide the basis for understanding and developing the roles of taxes in the SRI framework in the future. 1. The first statement is that responsible tax behavior is considered to be paying the taxes required by the relevant tax legislation. Taxes must be paid when the law requires, and to the extent the law requires. However, if this is all that is required in a company’s ESG analysis, the situation invites the question of whether taxation is a real responsibility theme at all. Acting according the requirements of the law of the land should be a self-evident responsibility. If an equivalent requirement or criterion were set for social responsibility, for example, it could mean that acting in accordance with local labor law standards in each country would be sufficient. Obviously, from the legal point of view the fact is that the duty to pay taxes can only be based on law.13 Therefore this has been the most common argument proposed when some companies have been criticized by the media or NGOs for implementing aggressive tax planning activities. But what is legally acceptable, may not always be seen as responsible. For example, using holding or other offshore companies in tax havens may be fully legal, although not necessary responsible tax behavior. In order to be a genuine responsibility issue, tax behavior and corporate tax policy issues should therefore be something beyond just fulfilling the requirements of the law. This might mean tax reporting beyond the requirements laid down by law, for example. From this point can we proceed to the next statement. 2. Companies are subject to both requirements and expectations regarding reporting on their tax payments and other tax issues. Reporting cannot, however, be a final goal in itself, but is a step toward improving tax transparency. But what exactly is it that investors are looking for in the context of discussions of and demands for tax transparency? If the purpose of better transparency were only to ensure that taxes are paid in accordance with the tax law, then comprehensive reporting to tax authorities should be sufficient. If, however, investors want to assess whether taxes have been paid in accordance 13 This principle (the rule of law, the principle of legality) is ingrained in the constitution in many countries. with some other criteria, that is, non-legal criteria, what would those criteria be? With respect to environmental responsibility, transparency makes it possible for shareholders and other stakeholders to assess the ecological effects exerted by the business, and in the context of social responsibility. For example, transparency would reassure observers that human rights have been respected, irrespective of the legal requirements of whichever states the company operates in. But what would this mean in connection with taxes? 3. Sometimes it is considered by companies and investors that complying with tax laws is the minimum requirement to discharge responsibility, and any action beyond mere compliance is a bonus. But if this is the minimum level, what is the “good thing” above it? Does it mean more taxes or more information, for instance? The paradox of the third statement is that if companies pay taxes to a certain country above the level strictly required by the tax code and appropriate tax planning activities, the effect will be to reduce the company’s after-tax profit and thus reduce the return to investors. From an economics point of view, this can only be justified through a desire to offset the reputation risk; the company may choose not to take advantage of all the tax planning tools allowed by law, if doing so could expose the company to reputation risk. To sum up, the refined research questions are as follows: If a company’s tax responsibility is limited to ensuring the legally required level of taxes is paid, are taxation issues a real responsibility theme at all? Responsibility with tax issues is often linked to tax reporting, but is it clear what this transparency is intended to deliver? If investors are of the opinion that paying taxes according to the tax laws is the minimum requirement for responsibility, what would be the optimal level above the minimal (or economically justified) level? 5Methodology and material of the empirical research The empirical part of the research involves institutional investors located in Finland, where SRI practices have developed considerably in recent years (Eurosif 2010, 2012, Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM Responsible Investment: Taxes and Paradoxes |141 2014, and Eurosif 2016). The aim of the empirical research is to find out if Finnish institutional investors take taxation (which is reported to be a topical responsibility theme among institutional investors)14 into account in their SRI practices and factors. The research is based on a qualitative research methodology (Eriksson and Kovalainen 2008; Eskola and Suoranta 1998; Chi 1997) which has been used in research on both SRI (e.g., Sievänen 2014) and taxation (e.g., Ylönen and Laine 2015). The empirical research consists of interviews with Finnish institutional investors, who are committed to abiding by the United Nations’ principles for responsible investment (UN PRI15).16 Using this group of investors to inform the research means we can trust that the investors involved are aware of their responsibilities and of ESG issues (e.g., Jemel-Fornetty et al. 2011) as laid out in the UN PRI (see UN PRI 2017b). Those responsibilities include incorporating topical responsibility issues on to their ESG agenda and also being broadly committed to the principle of SRI. We did not allow investors’ total amount of investments (cf. Sievänen 2014) or possible use of external ESG service providers (see e.g., Guyatt 2016) to limit our choice of research subjects. In this research, the overarching factor is the fact that institutional investors are UN PRI signatories and their registered offices are located in the same country. We made interviews in Finnish institutional investment companies, including those managing pension funds and asset managers. We did not decide the number of the research subjects in advance but continued sending interview requests and conducting interviews until we detected theoretical saturation (Eskola and Suoranta 1998). There were total of nine interviews and had eleven representatives. Interviewee’s number per interview were not ordered in forehand, instead the companies chose their own representatives. Two of the interviews were with two and the rest were with one representatives. Eight of the interviews were face-to face and one by telephone. The representatives interviewed played a key role in implementing SRI practices (see e.g., Eurosif 2016) and had a long working experience in the area of investment or banking. Their job titles included Head of Asset Management and Portfolio Manager. The respondents therefore possessed vital in14 See Werner and Morrow (2017). 15 See UN PRI 2017a. 16 All the interviews were conducted in Finnish, because both the interviewer and the interviewees were Finnish. Interviewees’ quotes in this article have been translated from Finnish to English. formation on SRI practices and ESG issues (see e.g., Sievänen 2014), such as that vital to the context of the current research like taxation as a part of the SRI process and ESG information. The interviews were conducted in October to December in 2016 and were audio recorded before being transcribed for detailed analysis. The interviewees were assured of anonymity, and the transcriptions redact information that could be used to identify the subjects, such as references to the date of signing the UN PRI. The interviews lasted between 45 and 90 minutes. We prepared semi-structured interviews to understand the role of taxation as a part of the ESG agenda in SRI and thus, to identify support or otherwise for our statements and research questions. The structured sections of the interviews consisted of questions asking how investors see taxation as a part of CSR, SRI, and specifically their ESG agenda. In addition, we left time for open discussion to encourage the interviewees to freely express their own perceptions of the topic. We used the content analysis method to analyze the interview material (Eskola and Suoranta 1998), following Chi’s (1997) suggestion for processing qualitative research material. First, we independently examined the transcripts of the interview material and the institutional investors’ published SRI documents. Doing so meant each researcher formed a subjective impression of the role of the taxation as an evaluation issue of SRI. Analyzing the content of the interview material involved a trawl for repeated and vital issues and the preliminary combination of congruent themes of research. After that, we assembled to review the interview material in regularly convened research meetings. In those meetings, we discussed the observations in an endeavor to connect subjectively reviewed themes and establish segmentation. As an outcome of the collective analysis, we converged themes for each refined research question that illustrate the role of taxation and its dimensions as part of an ESG analysis. For example, themes connected to the first refined research question were legislation,tax planning,tax avoidance and tax evasion. The themes connected to the second refined research question were tax reporting,transparency, and reputation. The themes connected to the third refined research question were engagement,influencing,risk, and opportunity. Themes observed at the limits of the refined research questions were not subordinated but all themes were also observed with respect to the other refined research questions if necessary. Nevertheless, the above segmentation process clarified the analysis of the interview material when we analyzed each refined research question individually within the limits of the relevant themes. These themes and Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM 142 |R. Knuutinen and M. Pietiläinen how they related to each other were analyzed more closely when we observed their positioning in relation to the context of SRI and the refined research questions. To assist content analysis, we read the interview material several times. In addition to interviews, we familiarized ourselves with how institutional investors integrate taxation issues and their ESG analysis by researching documents retrieved from the internet, such as SRI reports and overviews, annual reports, blog posts, and other publications. This research involved document analysis, in that we strove to find confluences to the refined research questions among the documentary material—either to confirm or reject them. The use of triangulation and multiple research methods (see e.g., Eskola and Suoranta 1998) was intended to deepen the understanding of the connection between SRI, taxation, and ESG information with the framework of Finnish institutional investors and to enhance the reliability of the research (see e.g., Eriksson and Kovalainen 2008). In addition, we would support the contention of Finér and Ylönen (2017) based on the findings of prior studies that flaws in taxation should be investigated with a qualitative approach and based on triangulation. 6Answers to the research questions derived from the empirical results Question 1: If the obligation to pay taxes is based only on a legal requirement, is taxation a genuine ESG theme at all? In this section, we look at the role of taxation as an ESG analysis factor on the basis of the interview results, and thus strive to answer our refined research questions. We analyze the interviews by addressing one statement/question at a time, after which, in the final section of our article, we draw conclusions. Concerning question 1, the results of the empirical material indicate a clear consensus among institutional investors assessing taxation as an ESG factor that the minimum requirement is that a company complies with the tax laws of the relevant state of operation. As a matter of fact, all interviewees mentioned that as a minimum requirement for tax compliance.17 This, however, does not indicate, for instance, how investors are concerned with (i) aggressive tax planning that is conducted within the limits of the legislative framework (i.e., the letter of the law of tax statutes), while not yet being acceptable in the opinion of all stakeholders, (ii) how investors are concerned with tax avoidance schemes which are not illegal as such, but could possibly be tackled by general or special anti-avoidance rules, or (iii) even tax evasion which is prohibited and incurs criminal law sanctions.18 Therefore, we asked the interviewees to clarify their views on the topic. Legally enforced tax planning was mainly addressed by the investors in two ways. For a majority of the interviewees, there was still no clear line on how to deal with tax planning cases in a critical area, if such is revealed by the media or in their ESG analysis. Nor did the interviewees offer a clear view of how far the tax planning or avoidance activities could go before they would adversely affect investment in the firm or lead it to be excluded from the investors’ portfolio19, or when it would have an impact, for example, on the risk/return requirement of the investment. However, the absence of a clear policy regarding the above-mentioned issues does not mean that institutional investors do not monitor the approach to taxation of the companies at all. Four interviews included a mention that the effective tax rate of companies is monitored in the ESG analysis, for example, as in the following: The thing what I would check out is effectively how much tax the company pays and how much is legislated for, and what is the difference between the two. That explains a lot. (Institutional Investor D) One issue and way that can be observed, is the difference between the theoretical tax requirement and the realistic payments. (Institutional investor A) 17 Institutional investors can influence the election of the company’s board and its auditors (corporate governance). It is their role to make sure that the company behaves in compliance with the tax law. In other respects, institutional investors have to trust that tax authorities and other authorities will intervene if the company’s behavior over taxation is not compliant with the law. 18 Regarding these levels of acceptability, see e.g. Uckmar 1983, p. 23 “tax avoidance can be defined as a way of removing, reducing ,or postponing the tax liability, otherwise than by means of tax evasion and tax saving .”; Thuronyi 2003, p. 156, “Tax minimization (tax mitigation, tax planning) is behavior that is legally effective in reducing tax liability.” See also Knuutinen 2014a. 19 From the perspective of influencing, this disinvesting/excluding approach may be inadequate, because the issue of aggressive tax planning or avoidance practices does not vanish but would move to other investors. Effectuation of the positive change concerning this flaw could be more helpful. Brought to you by | Jyväskylän Yliopisto University Authenticated Download Date | 12/21/17 12:19 PM Responsible Investment: Taxes and Paradoxes |149 Authority Pension Fund Forum has raised corporate tax transparency as one of its engagement themes.27 It remains to be seen how extensively other institutional investors in different countries follow these kinds of approaches. For companies and investors, there will always be a need for some tax planning. However, as stated earlier in the article, it may not be easy to say what kind of tax planning is socially responsible and what is not. It may be that investors need a second opinion; ratings or certifications, like the UK’s Fair Tax Mark28 could be helpful when this line is drawn in the future. References Alon, Anna and Amy M Hageman. 2013. “Impact of corruption on organizational tax compliance in transition economies.” Journal of Business Ethics 116 (3): 479-494. 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