Investors seek transparency on corporate taxation

October 28, 2014

By Fiona Reynolds, managing director, Principles for Responsible Investment. The opinions expressed are her own.

Public debate is well and truly focused on corporations and the amount of tax they pay – or don’t pay as we have seen in recent headlines decrying the fact that the likes of Google, Amazon, and Glencore are not paying their fair share.

Across the globe, investors, legislators, governments and regulatory bodies have been drawn to the debate. At next month’s G20 meeting, for example, multinational tax avoidance is high on the agenda.

This follows on from the OECD’s BEPS Action Plan of 2013 and its recent announcement in September that agreement had been reached with 40 countries to crack down on some tax avoidance, including measures to increase transparency, close loopholes and limit the use of tax havens.

There is widespread recognition that global taxation rules badly need structural reform. Financial secrecy and opaque accounts are no longer best practice.  It is now up to governments to ensure that this first tranche of OECD based changes are fully implemented on a country by country basis while discussion continues on the next round, to be considered at the 2015 G20.

While measures by the OECD and G20 are vital in terms of modernising the global tax system and addressing multinational tax avoidance, investors also have a critical role to play in ensuring that companies are open and accountable about their tax strategies.

At the United Nations-supported Principles for Responsible Investment (PRI), we analysed the results of a recent comprehensive reporting exercise on tax, looking at responses from both asset owners and investment managers.

The results showed that investors are starting to focus on tax strategy as a material risk, with many investors saying they are increasingly concerned that aggressive tax planning crosses the line between avoidance and evasion. This is of particular concern in emerging market jurisdictions, where tax enforcement might be weak, offering temptation for companies to avoid paying their fair share.

The results further found that investors see the risks in aggressive tax planning by the companies in their portfolios. The first is that they risk damaging their brands, or losing their license to operate – and this risk is especially acute for public-facing companies in the fast-moving consumer goods markets.

So what specific steps can investors take in addressing tax avoidance? Many PRI signatories are actively engaging companies on this issue, with some pushing for more disclosure on tax policy, planning and reporting. Although engagement on tax is at an early stage in most cases, with investors simply seeking to better understand management’s approach to tax planning and its impact on other business decisions, this dialogue is vital. Investors understand that tax driven tactics must fit comfortably against the companies long term strategies for value creation. The recent announcement by FTSE 100 company SSE over its tax affairs is an example of what is possible.

Ultimately, improving corporate transparency and disclosure has a strong foundation in governance and gives institutional investors an opportunity to make their own judgments.

 

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