5

Why investors are joining consumers and NGOs on tax evasion

tax responsibility cloud

When defining what sustainability and corporate social responsibility are really all about, tax should be part of the discussion. Increasingly, various stakeholders view corporate tax responsibility (CTR) as part of corporate social responsibility (CSR). In recent years, media coverage of companies’ tax policy and tax avoidance schemes has resulted in dented reputations, even consumer boycotts. Mainstream media joined the debate, like the BBC article on Google, Amazon, Starbucks: The rise of ‘tax shaming’. Deep public spending cuts in the wake of the financial crisis has made more consumers interested – and outraged – about corporate tax policies that minimize tax benefits for a broad group of stakeholders to the benefit of just one specific stakeholder – the shareholder.

 

For years, NGOs have addressed the negative impact of aggressive tax planning by multinationals on society, especially in developing countries. The UN Conference on Trade and Development (UNCTAD) estimates that corporate income tax losses for developing countries may be as high as US$100 billion per year.


Investors demand fair tax planning

pri_engagement_guidance_on_tax_final-1Investors have now joined NGOs to demand fair tax planning from companies. Until recently, most investors shied away from the topic, as they wanted companies to minimize tax payments to maximize profit. Today, investors are increasingly engaging on tax topics, as a lack of tax accountability can result in risks. In 2015, PRI (Principles for Responsible Investment) released its Engagement Guidance on Corporate Tax Responsibility. Fiona Reynolds, Managing Director, PRI opens the report: “Responsible investors and well-run companies will acknowledge that tax is not simply a cost to be minimised, but a vital investment in the local infrastructure, employee-base and communities in which they operate.”

 

PRI identifies various kinds of risks associated with aggressive corporate tax planning, such as earnings risk and governance problems, macroeconomic and societal distortions and reputational damage. A good indicator of potential earnings risk is the tax gap, defined as the difference between the effective tax rate on a company’s income statement and the weighted average of statutory rates based on the firm’s geographic sales mix. Large and persistent tax gaps are generally the result of profit-shifting and aggressive tax planning. Alarm bells should also go off if a company makes more money through tax systems than through its core business. Such corporate tax practices might be completely legal by the letter of the law, but a purely legal approach will not protect companies from reputational damage. Consumers, NGOs and investors rather use the intent of the law to assess whether tax practices are responsible – or not.
OECD1Logo_DJSI_gross2015 was the year for new guidance and guidelines from many parties. The World Federation of Exchanges included tax transparency in its Guidance and Recommendations on ESG disclosure. In
2015, the OECD presented its Action Plan on Base Erosion and Profit Shifting (BEPS) and the European Union released a tax transparency package to re-establish the link between taxation and where economic activity takes place. RobecoSAM has added tax as a topic for the Dow Jones Sustainability Index questionnaire. The questions focus on strategy, transparency and governance on tax.

 

Tax transparency in its infancy

So are all companies reporting on tax transparently now? Not quite yet. In 2015, RobecoSAM found that only 20% of the companies participating in the Dow Jones Sustainability Index issued a public statement about their tax policy (beyond complying with tax laws). Another 20% claim to have internal tax policies which are not shared publicly.
Tax is part of the ways in which companies can create shared value in the countries where they operate. Tax strategy should therefore be transparent and an integral part of responsible business. As many corporate leaders are striving to integrate 2015_16sustainability – or ESG – factors into core business, they should take tax along on the journey. So while 2015 was the year for new guidance, hopefully 2016 can become the year for positive change in corporate tax responsibility.

 

On February 4, 2016, the Dutch Sustainable Investment Forum, VBDO, celebrated its 20th birthday. The tax transparency session with speakers from Eumedion, RobecoSAM and PWC at their anniversary conference inspired this blogpost. For more information on this topic, please check out the links in this blogpost and VBDO’s 2014 publications Good Tax Governance in Transition and Tax Transparency Benchmark 2015.

Written by Marjolein Baghuis @mbaghuis