Investor guidance on engaging with companies on corporate tax planning

The UN Principles for Responsible Investment has released new guidance for institutional investors on engaging with companies on corporate tax issues — Engagement guidance on corporate tax responsibility: why and how to engage with your investee companies. It covers why investors should have concern about an aggressive corporate tax approach to tax planning; regulatory changes underway globally to facilitate greater scrutiny of tax avoidance and profit shifting; how to identify risks of aggressive corporate tax planning in investment portfolios; and the questions to put to companies in shareholder engagements. The guidance also includes an overview of key strategies employed in aggressive tax planning.

Why investors should have concern about aggressive corporate tax approach to tax planning

The guidance notes that an aggressive corporate tax approach to tax planning can indicate governance problems, and introduce reputation and earnings risks. Investors need to consider what impact this would have on the value of their investments. In relation to reputation risk and macroeconomic and societal distortions, companies may view aggressive tax planning as maximising value for shareholders, but the public is of the view that corporations should pay for the many years of employee productivity, and use of public infrastructure and public research that assisted in building their industries, and that companies should therefore pay full taxation. And when multinational corporations pay little or no tax, local businesses, both small and large, point out that the competition is anything but a level playing field, given that local businesses do pay tax.

Regulatory changes underway globally to facilitate greater scrutiny of corporate tax approaches to tax planning

It is not only the public that has a heightened awareness of how corporations approach tax planning. Governments and regulators globally are seeking to introduce regulatory frameworks that provide for greater scrutiny of corporate tax approaches to tax planning. Transparency measures are being introduced, and enforcement is strengthening. New rules being introduced in various jurisdictions can see multinational companies find themselves undergoing unexpected tax assessments and facing increased tax liability.

How to identify risks of aggressive corporate tax planning in investment portfolios

The UN Principles for Responsible Investment’s guidance sets out indicators for institutional investors that could ‘flag’ that aggressive tax planning is a problem in their investee companies. These include a large, persistent tax gap; large or growing unrecognised tax benefits balance; media stories or government inquiries; new disclosures or changes in language used in tax footnotes; opaque disclosure of geographic revenue mix; lack of a tax policy; and multiple subsidiaries in tax havens.

The questions to put to companies in shareholder engagements

The guidance also includes questions that investors can ask in their shareholder engagements. While the questions’ relevance will always depend on the circumstances of the individual company, the guidance points the way to how to build up a picture of the company’s approach. Questions could include:

  • Has the company considered publishing a tax policy/tax principles?
  • Is tax formally a part of the risk oversight mandate of the board?
  • How often and for what reason is tax discussed at board/committee level?
  • Has the company defined tax-related risks and can it set out how it manages it?
  • What are the company's top three tax related risks?

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