Growing investor focus on tax planning and reporting is underpinned by global regulatory trends.
The US Securities and Exchange Commission’s (SEC) backing for tax transparency calls by Amazon shareholders is a “landmark moment”, paving the way for investors to secure responsible tax practices other from investee companies.
“The SEC’s stance is part of a longer and wider trend towards fair taxation, tax transparency and good governance,” Dave Reubzaet, Director of Capital Markets at the Global Reporting Initiative (GRI), told ESG Investor.
“It’s a potentially a landmark moment that’s going to help investors put the topic on the table for other investee companies and ensure the integration of responsible tax into their sustainable investment strategies,” he said.
The Greater Manchester Pension Fund and the Oblate International Pastoral Investment Trust, supported by UK-based independent shareholder advisory consultancy PIRC, filed the shareholder proposal last year, calling for Amazon to disclose against the GRI’s Tax Standard, which includes requirements to provide country-by-country reporting of financial, tax and worker information.
It was filed as part of an initiative launched in collaboration with the Centre for International Corporate Tax Accountability and Research, which is attempting to facilitate active engagement with companies in sectors considered ‘high risk’ for aggressive tax avoidance, such as big tech.
Amazon promptly submitted a no action request to the SEC, a response which Katie Hepworth, Responsible Tax Lead at PIRC, said shows that the company is “out of step with investor and regulator expectations on corporate tax practices”.
In March, investors with US$3.6 trillion in AUM wrote to the US SEC Chair Gary Gensler expressing their support for the shareholder proposal, with AkademikerPension and the Ethos Foundation pre-declaring their intention to vote in favour.
“Aggressive tax practices can expose a company, and its investors, to increased scrutiny from tax authorities, adjustment risks, and increase their vulnerability to changes in tax rules as countries look to protect their tax bases from deleterious practices. Investors need to be provided with sufficient information to gauge a company’s tax position and governance approach and anticipate future impacts on and risks to their holdings,” the signatories wrote.
The SEC’s support for the resolution – confirmed last Friday – means that it will be voted on by investors at Amazon’s AGM on 25 May.
“Amazon will do everything it can behind the scenes to try to persuade institutional investors not to vote for the motion,” warned Paul Monaghan, CEO of UK-based NGO Fair Tax Foundation. The foundation launched the Fair Tax Mark in 2014 that is awarded to companies that are found to have transparent tax policies and disclose their country-to-country tax practices.
Whether or not the resolution passes, experts believe it sends a clear signal to companies that investors will be closely scrutinising their disclosures on tax, and expecting maximum transparency.
The majority of companies are not currently transparent about their tax practices. Seventy-five percent of 1,000 of the world’s largest companies have failed to published their tax strategies, according to research by the World Benchmarking Alliance (WBA) earlier this year. Only 9% disclosed the amount of tax they paid in each jurisdiction where the company has residence, and just 4% met all of WBA’s ethical indicators on tax to a satisfactory standard.
Tech companies, in particular, have been caught out before. Google, Facebook and Microsoft avoided paying US$2.8 billion in corporate tax in developing countries, according to a 2020 report by charity ActionAid.
Further, the UN-convened Principles for Responsible Investment analysed 41 companies on their tax policy, governance and financial reporting between 2017-2019. Eight of these corporates, including tech giants Alphabet, Facebook and Amazon, refused to provide any information on their tax practices.
Regulators globally are looking to stamp out tax avoidance and overly aggressive tax planning.
The first pillar will ensure a fairer distribution of profits and taxing rights to ensure developing countries are paid what they are owed, while the second is intended to introduce a global minimum tax rate of 15% by 2023, which will generate an estimated US$150 billion for governments around the world every year.
An EU directive to introduce tax transparency rules for multinationals will be implemented from June 2023.
It will require companies active in the EU single market and with global revenues exceeding €75 billion a year to disclose where they make their profits and where they pay their tax in the EU on a country-by-country basis.
In March, the European Network on Debt and Development and the Global Alliance for Tax Justice announced the launch of a civil society proposal for a UN Convention on Tax. Aligning with the GRI’s standard, it has an objective to ensure all tax systems are transparent and equitable, with an emphasis on safeguarding human rights, environmental protection and supporting the UN Sustainable Development Goals.
Under the proposal, all UN member states would be expected to implement legislation requiring multinational corporations in their jurisdictions to publish country-by-country tax reports.
“Regardless of legislation processes, it’s clear that a growing number of institutional investors are taking matters into their own hands – they want to know about taxes,” said Monaghan.
“Irrespective of whether the Amazon shareholder resolution passes or not, these investors have elevated responsible tax as an important issue that is only going to be carried forward. In that sense, they’ve already won,” he said.