Investee companies failing to publish tax policies or ensure maximum transparency should be subject to voting action from investors.
Asset owners need to identify gaps between their policies and those of their asset managers as part of their scrutiny of investee firms’ tax compliance.
This warning was issued by Pensions and Investment Research Consultants (PIRC) as part of new guidance on responsible tax practices for companies, and engagement and voting recommendations for asset owners and managers on tax-related themes.
At an asset level, risks from poor tax practices include reputational damage, increased vulnerability to tax regulation, and incurring additional legal expenses and potential fines if companies are subject to tax authority investigations, its new Tax Briefing noted.
“To preserve long-term value for the company and its various stakeholders, companies must align their tax approach to their overall business and sustainability strategies, and not just seek to optimise the amount of taxes paid,” the UK-based independent shareholder advisory consultancy said.
Earlier this year, a report by the World Benchmarking Alliance noted that 75% of 1,000 assessed companies failed to publish their tax strategies, with just 9% disclosing the amount of tax paid in each jurisdiction where the company has residence.
There are also “significant gaps between the policies and guidelines of leading investors and those of the largest asset managers”, PIRC added.
Having reviewed the public policies and voting guidelines of the top ten largest asset managers, Amundi was the only firm with a standalone tax policy, having identified tax as a key engagement issue in their stewardship and voting policies, the briefing said.
In comparison, although Allianz Global Investor’s most recent sustainability report does disclose its internal approach to tax transparency and broader tax practices, none of its public reports specify how it engages portfolio companies on tax-related issues, PIRC said.
Investors should ascertain that investee companies have assigned board responsibility for the company tax strategy and governance approach, PIRC said. Other recommendations for company best practice include publishing a tax policy, and disclosing tax practices country-by-country.
Shareholders should vote against members of the audit committee where there is no evidence of corporate tax management, the briefing said. Further, asset owners and managers should vote against management proposals demonstrating aggressive tax planning and vote for proposals seeking greater disclosure on tax practices.
“Companies do not operate in a vacuum, and they must contribute to the societies in which they operate in,” said Katie Hepworth, PIRC’s Responsible Tax Lead.
“With economic hardship and larger government deficits, companies will come under increasing pressure to disclose and justify their tax policies. They must align their tax approach to long-term business and sustainability strategies. Shareholders have a vital role in holding these companies to account, in order to ensure that they contribute their fair share and realise the value of their holdings.”
Ramping up the pressure
Investors are increasingly focused on ensuring investee companies have implemented responsible tax practices.
PIRC recently supported a shareholder proposal filed by the Greater Manchester Pension Fund and the Oblate International Pastoral Investment Trust against big tech company Amazon. The resolution has called for the company to disclose against the Global Reporting Initiative’s Tax Standard, which includes requirements to provide country-by-country reporting of financial, tax and worker information.
This marked the first action of a new initiative launched by PIRC in December in collaboration with the Centre for Corporate Tax Accountability and Research (CICTAR). The initiative aims to facilitate collaborative engagements with multinationals on tax transparency and responsible tax practices.
Corporate tax practices are also coming under increasing scrutiny from policymakers.
Last year, 140 countries agreeing to the Organisation for Economic Co-operation and Development’s (OECD) plans for a two-pillar global tax reform. 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.
The EU published a directive to introduce tax transparency rules for multinationals active in the EU single market with global revenues exceeding €75 billion a year which will be in force from June 2023. Companies will be required to disclose where they make their profits and pay their tax on a country-by-country basis across the EU.
“Given historic reforms to global tax regulation, and increased attention of tax authorities and governments to the issue of aggressive tax avoidance in light of large government deficits due to the pandemic, investors cannot afford to ignore the issue of corporate taxation. Asset owners must engage their managers on the development and implementation of stewardship and voting guidelines on tax to ensure that they are properly managing the risks in their portfolios,” PIRC said.