Industry

Corporate Tax Reporting Now a “Mainstream” Issue for Investors

Tech firms Cisco and Microsoft are the latest to face calls for increased transparency. 

Companies are increasingly being challenged on their tax reporting and activities by sustainability-focused investors, with recent shareholder proposals being used as a template for further action later this year. 

“Tax is no longer a niche sustainability issue, but a mainstream governance theme,” Katie Hepworth, Responsible Tax Lead at Pensions and Investments Research Consultants (PIRC), told ESG Investor. 

Last month, investors filed shareholder resolutions against tech firms Cisco and Microsoft, calling for both companies to report on their tax practices on a country-by-country basis under the Global Reporting Initiative’s voluntary tax standard, first published in 2019. 

Investors collectively managing more than US$350 billion in assets, including the Greater Manchester Pension Fund and AkademikerPension, a Danish pension fund, pointed out that Microsoft does not disclose revenues or profits in non-US markets and foreign tax payments are not disaggregated. This makes it more challenging for investors to evaluate if the company is engaged in responsible tax practices.  

“As a pension fund where 90% of our scheme members are employed in the public sector, it’s a very important theme for us – it’s vital the public sector is well funded,” said Anders Schelde, CIO of AkademikerPension. 

While Cisco does provide a global tax strategy document to its shareholders, the resolution – backed by investors such as Italian asset manager Etica Funds – has been filed partly because investors have argued the document gives insufficient information from a risk perspective. 

Both resolutions were coordinated by PIRC as part of its engagement efforts with 30 companies – the majority of which are based in tech or pharma – it identified as having poor tax transparency. Microsoft and Cisco were identified by PIRC through the UN-convened Principles for Responsible Investment’s (PRI) previous tax-related engagement initiative, which ran from 2017-19. 

The PRI analysed 41 companies on their tax policy, governance and financial reporting. Cisco was one of eight companies that refused to provide any information on its tax practices.  

“It felt important to escalate this engagement further and file shareholder proposals,” said Hepworth. 

Tech firms have been caught out for poor tax practices before. In 2020, Microsoft, Google and Facebook collectively avoided paying US$2.8 billion in corporate tax in developing countries.  

“Their income comes from the non-physical and intangible, which means these companies are more easily able to manipulate their tax-related responsibilities,” said Schelde. 

If the resolutions are not resolved, then they will be put to the vote at the companies’ annual general meetings (AGMs) later this year. 

Rising tide 

The resolutions filed against Cisco and Microsoft represent “growing momentum” behind investors challenging investee companies on their tax practices, Schelde noted.  

In May, a shareholder resolution calling for increased tax transparency from big tech retailer Amazon secured 21% in investor support. While this means the resolution was not passed, the weight of support is seen as putting the topic more firmly on the company’s agenda.  

“Twenty-one percent is quite a good outcome,” said Schelde.  

“Improving companies’ tax transparency won’t happen overnight – it’s likely to remain on the agenda for investors for the next several years. Amazon’s vote is a good start.” 

It is possible that Cisco and Microsoft may approach the US Securities and Exchange Commission (SEC) and challenge the resolutions so they do not have to be put to vote, PIRC’s Hepworth noted.  

However, by rejecting Amazon’s own challenge of its tax-related shareholder resolution, there is now “a very clear precedent that the SEC thinks tax proposals are a suitable subject for shareholder proposals and can therefore be included on company ballots”, she said.  

Governments and regulators globally are taking a stricter stance to ensure that companies are disclosing their current tax practices. 

In 2021, over 130 countries agreed to the Organisation for Economic Co-operation and Development’s (OECD) plans for a two-pillar global tax reform. This would introduce rules to ensure a fairer distribution of profits and taxing rights so developing countries are paid what they are owned, as well as a global minimum tax rate of 15%. The tax rate is expected to annually generate an estimated US$150 billion for governments around the world. 

EU lawmakers recently advanced its plans to introduce the global minimum tax across member states by the end of this year, and the UK has also announced its intention to have the tax in place by 31 December 2023. 

The OECD has noted that its finalised rules for the fairer distribution of profits and taxing rights will be finalised by mid-2023 and enter into force 2024. 

Increasing scrutiny from investors and lawmakers means that it’s time for companies to “get their house in order”, said AkademikerPension’s Schelde. 

“There is going to be an increasing amount of tax-related regulation, harmonisation and demand for transparency that companies need to be taking seriously. They will be deemed a financial and sustainability-related risk to investors if they don’t.” 

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