There is growing interest among responsible investors to understand how companies in their portfolios approach tax-related issues.
As multinational companies continue to face increased scrutiny in relation to their tax practices, investors are calling for greater transparency to evaluate companies’ exposure to potential earnings, governance, reputational and broader societal and macroeconomic risks.
Where corporate disclosure is poor, investors may engage with companies to encourage improvements in their publication of tax-related qualitative and quantitative information to aid investment decision making.
This report serves as an investor tool for engagements on tax, drawing on key trends and gaps observed in the current status of corporate income tax disclosure practices.
The framework will enable investors to:
- identify areas for further evaluation when assessing corporate data on tax; and
- structure their engagement questions based on observed trends in reporting.
Why is corporate tax transparency important for investors?
Four key arguments for enhanced corporate tax transparency are set out below:
- The amount of corporate income tax a company pays is material to its profitability. Investors therefore seek to understand the extent to which future cash flows are based on the performance of the underlying business, and the extent to which they rely on other factors such as access to subsidies and the use of artificial tax structures which may be challenged in the future.
- Corporate tax avoidance activities may suggest underlying legal, operational, reputational, financial and/or governance risks. Investors increasingly recognise that companies that pursue aggressive tax minimisation activities may be sending a signal regarding the board’s or management team’s risk tolerance. High risk tolerance can result in a variety of damaging outcomes for the business. For instance, where boards are focused on short-term tax-related strategies and gains, opportunities linked to genuine economic activity may be overlooked. As such, it is important that investors can access corporate information that provides a well-rounded view of a company’s governance of tax-related issues.
- Investors want reassurance that the tax practices of their portfolio companies can withstand stakeholder scrutiny and potential regulatory changes. As corporate tax regimes are reconsidered across countries to avoid revenue loss to tax avoidance, multinational companies will face increased pressure to defend their tax-related transactions and/or may see new forms of taxation applied. Corporate reporting that shows how the corporate tax structure and strategy manage and adjust to the regulatory environment will boost investor confidence.
- Investors recognise that corporate taxes support society’s tangible (i.e. infrastructure) and intangible (i.e. education, governance/legal, etc.) needs. Investors recognise that strong government institutions create a solid foundation for competition, growth and other factors that enable long-term business sustainability at investee companies. Corporate income taxes are an important part of most governments’ revenue base, and, as such, help to support this.
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Evaluating and engaging on corporate tax transparency: An investor guide