Approach to dialogue and next steps

This section provides guidance on how investors can approach engagement as well as key considerations during the process (see final section for examples of good practice).

Tax policy

For investors looking to engage on tax transparency, a starting point could be to check for a publicly available tax policy. Where companies are yet to publish a policy, investors could:

query if there are any barriers to publishing tax principles and existing tax governance and control processes;
communicate to portfolio companies about what kind of information is relevant and useful in a tax policy (refer to the relevant tax authority guidance); and
refer to good practice examples of tax policies from peer companies.

Area of disclosure	Investor considerations in conducting desk research prior to engagement	Trends in current disclosure	Questions that can be raised in engagement dialogue
Policy coverage, level of detail provided, commitments and communication	Is the policy global, and is there evidence that it is understood and adhered to at local levels? Has the policy been signed off by a board member? Is the policy comprehensive? Does it provide a holistic overview of the company’s approach to tax? Are the tax principles in line with corporate values and strategic considerations of the business, including in relation to sustainability commitments? Is this communicated clearly in the company’s tax policy?	Not all companies publish a tax policy. Where policies are produced primarily to meet regulatory requirements, the policy may apply to a single jurisdiction. A small number of companies explicitly state that the policy is signed off by a board member. Poor disclosure on linking tax policy with business and sustainability strategies.	Has the company considered publishing a tax policy? What is the organisational and board view on the approach to tax? How is this approach linked to business and sustainability strategies?

Tax governance and risk management

Appropriate tax governance can ensure that companies comply with tax laws, as well as have processes in place to adhere to the principles and commitments in their own tax strategy. Companies may be relatively open about discussing internal control mechanisms. Specifically, investors could ask about:

board oversight for tax issues
engagement with stakeholders and potential reputational issues related to tax
staff training to increase awareness of the tax strategy
processes to flag tax practices that may be in breach of the policy – through whistleblowing mechanisms, for example

By requesting information on tax planning and tax risk management, investors may gain insights on the company’s approach beyond what can be gleaned from the tax policy. Questions may focus on:

the process for defining and managing tax risks;
key tax-related risks for the current year (particularly those emerging from tax authority audits of country-by-country reporting and new developments relating to taxing digital companies and intellectual property);
examples of the types of tax practices that are not considered acceptable;
the process for dealing with ambiguity in the interpretation of tax laws;
whether the company has a large and growing UTB balance, a large gap between the ETR and the statutory tax rate, and/or transfer pricing controversies, as these could be indicative of an aggressive tax planning approach.

Area of disclosure	Investor considerations in conducting desk research prior to engagement	Trends in current disclosure	Questions that can be raised in engagement dialogue
Board-level and delegated responsibility, mechanisms to ensure adherence to the tax policy	Is it clear from public disclosure that the board has ultimate responsibility for tax issues? Is there any indication in company disclosures that tax issues are periodically discussed at the board level? Are reputational issues arising from tax on the board’s radar? How does the company ensure compliance with tax laws? How does it ensure compliance with its own tax strategy? How often are relevant staff trained on tax issues and their link to the broader corporate strategy? What is the procedure for staff to flag breaches of tax policy or other concerns relating to tax transactions?	Companies that have published a UK tax strategy generally include some information on tax governance. Few companies refer to the spirit of laws and wider stakeholder perceptions on tax. A small proportion of companies discuss training; however, companies do not tend to publish any information on whistleblowing mechanisms that facilitate the reporting of concerns related to tax practices.	Is tax formally a part of the risk oversight mandate of the board? How often and for what reason is risk discussed at the board or board committee level?
Attitude to tax planning and management of tax risks	Does the company state its tax risk appetite? Are tax risks described in detail? Are there any examples of acceptable and unacceptable tax practices in corporate disclosure? Is there any indication that the company has adopted an aggressive approach in its tax planning (such as a persistent and high level of uncertain tax positions, controversies relating to transfer pricing, a persistently high tax gap or excessive use of low tax jurisdictions)? Have there been any recent material changes to corporate tax arrangements? To what extent do profits rely on having a presence in tax havens or tax incentives? What do the uncertain tax positions indicate about the tax risk appetite? (Also consider if the trend is affected by tax structures or strategies.)	Information on tax risk appetite tends to be published in UK tax strategies and not so much among companies operating in other jurisdictions. While key tax risks are published by US companies under “1A risk factors” in 10K reports, a number of disclosures appear to use boilerplate language.	How do you define and manage tax-related risks? Could you provide an example of a transaction that was not in line with the board-agreed risk profile for the company and was thus rejected?

Tax reporting

It is important that investors can test corporate commitments on tax against practices. Granular quantitative data on tax can enable risks and opportunities to be identified, allowing investors to have early conversations when there are discrepancies between what the company says it is doing and what the company is actually doing.

for instance, granular country-level data on the scale of activity (revenue, profits, tangible assets and employee numbers) can help investors understand if a company indeed commits to operating in tax havens only where there are commercial reasons for doing so. If the company has recorded a large profit in a low tax jurisdiction where it has derived relatively low revenues and has low employee numbers, investors may raise further questions to clarify the reasons for such an outcome.
it is encouraging to see that, in response to greater stakeholder demand, a handful of companies have started publishing detailed reports on taxes paid. However, enhanced voluntary tax reporting is at an early stage. Many companies are also reluctant to disclose more data than what is currently being made available for reasons such as commercial sensitivity, administrative concerns, potential misinterpretations of data and media or NGO scrutiny.

It is important that investors explain why requests for additional information are being made and how disclosing it can facilitate investment decision making. Through the engagement process, investors may also identify the barriers companies face in disclosing certain types of data and subsequently agree on what is feasible to disclose. For instance, investors could:

through ongoing dialogue, identify how prepared companies are for country-by-country reporting. Country-by-country reporting is interpreted differently in the public debate (see section on country-by-country reporting for further discussion). However, the investor ask is simple – it is a request for data on business operations and economic substance that contextualises the information on tax that a company reports. This information can take the form of a country-level breakdown of revenue, employee numbers, profits before tax, tangible assets and taxes paid, which is reconciled with financial statements.
ask for corporate tax reconciliation that more clearly and meaningfully explains the difference between what a company has paid in taxes and what it is required to pay by statute. Reconciliation provided by companies, although in accordance with accounting requirements, is often lacking in detail, making it difficult for investors to understand the consequences of factors such as research and development credits and other tax advantages.
discuss with companies the importance of disclosing intra-company debt balances i.e. to help investors understand whether companies are relying on excessive interest deductions to lower their tax rates. It is expected, however, that companies are likely to be concerned about the impact of such disclosures (which they are not required to make by statute or accounting standards) on their access to external credit. With that said, greater transparency in this regard will reassure investors that companies are well-placed to respond to tax developments relating to interest deductibility.

Area of disclosure	Investor considerations in conducting	Trends in current disclosure	Questins that can be raised in engagement
Disclosure on link between taxes paid and commercial substance	Does the company provide an overview of general corporate structure and strategies that explains its approach to tax? Where anomalies exist, does the company explain them by referring to transfer pricing and approach to and use of tax havens, for example? Are there any sector-specific risks that the company is likely to be exposed to? Does the company provide qualitative and quantitative data that might support its commitment to avoiding artificial corporate structures? This may include providing commentary on the tax gap or other areas that need clarification in the country-by-country report.	While some companies provide a high-level statement on linking taxes paid with economic substance, disclosure of qualitative or quantitative data that support these commitments is generally poor. Only a few companies explain their presence in low tax jurisdictions/tax havens. Companies tend to use the home country statutory tax rate in their tax reconciliation. When the weighted average statutory rate is used, the reconciliation is much more meaningful as it eliminates the difference caused by companies paying different tax rates in different countries of operations. Less than 5% of companies reviewed used the weighted average statutory rate in their reconciliation. Country-by-country reports are very rare.	What drives the gap between your weighted average statutory rate and the ETR? Would you consider publishing information on revenue, profits before tax, tangible assets, employee numbers and taxes paid at the country level? Given that this data is now gathered for tax authorities to use in their risk assessment, what are the challenges in making this information available to investors?