The companies that were selected for the PRI’s research on corporate tax disclosure were chosen because of sector-related tax risks as detailed below. 

Other considerations included:

  • identifying companies which have a large market capitalisation (those that investors will likely have large holdings in);
  • choosing a mix between leaders and laggards in corporate tax transparency to identify best practices and facilitate progress within the industry at large; and
  • identifying companies that are more most likely to benefit from the recommended changes.

Common profit shifting concerns in the technology and healthcare sectors include:

Transfer of intangible assets

Pharmaceutical and technology companies tend to rely on intellectual property (IP) assets and related revenues. Companies in these sectors may be exposed to transfer pricing risks when assets are transferred to subsidiaries in low tax jurisdictions below the arm’s length price, without reference to the actual functions of the subsidiaries and with the primary purpose of tax minimisation. The abuse of transfer pricing rules is more likely given that IP is difficult to value due to a lack of reference prices in the market and companies having a better sense of the long-term value of the assets than tax authorities do.

Taxable presence

Traditionally, physical presence has been a factor used to evaluate whether a company has resident status in that country and needs to pay taxes. However, with changing business models that are based on automation, companies may pay less tax in countries where they have no requirement for a taxable presence despite generating income. In addition, companies may adopt structures that fragment their functions for tax purposes – such as by using trading structures or by ensuring that each of the entity’s operations is below the permanent establishment (PE) threshold or qualifies for PE exceptions. This has been a clear area of concern for regulatory authorities around the world and has even resulted in unilateral measures in several jurisdictions to strengthen tax regimes. The OECD has also undertaken further work to address the tax challenges of the digital economy.


One of the common ways to reduce taxes in a jurisdiction where a taxable presence is established is to claim deductions on intra-group transactions, such as through lending between subsidiaries in high and low tax jurisdictions, payments between subsidiaries such as royalties, and service fees.

Additional considerations 

  • The companies in these sectors have also been known to have the highest tax gap relative to other sectors. Although it is possible that the tax gap is a result of factors unrelated to profit shifting, a large and persistent tax gap may be indicative of aggressive tax planning and warrant further consideration from investors.
  • Pharmaceutical and technology companies have been exposed to government enquiries and subject to media scrutiny. Although they may not be indicative of wrongdoing per se, they may point to reputational risk. Companies’ response to allegations may also be a good proxy for the board’s risk tolerance on tax.
  • Companies in these sectors often have poor tax disclosure. Although this is slowly changing with the rollout of regulations in certain jurisdictions, corporate tax transparency in these sectors is of interest to investors given the potential risks outlined above.

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    Evaluating and engaging on corporate tax transparency: An investor guide

    May 2018

Evaluating and engaging on corporate tax transparency: An investor guide