The list of questions proposed in this section can be used to research the company’s tax profile based on current financial or sustainability reporting.
When researching tax profiles, analysts should be looking at how the company geographically segments its revenues, or whether it already provides information on tax in its annual report or as part of sustainability disclosure.
Some of the questions could be used for enhancing knowledge of the company’s practices, which could be integrated into investors’ existing financial models or decision-making frameworks. Some could inform engagement requests for companies to improve oversight, governance and transparency.
The questions posed by an investor will ultimately depend on the tax profile of the company, the investor’s own priorities, any existing relationship with the company and the stage of the dialogue. Even when questions are not answered by companies at first instance, raising them will communicate to company management that they need to be more thoughtful about their tax strategies and how they communicate them to their investors.
The list below covers six broad themes that could be used to structure the engagement dialogue. While there is no one size fits all model, the themes are presented in a suggested order for engagement i.e. starting from policy, governance and risk management, and moving on to more technical questions.
Not enough mainstream investors are asking these questions, so companies feel they don’t need to be more transparent.
Meryam Omi, Legal & General Investment Management
Check if the company has a comprehensive tax policy publicly available
Key question: Have you considered publishing a tax policy/principles to indicate your approach towards taxation?
- Who has ultimate responsibility for setting your tax policy?
- Do you subscribe to any corporate responsibility standards, and if so do they include any standard about responsible tax management?
- Do you engage with policy makers on tax issues, directly or through active involvement in a business or industry group? [If yes:] i. What tax issues are you currently lobbying on? ii. What groups are you using?
- How does the board ensure that your tax strategy aligns with your sustainability commitments?
Check whether the company provides disclosure on clear board-level oversight of tax strategy
Key question: Is tax formally a part of the risk oversight mandate of the board? How often and for what reason is tax discussed at board/committee level?
- How do you manage tax planning policies, from board down to line-manager level?
- What is the role of your external audit firm in your tax planning strategy?
- Is your executive team and line/divisional managers judged by financial performance before or after tax? i. [If yes] Have you considered whether this might have an impact on their approach to tax planning?
- Do your external tax advisers also conduct your financial audit? [If yes] i. How do you manage conflicts of interest?
- How large is your in-house tax department?
- How much have you spent on tax advice from external advisers in the past three years?
Managing tax-related risk
Check whether the company discloses any information on tax-related risks and how they are managed, including any discussion on pending investigations of tax positions.
Key question: How do you define and manage taxrelated risks? What are your top three tax-related risks?
- How does your internal audit team monitor tax-related risks?
- Has the board discussed the potential risk of tax strategies negatively impacting relations with key stakeholders, such as consumers, local or national governments?
- Has your board discussed the possible ramification of your tax strategies on the firm’s brand or reputation?
- How would you characterise your relationship with the tax regulator in your home country?
- What is an example of a tax planning strategy that was rejected by the executive team or the board as too risky?
The effective tax rate
Check the company’s global effective tax rate and if the origin of any significant difference versus its weighted average statutory tax rate is explained in detail
Key question: What drives the gap between your effective tax rate and your weighted average statutory rate based on your geographic sales mix?
- Are there specific tax law changes currently being considered or to be adopted in the short term (e.g. following BEPS, by national governments), that if enacted would cause your rate to increase significantly?
- [For companies based in a jurisdiction with a worldwide taxation system (e.g. the US)] What drives the percentage gap between your foreign effective tax rate and your non-domestic weighted average statutory tax rate?
- [If the company’s Unrecognized Tax Benefit balance is large or has grown] What is driving the increase in your Unrecognized Tax Benefit? What does this growth suggest about the amount of risk that your organisation is taking on as it relates to questionable tax positions?
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Why and how to engage on corporate tax responsibility
Tax planning strategies
The questions below refer to the use of aggressive tax planning strategies.
- To what extent does your profit after tax rely on your presence in tax havens or incentives and structures that enable very low taxation (e.g. <15%) of profits
- Have you reconsidered your tax planning strategies, or do you intend to reconsider them, in light of changes following the BEPS project?
Key question: How many separate legal entities (under common control) make up your corporate group, and do you disclose all of them?
- Have you conducted a review of these and of the group structure recently, to check the functions they perform, and if the structure could be simplified?
- Have any of your agreements or structures been notified to the authorities under a disclosure scheme, or have you considered whether any might need to be notified?
- How many of these entities are formed or resident in a jurisdiction that could be described as a tax haven (and based on what definition e.g. the OECD list, Tax Justice Network)?
- What is the role of these tax haven entities?
Intellectual property rights
Key question: What is the internal ownership structure that governs your firm’s intellectual property assets?
- Have you reconsidered these structures, or do you intend to reconsider them, in light of the changes to transfer pricing rules following the BEPS project?
- If you have transferred IP, or on an ongoing basis transfer IP, out of the region in which it is developed, what is the business purpose and how do you determine the value of the IP that is transferred? [If yes] i. Where is the IP transferred to? ii. What functions are performed by the entity which owns these assets? iii. How many people does it employ, and what profits are attributed to it?
- If you use cost-sharing agreements to move IP out of the region in which it is actually developed, when were your most critical cost sharing agreements initially created, and have you reviewed them, especially in light of the BEPS project proposals?
- [If applicable] Given that much of your Research & Development/design work and hence new intellectual property generation appears to occur in XX country where your principal R&D/design facilities are located, why doesn’t your XX country subsidiary receive a higher share of your profits based on the value it is creating?
Financial structures - intra-company debt
Key question: Do you have subsidiaries in low tax jurisdictions that make intra-company loans? If yes, where are they located and why?
- How does your aggregate intra-company debt balance or interest expense compare to your external debt balances or interest costs paid to third parties? [If the company has a large intra-company debt balance] i. What is the purpose of the large intra-company debt balance? ii. What would be the impact of the likely introduction of stricter interest deduction limitations following the BEPS project?
- What is the average interest rate on your intra-company debt and how does this rate compare to your external debt?
- Is any of your intra-company debt paying an interest rate above your most recent externally-financed debt rate?
- Do you use hybrid debt structures to lower your effective tax rate? [If yes] i. Have you considered the implications for these structures of the proposals on hybrid mismatches in the BEPS project?
Trading company or marketing service structures
Key question: Have there been material changes to your corporate tax structure in the past four years (e.g. separation of high value-adding from routine functions)?
- Do you use a principal or trading company structure (e.g. where one subsidiary controls third party manufacturing, marketing, and distribution decisions) to manage your operations?
- [If company uses a trading company or marketing services structure] What are the primary subsidiaries in this structure, where are they located and what are their business functions?
- [If company uses a trading company or marketing services structure] Do you receive tax incentives or have any Advanced Pricing Agreements (APAs) with the countries impacted by this structure?
- Have you reconsidered these structures, or do you intend to reconsider them, in light of the changes to tax rules and their enforcement (e.g. BEPS project, EU state aid investigations)?
Key question: Are there any jurisdictions that have provided you with tax holidays or incentives?
- What is the value of these incentives (in monetary terms, or in terms of the impact that they have on your overall effective tax rate)?
- What countries have provided these incentives, what is their end date, and what investment or other requirements have been placed on your business as a result of agreeing to these incentives?
- If for some reason these incentives are not renewed upon expiration, or you cease to be eligible for them, what strategy would you pursue to avoid an increase in your effective tax rate?
Country by country reporting
Key question: How are you preparing for country by country reporting (CbCR)?
- What effect do you think submission of CbCRs will have on your tax exposure in countries where you do business?
- Has your board considered whether your CbCR should be publicly disclosed?
- Would you make your CbCR available to your investors?
- Do you believe that your firm could adequately defend the allocation of profits to the various countries where you have activities, including sales, if your CbCR were to become public?
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Why and how to engage on corporate tax responsibility