When the press publishes articles claiming that a number of profitable companies quite legally do not pay much, if at all, in income taxes, and politicians argue that companies simply do not pay their fair share, it is sure to create a little trouble. Now, this Bloomberg article reports that tax transparency has become one of the “under the radar” elements of ESG disclosure that is “gaining traction”. According to the article, ESG-oriented investors want “large public companies to disclose where they are shifting their profits and how much they pay in taxes, and to curb aggressive tax planning.”
But not everyone agrees. One BlackRock commentator described a major divide among investors: “Some investors don’t even like the word ‘tax planning’. They think that it shouldn’t be part of a company’s vocabulary…. At the other end of the spectrum, there are shareholders who believe they are not doing well if you don’t take tax risk. ‘”Those who advocate more disclosure, the article says, seem to view taxes as a component of stakeholder capitalism. According to a Wharton professor, people can enjoy charity and diversity on the board, but “‘we see you pay no taxes and employ 100,000 or a million people. Shouldn’t you be contributing to the government, the communities, the physical infrastructure, the social infrastructure in which you do business? ‘”
As the article notes, the House of Representatives recently passed HR 1187, the ESG Disclosure Simplification Act of 2021, which in the unlikely event that the Senate passes it, would require the SEC to require ESG disclosure. And despite the bill, the SEC already has ESG disclosure on its agenda, despite its focus on climate and human capital for now. (See this PubCo post.)
The disclosure law for tax havens and offshoring (p. 1545, HR 3007), which places a more specific focus on tax transparency, was also introduced. According to the accompanying Congressional report, the bill would require publicly traded companies to “disclose their total pre-tax profits and total amounts of state, state and foreign taxes paid. The bill would also require companies to disclose a number of specific tax-related items, such as total accrued tax expense, reported capital, and total accumulated profit for each of their subsidiaries and on a consolidated basis. The rationale for the bill mentioned in the report is that “corporate tax practices can impose significant financial risks on investors”. Without this disclosure, “investors and markets are unable to adequately assess a company’s tax liability or any associated legal or reputational risk that can materially affect the company’s short- and long-term value”. The report estimates that “companies around the world are storing up to $ 36 trillion in tax havens and that the practice of offshoring costs the United States approximately $ 100 billion in tax revenue annually. Also, the lack of disclosure of this information makes it difficult for investors and consumers to know whether the companies they invest in are contributing to the American economy and protecting American jobs. ”However, the Minority Report claims that the bill is“ misguided, ”not only because it would “make the SEC a new tax regulator,” but also because it would “require disclosure of taxpayers’ confidential information, which underscores the longstanding US position on maintaining the confidentiality of all information made available to the tax authorities. including Country Specific Reporting Information ”and“ provides no value to investors trying to evaluate companies in which they wish to invest. The bill’s disclosures are intended to name and shame companies that otherwise comply with applicable law. “
According to Bloomberg, the bill has “strong support from the private sector, with 66 investors representing $ 2.9 trillion in assets under management signing letters to the leaders of the relevant House and Senate committees in May urging support ”. The letters signed by companies like the New York City Comptroller’s Office, the Interfaith Center on Corporate Responsibility, AFSCME, the AFL-CIO, Harrington Investments, Oxfam America, and CorpGov.net (founded by James McRitchie) show that investors “Require country-level income and tax information to better understand a company’s financial, reputational and economic risks and to make informed investment decisions. With increasing global momentum set to transform the taxation of multinational corporations significantly – including through the government’s tax amendment proposals and the OECD negotiations – investors need information more than ever to inform them about how their holdings are affected by changes in US tax law could be affected. “The signatories claim that”[g]On a global level, there is both growing investor support and new standards for disaggregated corporate tax disclosure on a country basis, “including a” new standard for tax transparency reporting, including public country-by-country reporting, which went into effect in January ” , by the GRI (Global Reporting Initiative), an international standardization body, “whose reporting guidelines are followed by more than three-quarters of the companies listed in the Dow Jones Industrial Average”.
Likewise, the “United Nations Principles for Responsible Investment, a network that represents investors with more than $ 100 trillion in assets under management, has required companies to publish tax information on a country-by-country basis.” According to a June 2021 PRI report, “corporate tax practices are increasingly being scrutinized by investors and other stakeholders”, but the tax transparency framework is “less developed than other ESG issues”.
To support tax transparency, both business risk and social impact are cited. For example, in the article, one commentator noted that they have seen “a lot of momentum for this kind of transparency in tax payments that multinational corporations make overseas”. Investors “see this as something very important and essential to their investment decisions – not just for assessing corporate reputational risk, which is viewed as tax evasion, but also for regulatory and systemic risks of undermining tax payments.” that the recent move by some from the primacy of shareholders – the view that the primary responsibility of corporate boards is to maximize shareholder value – towards the capitalism of stakeholders – the view that boards have responsibility to other stakeholders such as employees, consumers and the wider community – is “tax-relevant”. Under the primacy of shareholders, the “standard rhetoric was: ‘We owe it to our shareholders to pay little or no tax’ … But now we are not only obliged to our shareholders. It’s also our larger community, our employees, our customers, our stakeholders. And when you’ve done that step, the next step is to pay some taxes, and that’s how the rhetoric changes. ‘”(See this PubCo post.)
Still, the drive for tax transparency does not seem to be making much headway in the US so far. It appears that “in some cases, executives are concerned that their tax information is being taken out of context or misunderstood”. To address some of the concerns of businesses, PwC developed the concept of “total tax contribution”, which is described as a more complete picture of taxes – “not just corporate taxes, but also wage, property, consumption, VAT and other taxes , including those collected on behalf of governments. The accounting firm described it as a way of ‘helping companies respond to the current environment’ and ‘one of the tools that can help companies tell their own story that binding rules may not fully explain’. However, some activists fear that while companies should be “proactive in providing a narrative,” this type of disclosure “obscures and distracts the detailed breakdown of tax planning and the country-specific profits, operations and payments they seek” assessment the risk of investing in a company. “
In terms of tax transparency, according to two commentators, there is still “a way to go”. The article also notes that in the US, shareholder proposals on “tax disclosures and strategies have been rare and have not received many votes.” However, a quick look at the signatories of the letters to the congressional committees discussed above suggests that this may change. We will see.
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