I am pleased to share the following press release (which is already reflected in the FT) simply because I think it wholly appropriate:
Charities ShareAction and Christian Aid are urging shareholders to ask companies about the “seven pitfalls of corporate tax practice” that could impact the share price of a company.
The seven pitfalls of corporate tax practice are: Relying on profit-shifting, tax havens, tax incentives, transfer pricing, opaque reporting, intra-group financing and treaty shopping.
The seven pitfalls of corporate tax practice are drawn from an investor briefing prepared by the charities, which follows growing evidence that stricter global tax regulation is likely. This includes an action plan released by the Organisation for Economic Cooperation and Development, aimed at curbing tax avoidance by multinational corporations, and heightened White House rhetoric on U.S. companies using foreign takeovers as an opportunity to relocate and avoid taxes there.
In Ireland meanwhile, the Government has announced the withdrawal of the ‘Double Irish' tax concession, which is widely used by multinationals to avoid tax on much of their income.
Despite the signs that stricter regulation is a possibility, many companies continue to rely on opaque tax strategies to protect their profits. The charities hope to show investors why it is important to raise questions on these subjects to avoid downside risk.
A 2013 report by the charity ActionAid showed just three of the FTSE 100 companies published what ActionAid defined as an “adequate tax policy”, and ShareAction says that means investors are still in the dark about the potential valuation risk of possible changes in tax regulation.
A more recent 2014 report by Christian Aid showed 36% of FTSE 100 companies are enthusiastic users of so-called “opaque tax jurisdictions”, with subsidiaries located in jurisdictions where authorities don't require company accounts to be publicly accessible for a fee of less than $10.
ShareAction director of engagement Louise Rouse said: “The lack of disclosure around corporate tax practices right now really could be described as sinful, as far as investors are concerned, and shareholders could be left carrying the can for the bad behaviour of these companies.
“With regulatory change on the horizon, investors need to understand how vulnerable companies might be to any changes which could increase their tax payments. The question is no longer whether we will see reform of the laws governing multi-national tax practices but, rather, how extensive that reform will be. Currently there is an information deficit from major companies, with very little of the relevant data being disclosed. It's vital that investors see corporate tax practices as a material risk and push for greater disclosure from investee companies on their management of these risks.”
Chris Hegarty, Senior Policy & Advocacy Adviser at Christian Aid said: “Companies are facing more scrutiny of their tax practices than ever, and if anything this seems likely to increase. We see mounting pressure from the media, from politicians and from our supporters calling for countries to receive the taxes they are due from multinationals.”
“Christian Aid works in many countries where very limited tax revenues are further depleted by some of the corporate practices outlined in this report. These taxes could improve millions of people's lives, so for us the moral dimension is very clear. That moral dimension makes tax an increasingly high-profile ethical concern for investors and we are already working with several large financial institutions on this issue.”
The following are suggested questions for investors to ask companies about the seven pitfalls of corporate tax practice:
- Do you “profit-shift?”, and if so, how might regulatory changes leave you vulnerable to a drop in corporate profits?–Many companies have the vast majority of their assets and staff in one country but state that the profits from their activity actually arose in another country with much lower tax rates. Following the Public Accounts Committee's bruising grilling of Amazon and Google executives about profit-shifting, how vulnerable is the company to any changes in the law around profit-shifting that might increase tax payments, and how clear is the information currently being disclosed around practices in this area?
- Do you use secrecy jurisdiction, and if so, what regulatory risk does that represent for investors?–Investors should encourage companies to publish a tax policy that sets out the company's approach to tax beyond mere legal compliance, including a code of conduct, defining the level of aggressiveness of the company's tax planning, ruling out certain tax practices, and communicating where the company is headquartered for tax purposes. Such a policy should also include the company's criteria for negotiations with tax authorities, and internal governance structures for the development, implementation and review of the company's tax policy. Where, specifically, does accountability lie within the company for the effective delivery of such a tax policy?
- How much do you rely on tax incentives in certain jurisdictions, and can you be sure that those incentives are secure?–Investors may wish to ask how much a company relies on incentives in the jurisdictions in which they operate, examining the duration and financial value of the incentives against the likelihood of regulatory reform, and what financial impact that may have. How has the company planned for contingencies around the possible changes in regulation in that area?
- Do you rely on transfer pricing, and if regulation changes on this practise, can you model the financial risk to investors?–Many companies rely on the pricing of sales between related companies within the same multinational group of companies, but the deliberate mispricing of sales of goods and services in this area raises legal concerns. How has the company made preparations for any moves to reform transfer pricing rules to align companies' profit distribution more closely with their real economic activity? Can the company model the financial implications of having to locate intellectual property assets in the countries in which they were developed?
- Does the company favour country by country reporting of the taxes paid in each country where they operate, and if not, could such disclosure impact the share price? Very few companies currently do this on a country-by-country basis, leaving them open to suggestions that there could be material risk in the absence of such disclosure. Is the company concerned that public disclosure could expose them to media or civil society criticism?
- Does the company use intra-group financing, and if so, what is the risk to investors of relying on this practice? Many companies currently make loans from subsidiaries in low tax jurisdictions to those in higher tax jurisdictions, sometimes at above market rates. But investors need to be asking to what extent the company is saving money through such arrangements and whether reform around these practices could cost them dear.
- Does the company use “treaty shopping” and what is the risk of indulging in it? This is the practice of structuring investments in order to route payments through jurisdictions with beneficial tax treaties. Many countries are now beginning to cancel and renegotiate their tax treaties so the company should be asked whether regulatory reform could have an impact on their bottom line.
For further information, please contact Matt Davis at ShareAction on 07564 438 804 or matthew.davis@shareaction.org or Rachel Baird at Christian Aid on 00 44 (0)207 523 2446 or rbaird@christian-aid.org
Notes:
- ShareAction is a UK-based NGO campaigning for responsible investment by pension funds and other institutional investors. ShareAction demands transparency and accountability to the millions of people with savings managed by investment professionals.
- Christian Aid works in some of the world's poorest communities in around 50 countries at any one time. We act where there is great need, regardless of religion, helping people to live a full life, free from poverty. We provide urgent, practical and effective assistance in tackling the root causes of poverty as well as its effects.
- The full briefing on these issues is available at Christian Aid's website:
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