Engagement update: Responsible tax
Taxation is a matter of social justice – paying a ‘fair’ share; it is also one of risk, linked to reputational damage, the impact of changing regulation and uncertainty around future profits.
The fundamental ethical principle underlying the concept of ‘responsible tax’ is that residents of a country (whether individual citizens or corporations) have an obligation to pay taxes in order to support elements of our social fabric such as education, transport infrastructure and the judicial system. These, in turn, enable people and companies alike to go about their business in a safe, efficient and profitable manner. Consideration of tax practices is also linked to issues of corruption and international equity and development.
From an investment perspective, opaque and inconsistent disclosure makes it difficult for investors to fully assess the true risk to which they are exposed through a company’s approach to tax management. Reputational risks can arise from negative media coverage and consumer backlash. However, of greater importance is the risk posed by changing regulation, which may result in the closure of loopholes or cancellation of so-called ‘sweetheart deals’ on which corporate profits may depend. These risks have been exemplified by the recent decision of the European Commission to investigate whether tax arrangements agreed between Apple and the Irish government, and Amazon and the Luxembourg government, constitute illegal state aid.
Recent engagement activity
During 2013 and 2014, Rathbone Greenbank joined a small group of responsible investors to undertake a collaborative engagement on tax and tax avoidance. From initial discussions within our group, it was apparent that a lack of understanding regarding what is often a highly complex issue made investors reluctant to question companies on tax arrangements.
Our aim therefore was to develop guidance for investors wishing to engage with companies and policy makers on this issue. We took the decision to focus on investment risks rather than ethical considerations in order to make the research relevant to a broad investor audience, not just those with an ethical or responsible investment approach.
Our group met with senior tax or finance department representatives from companies within the mining and consumer goods sectors. These discussions covered aspects of tax policy, governance and disclosure and gave us an understanding of current and best practice, in addition to some of the challenges companies face in increasing disclosure. In order to encourage a frank and open discussion, we agreed to keep the names of participating companies confidential.
A discussion paper, summarising our findings and setting out future disclosure expectations for companies, was launched in July 2014 at an event for members of the investment community. From feedback sessions at the launch event, it was clear that there is genuine interest in this issue, and that investors are keen to learn about tax risks and continue to participate in the debate. Further feedback on the discussion paper has been gathered through the Engagement Clearinghouse of the UN-backed Principles for Responsible Investment (PRI) and at an event on taxation at the annual ‘PRI in Person’ conference in September 2014.
We are pleased that our initial discussion paper has played a role in educating investors and stimulating a wider discussion on the nature of tax risks. The members of the collaborative engagement group remain committed to promoting greater understating of investment-related tax risks and are now considering the best way in which to take this project forward, with a view to publishing a paper for a wider audience in 2015.