These past few weeks have been big ones for tax transparency. This year some companies will begin voluntary reporting under the first global standard on tax transparency, the Financial Accounting Standards Board (FASB) is exploring enhanced income tax disclosure, and institutional investors and analysts are increasingly recognizing the risks posed by corporate tax planning and aggressive tax avoidance. To properly assess these risks, investors need to know how a company handles taxation. In a 2019 report FACT pointed out the growing momentum for tax transparency. Now, it seems, that growth is explosive.
Tax avoidance by multinational companies is not a new problem, but amidst the pandemic, public patience is wearing thin. Greater tax transparency will shine a spotlight on companies using profit-shifting strategies – artificially booking profits in low-tax jurisdictions – to reduce their tax obligations. With the Covid-19 crisis creating immense budget pressures at every level of government and in nearly every country, the backlash spurred by further news of billion dollar corporations paying nothing in tax is unlikely to be good for corporate brands. At the same time, countries eager to stimulate troubled economies will need to find funds where they can, potentially leading to increased corporate tax rates or enforcement of current policy. Here in the U.S. there are already signs that this administration will take the issue of tax avoidance more seriously with both Treasury Secretary Janet Yellen and Deputy Secretary nominee Adewale Adeyemo indicating support for confronting the issue of tax avoidance at their nomination hearings.
Some companies and industries will be more impacted than others, and therefore investors face risks with companies who are overly dependent on tax avoidance for their profits. Investors will need to decide for themselves how much of that risk they are willing to take on, and companies need to transparently inform investors so they may properly assess this risk. Seeing potential risks, investors are increasingly asking for this information. Just this week the Council of Institutional Investors held a meeting to discuss the importance of tax disclosures to investors in properly evaluating companies’ potential exposure to risk.
A report launched in late February by the United Nations High-Level Panel on International Financial Accountability, Transparency and Integrity for Achieving the 2030 Agenda (FACTI Panel) outlined key reforms to fix gaps in the global framework to combat tax abuse, corruption, and money laundering. Among other much needed reforms, its recommendations include requiring multinational companies to publish accounting and financial data on a public country-by-country basis–information that many investors have been calling for in order to invest intelligently.
The EU recognized this need for investors last week. The European Council joined the EU Commission and Parliament in approving the start of formal negotiations to finalize public country-by-country reporting of tax information for companies captured by EU regulations.
Released the same day as the FACTI report, a report from the Norwegian Sovereign Wealth Fund, with over $1 trillion in assets under management, found that a company’s corporate tax practices can affect a fund’s returns and therefore the fund divested from seven companies that they found had an elevated risk of tax noncompliance. (Investors have been calling for this information for years, something we highlighted in our 2019 report Trending Toward Transparency: The Rise of Public Country-by-Country Reporting.)
The Global Reporting Initiative, a standard-setting body that lists 75 percent of NASDAQ 250 companies as adhering to its reporting guidelines, issued the first global public reporting standard for tax transparency last year. Now being implemented, companies like pharmaceutical giant Merck have joined in adhering to them.
The same day FACTI released reform recommendations, the U.S. House of Representatives held a hearing on corporate social responsibility where the issue of tax disclosures were frequently flagged as an essential piece of material information for investors. In her questioning of the witnesses, Rep. Cindy Axne (D-IA) pointed to legislation she drafted which would require public country-by-country tax disclosures. Nearly all of the witnesses voiced support for such disclosures including James Andrus, the investment manager for California Public Employees’ Retirement System–one of the largest pension funds in the country–who previously pointed out how investors are currently left in the dark: “We have seen abuses that could cause substantial problems for corporations in which we invest…public country by country reporting would alleviate that concern.” He further pointed to the simplicity of disclosure of this information as it is already “well available to the management of the company.”
All eyes now are turning to the US Securities and Exchange Commission (SEC). The FACT coalition is hopeful that Gary Genlser, the nominee as the Chairman of the Securities and Exchange Commission (SEC), would be supportive of increased tax transparency if confirmed. In his former position as Chairman of the Commodity Futures Trading Commission (CFTC), he was an advocate for transparency. To protect investor interests and level the playing field for U.S. businesses the SEC should advance mandatory public country-by-country reporting of tax information and other key financial information as a package of broader Environmental, Social, and Governance (“ESG”) issues investors have been calling for.Another report out this past month from the Global Financial Markets Center at Duke Law outlined how the SEC could bring disclosures in line with information that investors need to make responsible investments–including through corporate tax disclosures. Moves by the SEC, EU, and companies could make this the year when the formerly “impossible” becomes the “inevitable” for tax transparency. Speaking at the Council of Institutional Investors event earlier this week, Rob Wilson, a Research Analyst with MFS Investment (with over $500 billion in assets under management) pointed out the absurdity of claiming these disclosures are immaterial: “It’s hard not to view taxes as financially material.”