As ESG stakeholders work to reduce risks around governance, many investors also seek ways of gauging the broader contributions that firms make to society. Their efforts have begun to shine a new light on corporate tax transparency, positioning companies that avoid paying taxes as raising moral issues in addition to legal ones.
What Is Tax Transparency?
Along with ensuring that companies comply with tax laws, corporate tax transparency enables investors and stakeholders to judge whether firms are paying their fair share. There is a strong international element within tax transparency, particularly as various multinational companies have leaned on overseas structures to cut their tax bills. Global tax cooperation has been cited as a matter of integrity on a massive scale—a means of “putting an end to bank secrecy and tax evasion.”
Corporate tax transparency involves making the how, what, and where of a company tax contribution readily available so that stakeholders and impact investors can get a fuller picture. Another level of tax transparency is accessibility—in order to promote the understanding and trust of stakeholders, proponents argue that firms should present this information in a way that is clear to those who go through the information. For multinational companies, this process also necessitates disclosing, presenting, and breaking down different kinds of taxes incurred on a country-by-country basis.
Promoting ESG Tax Transparency
Stakeholders focused on ESG generally expect companies to conduct their tax affairs in a sustainable manner. Many ESG investors view the public disclosure of a company’s approach to tax (including the amount of taxes paid and where) as key to achieving more sustainable tax practices.
In recent years, major corporations have come under fierce criticism over their tax practices. In November 2021, for example, the US Tax Court supported allegations that Coca-Cola had shifted profits to various countries, underpaying billions of dollars in US taxes.
Investors have also shown a fresh willingness to advocate for tax transparency. Several Amazon shareholders called this year for the adoption of a new tax standard. They claim that without changes, the company and investors could face “scrutiny from tax authorities, adjustment risks, and increase their vulnerability to changes in tax rules.”
Building Traction on Transparency
Various multinationals such as Shell have already established country-by-country reporting practices on a voluntary basis. The G7 countries as well as the EU are steadily making moves that will require more big companies to make more transparent disclosures. In 2021, the House of Representatives approved legislation that would have large companies disclose more information about their use of offshore tax havens on a country-by-country basis.
In other developments:
- The Global Reporting Initiative, whose guidelines are adhered to by most companies listed on the Dow Jones Industrial Average, incorporated a voluntary public country-by-country reporting tax transparency standard in January 2021.
- In 2021, the EU also agreed on new country-by-country reporting standards, which are expected to go into effect within the next couple of years. It will ultimately ask multinationals with EU operations to provide far more detail about their tax affairs.
As regulators increasingly take up the cause of tax transparency, pressure from ESG investors can help encourage multinationals to adopt more transparent tax practices on a voluntary basis. Along with reducing risks around corporate governance, tax transparency helps ESG investors judge whether firms are paying their “fair share” to society.