This guest blog post from Sustainalytics and MorningStar forms part of our work exploring tax and ESG metrics on behalf of the Global Responsible Tax Programme in partnership with KPMG International. To hear more about Jericho’s work on tax transparency please get in touch.
In our article entitled “Tax Fairness Should be a Core Principle in Corporate Sustainability Strategies,” we discussed why tax transparency has become a much more significant issue in the context of changing investor and societal expectations and the need to rebalance national budgets. We also discussed that the 2022 proxy season saw the first tax-related shareholder proposal in 8 years – and the first ever to be SEC-validated – at Amazon. The level of support it received points to growing investor momentum behind this issue. Despite the summer period, a lot has happened since then.
Regional Developments to Advance Corporate Tax Fairness
In the European Union (EU), Member States (MS) have not yet reached unanimity in implementing the 15% minimum global corporate tax rate piece of the agreement brokered by the Organization for Economic Co-operation and Development (OECD) in 2021, broadly known as “Pillar II”. This is due to a last-minute reversal of its initial position by the Hungarian government. Despite this, the other 26 MS are jointly considering options to implement without Hungary. A joint statement by France, Germany, Italy, Netherlands and Spain reaffirms their commitment to implement a global minimum effective taxation in 2023, and of these 5 countries, Germany is leading the way, having already introduced draft legislation to create a minimum corporate tax. In addition, the Dutch Ministry of Finance recently opened a consultation on the enactment of a minimum corporate tax, fulfilling a promise made by the Dutch government in September. We expect the other 21 of 26 MS to follow the lead.
Following Hungary’s last-minute change of heart, the US seems to have pressured the Budapest government to accept the EU deal by announcing the termination of its double tax treaty with Hungary, a move that could considerably weaken Hungary’s attractiveness for US and international investors. More importantly, having played a central role in the 2021 OECD deal, the US also implemented a customized version of Pillar II. While this is a move in the right direction, there are concerns it falls short of the OECD’s Pillar II proposal. Nevertheless, we think this move will accelerate Pillar II’s global implementation and EU developments mentioned above are consistent with this view. In turn, EU implementation would likely compel other jurisdictions to meet the OECD deal standards to avoid losing tax revenue to those aligned to Pillar II. However, a major stumbling block to US involvement has come in the form of the recent mid-term elections. With the Republicans winning a slim majority in the House of Representatives, they can now halt President Biden’s legislative agenda and therefore significantly impact the US role in global tax reform.
There are other parts of the world where progress is being made. For example, Colombia is also trying to push ahead with tax reform after Congress recently granted first-stage approval of President Gustavo Petro’s proposals to implement higher taxes. The bill still has to pass through the Senate and the Chamber of Representatives, where it is likely to face opposition.
Additionally, in Australia, the newly elected Labor government prioritized the implementation of OECD Pillar II together with other measures intended to increase corporate tax transparency and curb tax avoidance, such as adoption of public country-by-country reporting (CbCR). Public CbCR is now part of the country’s proposed 2023 budget. While Australia’s economy is not as big as that of the US or the EU, we believe this has the potential to be a game-changer with global impact, as it may require qualifying Australian and foreign-based multinationals doing business in Australia to provide public CbCR to the Australian Tax Office. This would include US companies. Therefore, such measures are likely to further accelerate implementation globally.
Actions Undertaken by Stakeholders to Advance Corporate Tax Transparency
Encouraged by the stronger than expected support for the Amazon proposal, shareholders have tabled tax transparency proposals for a vote at Microsoft and Cisco Systems’ shareholder meetings in December 2022, asking the companies to provide tax disclosures in line with the Global Reporting Initiative’s (GRI) 207 standard, i.e., including CbCR. In addition to this, resolution filers also seek to engage with another 20-30 large corporations in various industries, and this has already seen tax proposals filed at US oil majors, Exxon, Chevron, and ConocoPhillips for their 2023 AGMs. The Amazon proposal appears to have been the testing of the waters on this issue – particularly given that the only other tax-related shareholder proposal we are aware of was at Google in 2014. At that time, Google did not seek to challenge the proposal via the SEC, and it earned just 3% support. Therefore, we believe the Amazon proposal was in part a way to gauge a) whether the SEC would allow the proposal to make it to the ballot, and b) investor appetite for the proposed measure. With adjusted shareholder support of 21% for the Amazon proposal, the tide could be turning on this issue.
In addition to this, in July, the Financial Accountability & Corporate Transparency (FACT) Coalition published its comprehensive and insightful report, A Material Concern: The Investor Case for Public Country-By-Country Tax Reporting. In this, the FACT Coalition highlights the information gap that investors face when it comes to tax disclosure, and how this lack of transparency can lead to increased modeling risk and valuation inaccuracies, which, in turn, leads to inefficient capital allocation and market volatility. The report concludes by highlighting the need for public CbCR in line with the GRI 207 standard in order to address these risks – the same standard that Amazon shareholders asked the company to align its reporting with.
We at Sustainalytics are hearing more from our clients on this issue. For example, we have learned that some investors are now starting to look at how to extract insights from public CbCR information and integrate this into their investment processes. Without CbCR, investors that want to analyze how a company manages its taxes would have to go through a labour-intensive process that is difficult to execute at scale. The benefit of CbCR is that it provides investors with more consistent data, allowing for more efficient analysis of the tax risk in their portfolios.
Why Have We Seen Such a Change in Approach from Investors Towards Tax Transparency/Sustainability?
Aggressive tax strategies that reduce a company’s tax liability are good for the bottom line. So why are investors focusing their attention on tax transparency and sustainability after decades of rewarding tax optimization? There are several reasons, in our view. Firstly, increased risk awareness means that, while a lower tax liability boosts a company’s financial position, it could raise reputational risks down the line and have significant impacts on company valuations. Recent cases landing in the media spotlight include PVH Corporation, which had entered into a tax agreement with the Dutch tax administration in 2003, granting it certain tax benefits for a specified period. It would seem that the implications of the tax agreement may not have been clearly understood by the market because, as this agreement came to an end, it caused an increase in the group’s tax rate estimate for 2022. According to analysts, this would significantly impact PVH’s future financial performance and was subsequently reflected in the stock price. Such details are significant as they help investors properly assess the sustainability of business models and better estimate the future financial performance of their investments. Another example of the potential impact of tax strategies was highlighted during the Amgen, Inc. quarterly earnings call that took place in April 2022. The company announced overall better than expected results, however, during the same call, management informed investors that The Internal Revenue Service (IRS) sent the company a notice of deficiency for the period 2013 to 2015 (in addition to the first notice of deficiency sent previously for the period 2010 to 2012) and that the IRS is further expanding the scope of the review of Amgen’s tax planning practices, that is, by adding years 2016 to 2018 to the investigation, and the tax exposure for Amgen may further increase beyond the current total of USD 11 billion. Despite the better-than-expected results, Amgen’s stock significantly fell in the following days. In addition, in recent years there have been other high-profile cases concerning multinationals and their involvement with corporate tax avoidance practices, including: Amazon, Coca-Cola, AbbVie, Starbucks, Alphabet, UBER, and McDonalds.
As changes in public perception and expectations place stronger emphasis on a fairer and more sustainable society, investing in companies that do not pay their fair share of taxes could lead to accusations of greenwashing, especially where institutional investors tout themselves as responsible and long-term stewards of capital.
As political winds change, so too can the fortunes of business models reliant on corporate friendly policies. Since President Biden took office in the US in 2021, the SEC has become less likely to side with companies on shareholder proposals, as evidenced by the significant increase in the number of shareholder proposals voted in 2022, and likely explained the Amazon proposal reaching the ballot. Furthermore, SEC Chair Gary Gensler recently announced that the Commission is considering stronger disclosures on corporate tax practices, reinforcing the topic’s relevance for investors.
Finally, more pension funds, particularly in Europe, are realizing that by financing companies that employ aggressive tax strategies, they are effectively depriving their state governments of tax revenue and ultimately impacting those who work for the state, i.e., their own beneficiaries. In addition, unfair competition by one company can put another competing company at a disadvantage, and as pension funds invest in the broader market, this may result in suboptimal public-sector investment in infrastructure and other public goods. At both the individual company level and at the market level, sustainable business is not about finding and exploiting tax loopholes.
Encouragingly, some companies are voluntarily responding to the demands for increased transparency around tax. According to UN PRI, as of 2019 around 7% of large cap multinationals publicly report tax information on a country-by-country basis. While Amazon pushed back on its shareholders’ request for CbCR, Australian mining behemoth, BHP, has begun publishing an Economic Contribution Report which, according to the company’s disclosure, is aligned with the GRI 207 standard (although the GRI does not currently provide companies with verification of their reporting). The British multinational telecommunications company, Vodafone – having faced a tax avoidance scandal in 2012 where it was reported that the company had used interest payments on money borrowed from within the Vodafone group of companies to avoid around GBP 1 billion in taxes – now publishes a GRI 207 compliant Tax and Economic Contribution Report. This report marks a significant turnaround from ten years ago, with Vodafone now being viewed as best in class when it comes to tax transparency. US-based mining company Newmont Corporation very recently published its inaugural Taxes and Royalties Contribution Report, which discloses the company’s tax strategy and its contributions to communities and host governments where it operates. Furthermore, oil and gas company, Hess Corporation, has voluntarily published its country level tax information, as well as the company’s governance and management approach and risk management framework around tax, on its website. To our knowledge, Newmont and Hess’ tax disclosures are some of the first of their kind in the US that are aligned with the GRI 207 standards and, given their voluntary nature, represent a ground-breaking development in this market. Such examples are becoming more common around the world and in many different industries.
We believe that investor calls for greater tax transparency are only going to get louder in the context of the looming global recession and ongoing energy crunch as post-COVID societal expectations demand fairness in taxation and investors seek to better understand and reduce the related risks both to themselves and to the companies that they invest in. In our view, companies that move early on this issue will be viewed positively by the investor community, their customers, and wider society. Furthermore, they will have more time to improve their disclosures and practices, design a robust communication strategy and develop their narrative to investors and the public, and likely face a lower level of scrutiny and risk in the future.
The opinions and views reflected herein pertain to the authors, do not represent the official position of Sustainalytics and may deviate from it. The information and data contained herein may be proprietary to Sustainalytics and/or other referenced third-parties. Any reference to third party names is for appropriate acknowledgement of their ownership and does not constitute a sponsorship or endorsement by such owner. These are intended for informational, non-commercial use only and may not be copied, distributed or used in any other way, including via citation. These do not constitute an endorsement of any product or project, nor an investment advice and Sustainalytics assumes no responsibility for the reliability, completeness or accuracy of any opinion provided herein and makes no representation or warranty as to any of the information, including, without limitation, any representation or warranty that the information or any portion of it is accurate, complete, or suitable for a particular purpose. Neither Sustainalytics/Morningstar nor other referenced third parties are responsible for any damages or losses arising from any use of this information.
References in order of use (accessed on 29 November 2022):
- US – Update to Termination of Treaty with Hungary – KPMG Global (home.kpmg)
- Exxon Mobil, Chevron and ConocoPhillips challenged over tax practices (cnbc.com)
 Support adjusted to exclude Jeff Bezos’ 12.7% shareholding in Amazon
 The FACT Coalition is a non-partisan alliance of more than 100 state, national, and international organizations working toward a fair tax system