Blog: Is Tax Transparency the New ESG Disclosure Requirement? | Cooley LLP


When the press runs stories alleging that many profitable businesses legally pay little or no income tax, and politicians argue that businesses are simply not paying their fair share, this will not fail to raise some pitfalls. Now, This article in Bloomberg reports that tax transparency has become one of the “under the radar” elements of ESG disclosure that is “gaining traction”. According to the article, ESG-focused investors “want large state-owned companies to disclose where they move their profits and how much they pay in taxes, and cut back on aggressive tax planning.”

But not everyone agrees. A BlackRock commentator described an important divide among investors: “Some investors don’t even like the word ‘tax planning’. They don’t think it should be part of the vocabulary of a company,…. On the other end of the spectrum, there are shareholders who think that if you don’t take a tax risk, it’s not good for them. Those in favor of greater disclosure, the article argues, seem to view taxes as a component of stakeholder capitalism. According to a professor from Wharton, people may be happy with the charitable contributions and the diversity of the board, but “we see that you pay no taxes and you employ 100,000 people or a million people. Shouldn’t you be contributing to the government, the communities, the physical infrastructure, the social infrastructure where you do business? “

As the article notes, the House recently adopted HR 1187, the “2021 ESG Disclosure Simplification Act,” which, in the unlikely event that it is passed by the Senate, would require the SEC to enforce ESG disclosure. And the bill notwithstanding, the SEC already has ESG disclosure on its agenda, although it is focusing on climate and human capital for now. (See this post from PubCo.)

Tax Haven Disclosure and Offshoring Act (S. 1545, RH 3007), which places particular emphasis on tax transparency, has also been introduced. According to the related congress report, the bill would require state-owned enterprises to “disclose their total pre-tax profits and the total amounts paid in state, federal and foreign taxes.” The bill would also require companies to disclose a number of specific tax items such as total accumulated tax charges, stated capital and total accumulated profits for each of their subsidiaries, as well as on a consolidated basis. The rationale for the bill set out in the report is that “corporate tax practices can impose significant financial risks on investors.” In the absence of this disclosure, “investors and markets are unable to adequately assess a company’s tax liability or any associated legal or reputational risk, which can have a material impact on the short and long term value of the business ”. The report estimates that “companies hide up to $ 36 trillion worldwide in tax havens and that the practice of offshoring costs the United States about $ 100 billion in annual tax revenues … Moreover, the lack of Disclosure of this information makes it difficult for investors and consumers. to find out whether the companies they invest in are contributing to the US economy and protecting US jobs. The minority report, however, argues that the bill is “misguided” not only because it “would make the SEC a new tax regulator”, but also because it “would require the disclosure of confidential information on taxpayers. taxpayers, upsetting the long-held US position on maintaining the confidentiality of all information provided to tax authorities, including country-by-country reporting information, “and” offers no value to investors attempting to evaluate the companies in which to invest. The bill’s disclosures are intended to name and humiliate companies that otherwise comply with applicable law. “

According to Bloomberg, the bill enjoys “a lot of backing from the private sector, with 66 investors representing $ 2.9 trillion in assets under management signing May letters to leaders of affected countries.” lodge and Senate committees asking for their support. The letters, signed by entities such as the New York City Office of the Comptroller, the Interfaith Center on Corporate Responsibility, AFSCME, AFL-CIO, Harrington Investments, Oxfam America and (founded by James McRitchie), show that investors “need income and tax information at the country-by-country level to better understand a company’s financial, reputational and economic risks in order to make informed investment decisions. As the global momentum accelerates to dramatically change the way multinational corporations are taxed, including through the administration’s tax change proposals and OECD negotiations, investors need more support than ever before. information to inform them of how their holdings may be affected by changes in US tax laws. . “The signatories maintain that”[g]globally, there is both growing support among investors and emerging standards for disaggregated country-by-country corporate tax reporting, ”citing, among other examples, a“ new tax transparency reporting standard, including the country-by-country public declaration, which entered into force in January, “from the Global Reporting Initiative (GRI), an international standards body” whose reporting guidelines are followed by more than three-quarters of companies listed on the Dow Jones Industrial Average ”.

Likewise, the “United Nations Principles for Responsible Investment, a network representing investors with more than $ 100,000 billion in assets under management, urged companies to publish tax information on a country-by-country basis. “According to a Report June 2021 According to PRI, “corporate tax practices are increasingly monitored by investors and other stakeholders”, but tax transparency frameworks are “less developed compared to other ESG issues”.

Both business risk and social impact are cited in support of tax transparency. For example, in the article, one commentator observed that they have “seen a lot of momentum for this type of transparency on tax payments that multinational corporations make abroad.” Investors “see this as something important and material to the investment decisions they make, not only to assess the risk to the reputation of companies seen as tax dodging, but also regulatory risks and risks. systems of undermining tax payments. Another commentator observed that the recent shift by some from shareholder primacy – the idea that the primary responsibility of boards is to “maximize shareholder value” – towards stakeholder capitalism – the idea that boards of directors also have responsibilities to other stakeholders, such as employees, consumers and the community at large – is “tax-relevant”. Under shareholder primacy, the “standard rhetoric has been, ‘we owe our shareholders to pay little or no tax’ … But now,” it’s not just our shareholders to whom we owe an obligation. It is also our wider community, our workers, our customers, our stakeholders. And once you’ve taken that step, the next step is having to pay taxes, and so the rhetoric is changing. ” (See this post from PubCo.)

Nonetheless, the push for tax transparency does not appear to be making much headway so far in the United States. Apparently in some cases “executives are concerned that their tax information has been taken out of context or misunderstood.” To address some of the company’s concerns, PwC developed the concept of ‘total tax contribution’, which is described as a more comprehensive picture of taxes – ‘not just corporate income taxes, but also taxes on corporate income. wages, property, excise, value added and others, including those collected on behalf of governments. The accounting firm described as a way of “helping businesses respond to the current environment” and “one of the tools that can help businesses tell their own story, which may not be fully explained by mandatory rules.” However, some activists are concerned that while companies should be “proactive in providing a narrative”, this type of disclosure “will hide and distract from the kind of detailed breakdown of tax planning and profits, operations and payments country by country. they look for when assessing the risk of investing in a business.

Certainly, in terms of tax transparency, according to two commentators, there is still “some way to go”. The article also notes that in the United States, shareholder proposals regarding “tax disclosures and strategies have been rare and did not get many votes”. However, a quick review of the signatories of the Congressional committee letters discussed above suggests that this may change. Time will tell us.

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