Tax responsibility: key questions for investors
Tax is increasingly under the spotlight, intensifying financial, regulatory and reputational risks in this area for companies. Where tax practices are aggressive, they can also undermine the ability of governments in developing countries to provide public services, which is why international development organisations such as Eurodad, ActionAid, governments and international organisations are increasingly seeking a socially responsible approach to corporate tax.
In this climate, investors need clear benchmarks to gauge such risks, particularly in navigating often contradictory claims by businesses, journalists, campaigners and tax authorities. Clear, verifiable benchmarks would also help companies to cut through claims and counter-claims, enabling them to communicate their tax policies and practices, and the true levels of risk associated with them.
This guide is intended as a practical contribution towards defining such benchmarks across three broad areas of tax responsibility:
- a responsible tax policy (content)
- responsible management of tax policy (processes)
- responsible tax reporting (transparency).
The report presents seven criteria to help assess tax responsibility:
- Who sets the policy, and who provides input?
- Who has responsibility and how is the policy reviewed?
- How does the content of the policy address risk?
- What systems are in place to implement the policy?
- Is the tax policy available?
- How much tax is paid, and where?
- Is detailed information given on subsidiaries in tax havens?
The business rationale
ActionAid, Eurodad and others have long believed and argued that responsible tax practices make clear moral sense. But there is also growing evidence that they make clear business sense too. A combination of fiscal downturn, media attention and regulatory weakness has increased the financial, reputational and regulatory risks of irresponsible tax behaviour in the last two to three years.
There is a risk that investors will bear the brunt of this sea-change. Their long-term prosperity – as well as the long-term prosperity of the companies they invest in, and the economies and societies they operate in – depends upon companies and investors working together to develop responsible tax policies, tax practices and tax management and tax reporting.
Even 12 months ago, such an initiative seemed unlikely, with large companies wary of ‘breaking away from the pack’ on tax. Now some large UK companies – including major retailers like John Lewis and Morrisons – are themselves seeking to distinguish themselves to consumers as responsible taxpayers, and are calling for legislative action on corporate tax avoidance. Investors may find that companies are far more receptive to the business case for tax responsibility than once seemed possible
Download the full report here.