Fair Tax Foundation Consults on Responsible Tax KPIs
Investor input sought as countries start to demand greater tax transparency from corporates.
UK-based campaign group the Fair Tax Foundation is seeking feedback from investors on the development of responsible tax conduct key performance indicators (KPIs) for companies.
It follows increasing interest from asset managers and institutional investors on how to assess responsible tax conduct among portfolio companies, said the Fair Tax Foundation.
In 2022, the Greater Manchester Pension Fund and the Oblate International Pastoral Investment Trust filed a shareholder proposal calling for Amazon to disclose against the Global Reporting Initiative’s (GRI) Tax Standard. This includes requirements to provide country-by-country reporting of financial, tax and worker information.
In 2019, Fair Tax Mark, a certification scheme recognising companies that meet their corporation tax obligations, named Amazon as having “the poorest tax conduct” of the six major tech companies, several of which have been accused of tax avoidance.
A lack of country-by-country financial reporting by companies is one of several ‘red flag’ activities in the Fair Tax Foundation’s responsible tax conduct KPIs. “Comprehensively implemented country-by-country reporting of corporation taxes paid provides a strong indication of the economic footprint within a jurisdiction and can signal emerging financial and reputational risks,” it said.
Other KPIs include robust responsible tax conduct commitments that are subject to annual compliance confirmation; disclosure of uncertain tax positions, with narrative to explain significant tax disputes; and freely available, complete sets of annual financial statements.
“We’ve designed these KPIs and flags so that they can be applied relatively easily by investors and don’t require specialist tax knowledge,” Paul Monaghan, CEO of the Fair Tax Foundation, told ESG Investor. “An isolated green or red flag is not a reason for investors to invest or disinvest, but rather a prompt to adjust risk-rating and to potentially raise concerns directly with a company.
“However, we believe that a business exhibiting five green or five red flags could generally be considered, respectively, to be a substantially derisked investment or a high-risk investment from a tax conduct perspective. We think this is really useful intel for investors who are interested in assessing their multinational portfolios in a substantive manner.”
Investor tax initiatives
The responsible tax conduct KPIs add to a growing suite of investor-related initiatives on the issue. In 2017, the Principles for Responsible Investment (PRI) led a two-year collaborative engagement initiative on tax transparency.
Pensions and Investment Research Consultants (PIRC) launched an initiative in December 2021 on responsible taxation, in partnership with NGO the Centre for International Corporate Tax Accountability and Research, to push companies to align their tax approach to their overall business and sustainability strategies, rather than seeking to optimise the amount of taxes paid.
PIRC’s tax expectation document directs companies to comply with the spirit and letter of the law and commit to paying taxes where profits are earned. They should publish country-by-country reporting of tax and financial information, in line with international standards, such as the GRI Tax Standard. Boards should also consider how remuneration may influence management’s approach to tax planning.
The Government Pension Fund of Norway, the world’s largest sovereign wealth fund, has had an investment policy on tax since 2014. In 2023, its asset manager, Norges Bank Investment Management (NBIM), divested from one company due to “elevated risk of aggressive tax planning”.
“The world is on the verge of an explosion of corporate tax transparency,” said Monaghan at the Fair Tax Foundation. “The voluntary disclosures of progressive businesses will soon be augmented by newly mandated disclosures from large multinational enterprises operating in the European Union, the United States and Australia.”
The EU Country-by-Country Reporting Directive requires some multinational groups operating in the EU to publish information on their tax affairs. In the US, the Financial Accounting Standards Board (FASB) has issued guidance directing companies to provide significantly more transparency on their tax affairs, including country-by-country tax payment disclosures.
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