PRI launches Engagement guidance on corporate tax responsibility

Engagement guidance on corporate tax responsibility

November 23, 2015

The PRI hosted an event discussing aggressive tax practices to launch its new guidance document on engaging with companies on corporate tax issues.

The document, developed by the PRI and a global investor taskforce, discusses why and how to engage with companies on their tax practices, including a list of red flags to look out for in identifying which companies to engage with and a list of suggested questions to choose from when holding discussions. A shorter reference guide is also available.

At the launch event in the PRI’s London offices, an audience of investors and media heard Margaret Hodge MP, former Chair of the UK Public Accounts Committee, share examples of tax practices the committee uncovered during their investigations, highlighting a company exploiting the Gift Aid system of tax relief for charities as a particularly egregious example. She emphasised the demands of civil society for companies to contribute to the tax system whose ultimate reinvestment they benefit from.

Raffaele Russo, Head of the OECD’s BEPS Project, joined via video link and described benefits to governments of the new global framework the BEPS project is pursuing, saying that having one, global treaty for each parliament to ratify will be simpler than existing arrangements where parliaments must ratify hundreds of different bilateral agreements. He also highlighted reasons that a coordinated global approach to tax would be necessary aside from in managing profit shifting practices, talking about how the growing “Internet of Things” will create increasing numbers of machine-to-machine transactions that create assets, and risks, in ways that transcend geographic borders.

Meryam Omi, Head of Sustainability at Legal and General Investment Management, and Peter Michaelis, Head of Equities at Alliance Trust Investments, discussed the issue from an investor’s perspective, and described how the new PRI guidance would help investors to manage these issues within their portfolios.

Meryam described the risks that investors face by holding companies that are pursuing aggressive tax practices. She talked of the risk that profits based on exploiting tax structures would disappear when regulations changed, the reputation and brand risk faced by companies when practices deemed unacceptable by the public are brought to light by the media and the macroeconomic damage caused by governments missing out on revenue, which will harm large, diversified investors who have an interest in the whole economy.

Peter spoke of the importance of looking out for red flags, such as a large tax gap, to identify companies that are at risk, so that investors are not unwittingly holding companies whose balance sheet is not based on long-term value creation. He also suggested that responsible tax practices are a proxy for good management, questioning whether it is in investors’ interests to be invested in companies whose management is focused on minimising tax rather than creating sustainable, long-term value.

Listen to an audio recording of the event here.