Cooley LLP

When the press publishes articles alleging that a slew of profitable businesses are, quite legally, not paying much—if anything—in income taxes, and politicians argue that companies are just not paying their fair share, it’s bound to raise a few hackles.  Now, this article in Bloomberg reports that tax transparency has become one of the “under-the-radar” elements of ESG disclosure that’s “gaining traction.”  According to the article, ESG-oriented investors “want large public companies to disclose where they shift their profits and how much they pay in taxes, and to cut back on aggressive tax planning.”

But not everyone agrees.  A commentator from BlackRock described a significant split among investors: “Some investors, they don’t even like the word ‘tax planning.’ They don’t think it should be part of the vocabulary of a company,…. At the other end of the spectrum, there are shareholders who believe that if you don’t take tax risk, that’s not doing well by them.’”  Those that favor more disclosure, the article maintains, seem to consider taxes to be a component of stakeholder capitalism.  According to a Wharton professor, people may be pleased about charitable contributions and board diversity, but “‘we see you’re not paying any taxes, and you employ 100,000 people or a million people. Shouldn’t you be contributing to the government, to the communities, to the physical infrastructure, the social infrastructure where you do business?’”

As the article notes, the House recently passed H.R. 1187,  the ‘‘ESG Disclosure Simplification Act of 2021,’’ which, in the unlikely event that it passed the Senate, would require the SEC to mandate ESG disclosure. And the bill notwithstanding, the SEC already has ESG disclosure on its agenda, although focused for now on climate and human capital. (See this PubCo post.)

The Disclosure of Tax Havens and Offshoring Act (S. 1545H.R. 3007), which has a more specific focus on tax transparency, has also been introduced.  According to the related congressional report, the bill would require public companies to “disclose their total pre-tax profits, and total amounts paid in State, Federal, and  foreign taxes. The bill would also require companies to  disclose a number of specific tax-related items such as total accrued tax expenses, stated capital, and total accumulated earnings for each of their subsidiaries, as well as on a consolidated basis.” The rationale for the bill stated in the report is that “corporate tax practices may impose material 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 may have a material impact on both short- and long-term value of the company.” The report estimates that “corporations are stashing up to $36 trillion globally in tax havens and that the practice of offshoring costs the United States around $100 billion in annual tax revenue….Additionally, lack of disclosure of this information makes it difficult for investors and consumers to know if the companies they are investing in are contributing to the American economy and protecting American jobs.” The minority report, however, contends 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 taxpayer information, upending the longstanding U.S. position on maintaining the confidentiality of all information provided to tax authorities, including country-by-country reporting information” and “provide no value to investors attempting to evaluate companies in which to invest. The bill’s disclosures are intended to name and shame companies that are otherwise complying with applicable law.”

According to Bloomberg, the bill has “plenty of private-sector backing, with 66 investors representing $2.9 trillion in assets under management signing onto May letters to the leaders of the relevant House and Senate committees urging support.”  The letters, signed by entities such as the New York City Comptroller’s Office, the Interfaith Center on Corporate Responsibility, AFSCME, the AFL-CIO, Harrington investments, Oxfam America and CorpGov.net (founded by James McRitchie), make the case that investors “require income and tax information at the country-by-country level to better understand a company’s financial, reputational, and economic risks to make informed investment decisions. With global momentum growing to significantly change how multinational corporations are taxed—including through the Administration’s tax change proposals and the OECD negotiations—investors now, more than ever, need information to inform them on how their holdings may be affected by changes to U.S. tax law.” The signatories contend that “[g]lobally, there is both growing support among investors and emerging standards for disaggregated corporate tax disclosures on a country-by-country basis,” citing, among other examples, a “new tax transparency reporting standard, including public country-by-country reporting, that became effective in January,” from the GRI (the Global Reporting Initiative), an international standard-setting body “whose reporting guidelines are followed by more than three-quarters of the companies listed on the Dow Jones Industrial Average.” 

Likewise, the “United Nations Principles for Responsible Investment, a network representing investors with more than U.S.$100 trillion in assets under management, has urged companies to publish tax information on a country-by-country basis.” According to a June 2021 report from PRI, “companies’ tax practices are coming under increasing scrutiny from investors and other stakeholders,” but frameworks for tax transparency are “less developed compared to those for 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 are making overseas.” Investors “see this as something that’s critically important and material to the investment decisions that they’re making—not only to gage risk to the reputation of businesses seen as dodging taxes, but also regulatory risks and systemic risks of undermining tax payments.”  Another commentator observed that the recent shift by some away from shareholder primacy—the view that the principle responsibility of corporate boards is to “maximize shareholder value”—toward stakeholder capitalism—the view that boards also have responsibilities to other stakeholders, such as employees, consumers and the broader community—is “relevant to tax.” Under shareholder primacy, the “standard rhetoric has been, ‘we owe it to our shareholders to pay little or no taxes,’… But now, ‘it’s not just our shareholders that we have an obligation to. It’s also our larger community, our workers, our customers, our stakeholders. And once you take that step, the very next step is having to pay some taxes, and so the rhetoric is changing.’” (See this PubCo post.)

Nevertheless, the push for tax transparency does not appear to be making much headway so far in the U.S. Apparently, in some cases, “executives are worried about their tax information getting taken out of context or misunderstood.” To address some company concerns, PwC developed the concept of “total tax contribution,” which is described as a more complete picture of taxes—”not just corporate income taxes, but payroll, property, excise, value added, and other taxes, including those collected on behalf of governments. The accounting firm described it as a way to ‘help companies respond to the current environment’ and ‘one of the tools that can help companies tell their own story, which may not be fully explained by mandatory rules.’”  However, some activists fear that, although companies should be “proactive in providing a narrative,” that type of disclosure “will obscure and distract from the kind of detailed breakdown of tax planning and country-by-country profits, operations, and payments they’re looking for when assessing the risk of investing in a company.”

To be sure, with regard to tax transparency, according to two commentators, there is still “a way to go.”  The article also notes that, in the U.S., shareholder proposals addressing “tax disclosures and strategies have been few and far between, and haven’t gotten many votes.” However, a quick review of the signatories to the letters to the congressional committees discussed above suggests that that could change.  Time will tell.

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