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December 4, 2023

Advocating for global tax transparency

By Aldo Bonati
Microsoft: The tech giant is one of the companies that has a shareholder resolution on its upcoming AGM agenda, requesting it reports according to the GRI 207 tax standard. (Photo: David Paul Morris/Bloomberg)
Microsoft: The tech giant is one of the companies that has a shareholder resolution on its upcoming AGM agenda, requesting it reports according to the GRI 207 tax standard. (Photo: David Paul Morris/Bloomberg)

The complex nature of tax planning by global corporations and current low levels of disclosure hold risks for investors. One solution is to urge multinationals to adopt the GRI 207 reporting standard

The approaching AGMs of Microsoft and Cisco Systems provide a timely opportunity to highlight tax transparency, and its relevance for investors. Both of these tech giants have a shareholder resolution on tax reporting on their AGM agendas requesting them to report according to the GRI 207 tax standard.

Launched in December 2019 by the Global Reporting Initiative, GRI 207 is the international voluntary reporting standard on public tax disclosures for corporations. Advocates of the standard maintain that it provides an international benchmark for fiscal transparency, allowing for comparison of companies across diverse geographies and subject to different regulatory reporting requirements.

In practical terms, there are two crucial reasons why long-term investors should vote for compliance with the requirements of GRI 207: financial materiality and social salience.

Tax is a financially material issue as it usually represents a significant cost item on companies’ balance sheets. To reduce costs, and increase profits, therefore, multinationals may have an incentive to pursue aggressive tax planning that aims to exploit discrepancies or loopholes in the international tax framework in order to reduce their overall tax burden.

Tax planning is legitimate corporate behaviour, as long as it interprets tax provisions respecting the spirit, not just the letter, of the law. Regrettably, the increasing globalisation of international markets has given multinationals a greater incentive to adopt tax planning, raising their exposure to legal, reputational and compliance risks.

The current level of disclosure does not allow investors to thoroughly appraise this risk, however. To promptly identify and better assess companies’ risk–opportunity profile, investors need to receive timely and detailed information on a company’s tax governance and risk management practices, along with accurate country-level information about the tax it pays.

Failure to provide such information can lead to legal action. For example, in March 2022, a pension fund filed a proposed class action lawsuit against biotechology company Amgen, for its lack of transparency about a dispute over its international tax strategy. The complaint alleges that Amgen failed to disclose to investors in a timely manner a potential liability worth $10.7bn in taxes and penalties with the US Internal Revenue Service.

Beyond financial materiality, the social salience of fair tax management is a pivotal topic for investors, especially those concerned with socially responsible investment.

Paying taxes is a key way in which multinationals can demonstrate how they contribute to the communities where they operate, since taxes fund critical infrastructure and services such as health care, education and security.

Governments and other stakeholders such as shareholders, civil society organisations, governments and regulators – are increasingly concerned about the negative impact of tax planning, which has consequences such as distorting financial and capital flows. Now, many governments are introducing laws to protect their tax revenues.

In Australia, for example, the Treasury published draft legislation in April 2023 that seeks to introduce mandatory country-by-country tax reporting in line with GRI 207. The scope of this legislation has been heavily debated, however, and the implementation has been delayed.

Meanwhile, the EU’s Country-by-Country Reporting Directive entered into force in 2021, which provides country-by-country tax reporting by multinationals with a turnover exceeding €750mn. So far it has been implemented only by Romania, at the start of 2023 but many other EU countries are expected to follow in 2024, as 11 other member states have already adopted the legislation.

Companies will need to report on their 2025 financial year at the latest.

Tax is also covered by the EU Corporate Sustainability Reporting Directive and from 2024, transparent reporting will be required in the case that tax is considered a material topic. In the US, the Financial Accounting Standards Board has proposed a package of tax disclosure rules that would require companies to provide more tax transparency, and another proposed bill, the Disclosure of Tax Havens and Offshoring Act, would require public country-by-country tax reporting.

All stakeholders must keep up the pressure on multinationals to commit to public country-by-country tax reporting, and have a crucial role in nurturing the global momentum behind policy measures to make such reporting mandatory.

While a growing number of major companies already voluntarily disclose their tax practices using GRI 207, investors need to urge more companies to get ahead of incoming policy changes and commit to tax transparency. One powerful way to achieve this is to vote for shareholder resolutions calling for the adoption of the international GRI 207 tax standard.

Aldo Bonati is stewardship and ESG networks manager at Etica Sgr

A service from the Financial Times