Is your tax position a reputational liability?

Is it smart to only focus on minimising your corporate tax liability without regard to public opinion and investor confidence?

As an article in the International Tax Review by KPMG’s Eric Janowak points out, the environmental, social and governance (ESG) profile of companies is growing in importance. Making a fair contribution to society through taxes is a commitment that organisations are going to have to embrace.

Letter of the law, or spirit of the law?

Historically, many Corporations were solely driven by ETR (‘Effective Tax Rate’) minimisation in their approach to legal tax planning initiatives.

What’s changed? For a start, the EU, OECD and other governments around the world have found ways to reduce the scope for tax planning. Some major corporations have been questioned about the level of their contributions to the exchequer in countries where they run significant operations. In response, stakeholders have begun to put pressure on boards and the C-suite to clean up their act.

What does a responsible tax policy look like?

A recent BP Tax Report says the company wants to “facilitate more informed conversations with our stakeholders about our contribution to economic development and the part we play in society, as well as the rigour of our tax practices.” In other words, tax is something that now needs to be spoken about more openly than in the past.

Institutional investors are pushing for more responsible tax policies, at organisational and investee/portfolio company levels. For example, Norges Bank has placed the role of corporate tax at the heart of its approach by making it one of its investment principles. This move resulted in the bank divesting from companies with a poor or undocumented record on tax and transparency.

Divestment can spell trouble for companies, raising the cost of capital and cutting management compensation. Asset managers also stand to lose out, which is why some have started disclosing their tax policies to reduce the risk of divestment by existing investors.

The role of COVID-19

Nobody knows what the lasting effects of the pandemic will be, but one thing is for sure: governments around the world need money right now.

People are more aware than ever of what the state does for them, and how it borrows money to spend on initiatives that protect them in these unprecedented times. Companies that fail to pay a fair amount of tax – in line with their business profitability and business reality – can expect little sympathy.

What can we learn from all this?

The key point is to look at the bigger picture. Tax planning initiatives that merely reduce a company’s tax bill, but that lack business substance and business reality could lose far more value than they retain if it results in significant negative publicity and investors heading for the hills. A responsible, open approach to tax could be a much bigger asset to your company than a modest tax base. 

“There are numerous reasons for paying more than a minimum amount of taxes. The question always remains, what is ‘fair’ taxation. Public opinion, investors and tax authorities may even hold a different view. I believe it depends on your specific situation. One thing is for sure, tax planning to pay minimal taxes only will frustrate more stakeholders than you wish for. Keep that in mind.”

Patrick Van Min
Partner International Tax, Sustainability Lead, Chairman Tax Policy Review Board & CTO Program Lead

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