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Investor pressure drives corporate tax policy development

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Investors are giving serious consideration to their targets’ corporate tax policies before agreeing on the deal, but there are a number of companies that still have no such policy in place.

A company’s lack of tax policy can put off investors, incur public wrath, and even leave companies falling foul of the law. Post-BEPS, many companies are working on defining their corporate tax policies with accountancy firms to ensure their plans are appropriate for the company, do not deter prospective investors and align with public expectations.

"I think investors over the last two years, have been asking companies to do a number of things," said Paul Monaghan, chief executive of the Fair Tax Mark, a UK-based organisation which certifies companies with ethical corporate tax policies. "Any business now that doesn’t do the bare minimum of having a policy in the public domain, is going to be receiving black marks from investors."

The chief compliance officer of an investment group said: "We wouldn’t touch something structured aggressively."

"There are times when you will come across an asset where the seller wants you to purchase the shares, but then you find there are capital gains they are trying to shelter," they elaborated. "All it does is create problems down the line."

"If we think the asset is worth pursuing, we do an asset purchase," they told International Tax Review. "It’s cleaner, you’re not taking on any tax liabilities they’re trying to shelter. If you buy the shares you’re buying all the benefits and problems."

"I would say responsible tax is one of the great moral dilemmas of our time," said Rohinton Sidhwa, partner at Deloitte India during the he said at International Tax Review’s India Tax Forum on January 22. "Like any moral dilemma, there are two views on it: whether it is even a moral, or just a responsibility."

"In my experience, clearly tax administrators and taxpayers are very cognizant of this issue now," he continued. They do think a lot more before undertaking any kind of tax transaction."

"Most important of all, the bad press that a company can potentially get, especially when it's shown that a large, foreign, first-world multinational is depriving a small, third-world country of their fair share of tax revenue," he said wryly. "That really gets the headlines."

Many companies do now have a written tax policy for which heads of the tax department are accountable, which they view as an important part of not just their corporate social responsibility (CSR) duties but as crucial to investment decisions.

"One of the good practices that corporates have put in is to actually have a tax policy," said Sidhwa.

However, "you’d be surprised how many organisations do not even have a tax policy for their group," he said at the same conference.

The finance director of a US real estate investment trust (REIT) speaking to International Tax Review separately suggested their company does not have a clear corporate tax policy. "It depends on the projects we’re dealing with," they said, explaining that the tax strategy was decided "project by project".

The chief compliance officer, though, said his company’s strategy was far more rigorous. "We do take a very conservative view [of tax structuring in our investments]," he said. "It’s definitely communicated, from day one [of starting working at the company] – you’re well aware."

Nevertheless, boards are increasingly asking their employees and their organisations whether there is a tax policy in place, whether it is disclosed and if the company is transparent about it, Sidhwa said.

Even the REIT finance director admitted that investor pressure or preference had "somewhat driven tax policy" in the past few years.

Looking to the UK

Although the importance of a corporate tax policy is apparent, the fact that some companies still don’t have such a plan in place or could be undertaking unethical tax practices has perhaps, partially, led the UK to introduce the requirement for companies to publish their tax policies in the 2016 Finance Act. This includes:

  • The approach of the group to risk management and governance arrangements in relation to UK taxation;

  • The attitude of the group towards tax planning (so far as affecting UK taxation);

  • The level of risk in relation to UK taxation that the group is prepared to accept; and

  • The approach of the group towards its dealings with UK revenue authority HMRC.

The legislation also identifies as 'good practices’ ideas such as alignment of tax with CSR initiatives, board involvement in tax, comments on transfer pricing and adherence to tax transparency initiatives.

This was a key aim for Marie Pearse, group taxation senior manager at FTSE 250 utility group Pennon, when it published its group tax strategy.

"We want to do the right thing in terms of our tax affairs and be transparent in doing so," she told ITR. "That’s why our strategy tries to bring tax to life as it affects our business and what this means for our customers. We also want to highlight how much we really contribute to wider society across all taxes not just focusing on corporation tax as is routinely reported in the media."

BDO estimates around 2,000 companies have to comply with the UK’s tax policy rules, which applies to all multinational groups with an annual global consolidated turnover greater than €750 million ($860 million) that are also subject to country-by-country reporting (CbCR) requirements. However, not all companies fully comply.

"What we found is that within the FTSE50 the legislation had been quite poorly implemented," said Monaghan. "Some would treat it as a tick-box or a bare minimum."

"We don’t have a website," said the REIT finance director, adding that he simply files the policy with Companies House, the UK registrar of companies.

Nevertheless, the obligation to publish a tax strategy has made many companies think about what their overall policy on tax is, and has opened the door to more public discussion.

"We also took what I believe is a unique approach in that we asked customers for feedback on tax and big business and specifically what they expect us as a business to do," said Pearse. "Customer feedback was sought through a number of focus groups and a customer survey."

It’s not out of the question that other countries will follow suit, too, given the apparent failure of EU attempts to bring in public CbCR and the speed with which common law countries like Australia mimicked the UK’s diverted profits tax.

"The UK is the first country in the world with this requirement, and that’s a good thing," said Monaghan. "It’s created a baseline standard."

"I think some of the more developed countries will pick up on this but quite possibly not until they have resolved the issues on the BEPS agenda and challenging areas such as digital tax," Pearse said.

The tax transparency conversation often focuses on initiatives like CbCR, automatic exchange of information, publication of tax rulings and similar, data-focused initiatives. However, more legislation like the UK’s rules that asks companies to put into words how they deal with tax can prove just as revealing.

Complying with such legislation also provides companies an opportunity to look inwards at their overall tax strategy, as well as boosting their profile among investors or connecting with consumers.

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