Changing corporate culture is redefining tax transparency

For the first time, Royal Dutch Shell Plc (“Shell”) has voluntarily disclosed to the public details of how it has paid its taxes around the world. Royal Dutch Shell Plc: Tax Contribution Report 2018. The Wall Street Journal Shell disclosure said The beginning of the end of tax secrecy. As discussed below, the Shell report is a signal of a growing trend towards tax transparency that is part of a larger shift in corporate culture.

Corporate culture. Shell’s tax transparency is correlated with changes in corporate culture, including: (1) improved environmental, social and governance (“ESG”) responsibility; and (2) a more sustainable and equitable form of capitalism. This new capitalism is intended to benefit all stakeholders, not just shareholders. According to Business roundtable, maximizing shareholder profits can no longer be the primary objective of companies. Corporate greed, to the detriment of everyone and everything, has fallen into disuse. For example, Blackrock, the world’s largest asset manager, shuns high ESG risk investments, instead investing with environmental sustainability as a primary focus. Blackrock pushes companies to report on ESG measures and votes against those that do not make ESG disclosure. Changing corporate culture is pushing companies to publish more ESG information and better manage ESG risks.

ESG / Fiscal rankings. Companies are now ranked according to their sustainability performance (that is to say, ESG risk management). See Sustainalytics ESG risk rating reports. The objective of ESG analysis is to assess the risk that a company will suffer a significant financial impact from ESG factors. Dow Jones Sustainability Indices (DJSI) assesses the sustainability of thousands of public enterprises. These indices are key benchmarks for investors and companies. For example, the North American DJSI Index captures the top 20% of the 600 largest stocks in the broad S&P index based on their ESG practices. The index currently includes seven US energy companies (Chevron, Conoco, Devon, Hess, Marathon, ONEOK and Schlumberger). Shell recently dropped the index, possibly due to declining ESG scores. In Europe, the Tax transparency index ranks Dutch companies on tax transparency. In Australia, the tax administration has proposed a code of tax ethics. As these sources demonstrate, the clear global trend is towards greater transparency, including in tax matters.

ESG / Fiscal scores. The overall ESG score can be broken down into three underlying dimension scores that each measure their distinct ESG performance. The governance score is called the economic dimension score (EDS). There are eight specific EDS criteria, including taxation (which includes tax strategy, tax reporting and tax governance). The tax criteria examine the extent to which a company has a clear policy on its approach to tax matters and an awareness of the additional financial risks associated with the company’s tax practices. The Shell report is designed to respond directly to these EDS metrics on tax governance.

Tax disclosures. The Shell report is based on the tax transparency reporting standards promulgated by the Global Sustainability Standards Board (see GRI 207: Tax 2019). The report of the Financial Accountability & Corporate Transparency (FACT) coalition, Trend towards transparency: the rise of public country-by-country reporting proposes to apply global standards to US multinationals. The Shell report provides 80 pages of tax data. Most reports detail country-by-country specific tax data (e.g. number of employees, business operations, income, profits, taxes paid, taxes accrued, and earnings accrued), with Shell disclosing this data for 99 countries. The report also explains Shell’s tax policies and practices, fundamental tax principles and tax governance procedures. Companies that provide tax transparency can expect higher ESG scores and rankings.

Tax Responsibilities. Tax responsibilities adjust to reflect changes in corporate culture. According to the report, Shell supports an approach to taxation that enables companies to create a sustainable society. The goal is to “pay the right amount of tax at the right time. “The ‘right amount of tax’ means that tax minimization is no longer the primary goal. At the ‘right time’ means fewer tax deferral strategies. Shell’s responsible tax principles that guide its decisions in tax matters, emphasizes accountability, transparency and, above all, trust. In fact, trust is the cornerstone of the new model of capitalism. If trust is not the highest value of a business, then the business is going to be in a crisis of confidence.

Tax risk. For most businesses, the biggest tax risk is creating a franchise or reputational risk. Sometimes a company’s tax affairs grab the headlines, resulting in franchise risk. Amazon reported around $ 11 billion in GAAP profits, but paid no income tax for 2018. Outraged New York officials responded by opposing the subsidy (with tax incentives) of the second headquarters from Amazon to Long Island. Better tax transparency can allow companies to better control these political and public relations issues.

Take away food. There is a paradigm shift to force companies to meet higher standards, including increased tax transparency and less tax secrecy. To date, U.S. companies are disclosing sustainability, but no U.S. multinational has yet released a tax transparency report. It’s probably only a matter of time until we see more tax transparency. Tax transparency will allow US businesses to proactively control tax discourse and better manage franchise risk. Better management of ESG risks, including tax transparency, will also likely translate into improved company fundamentals, as well as stock performance. Although tax transparency is a cultural change for most companies, it should be embraced as a new way to increase value for all stakeholders, even shareholders.

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