The largest investors in Amazon, Cisco, and Microsoft are pushing for the GRI tax transparency standard, but this could signal the beginning of a wave of shareholder activism.
As more public companies come under pressure from investors to release information in country-by-country reports, at least thirty companies may adopt the Global Reporting Initiative tax standard in the upcoming months.
More shareholders are likely to demand that businesses adopt stricter tax transparency standards, predicts Katie Hepworth, responsible tax lead at Pensions & Investment Research Consultants in Sydney.
“PIRC is currently engaging with over 30 companies about their tax reporting, and our decision to support further proposals will depend on the outcomes of our engagements,” according to Hepworth.
The GRI tax standard is a voluntary reporting framework that would inform shareholders of tax receipts in each nation in which the company conducts business. Effectively, this would make CbCR public on a voluntary basis, but long-lasting changes might only be made through legislation.
German financial institution Allianz, Danish energy company rsted, and US mining corporation Newmont are among the businesses that have adopted the GRI standard. Although the list is expanding, many of the largest businesses in the world have not yet joined.
Investors asked Cisco Systems and Microsoft to adopt the GRI standard and release a tax transparency report for shareholders in resolutions sent to both companies last week.
According to the June 28 resolution to Microsoft's board, "shareholders request that the board of directors issue a tax transparency report at reasonable expense and excluding confidential information."
Microsoft is being pressured to adopt the GRI standard by investors managing more than $350 billion in assets. The Greater Manchester Pension Fund, AkademikerPension, and Nordea Bank are some of these shareholders.
The group of investors supporting the GRI resolution contends that despite Cisco Systems already providing its shareholders with a global tax strategy document, this document does not adequately address tax risk. The Missionary Oblates and Etica Funds are members of this group.
According to Hepworth, the resolution demands that Microsoft and Cisco create tax transparency reports that adhere to the GRI tax standard.She continues, "this includes the publication of country-by-country reporting of their tax and financial information, along with the number of workers, for each country where they have operations."
Hepworth notes that although Cisco and Microsoft already adhere to local CbCR requirements, the GRI standard will make the reports available to the general public.
"All this proposal asks for is that they make this information public, to provide investors with greater oversight of the structure of their business and how their tax planning strategy corresponds with their business and sustainability strategies."
Cisco and Microsoft may reject the proposals, but it is likely that other businesses will soon be forced to deal with investors who want the GRI standard as well. However, tax directors anticipate that this trend will not go far enough to make up for the absence of transparency legislation.
After attempting to prevent it from being placed on the agenda of its meeting, the Amazon board already rejected a GRI proposal in May.
A group of shareholders in March demanded that Amazon adopt the GRI standard. These shareholders were in charge of $3.6 trillion worth of assets. At the company's annual general meeting on May 25, the shareholder resolution did not, however, receive sufficient support.
Although the resolution was defeated, 21 percent of independent shareholders voted for the proposal for public CbCR. It was the first time a resolution of this kind drew attention.
"Twenty per cent is the threshold for ‘significant dissent’ under the UK corporate governance code and sends a significant message to management that they must review an issue and report back to investors on how they plan to act," according to Hepworth.
She continues, "We expect the vote to go up as more investors become familiar with tax transparency proposals and how the information can provide insights into the risks of a company's tax strategy."
In a letter to the US Securities and Exchange Commission (SEC) in March, more than 100 asset management organizations—among them Nordea, Royal London, and several sizable EU and US pension funds—demanded the GRI vote. The SEC decided that the vote should be included in Amazon's May meeting.
The Amazon proposal, according to Hepworth, "became the first ever tax transparency proposal to survive a company challenge at the SEC." The GRI standard was previously rejected by Amazon on the grounds that tax matters are routine business matters and are exempt from voting.
"We expect that the SEC would find similarly if another company chose to challenge our proposal," she continues.
Although Amazon's example may have encouraged investors to carefully review tax transparency reports, another trend is also currently in motion. Private equity (PE) funds are purchasing and privatizing publicly traded companies.
This trend, according to at least one tax director at a technology company in London, is an attempt to avoid regulatory and reporting pressures.
The tax director claims that "the pull is listed status brings too much regulation and reporting; by going private we can free up management to focus on the business and unlock value."
The push, they continue, is "too much money chasing returns – there is lots and lots of investor cash in PE funds and the like right now."
However, private businesses are less susceptible to the shareholder pressures that Microsoft, Cisco Systems, and Amazon have to deal with. NGOs are therefore pushing for more extensive legislative change rather than just voluntary initiatives.
"You will see increased shareholder activism pushing large high-profile groups to disclose more," a tax director at a software company in London said. "But it will not be widespread enough to pre-empt legislation."
A political shift is currently taking place. Public CbCR will be made available in the EU by January 2023. For those who advocate for tax transparency, this could be their biggest victory.
Tax directors might find themselves longing for the times when these actions were optional. Some tax chiefs believe that investors, not governments, should exert the initial pressure.
According to Karl Berlin, head of tax at Ørsted in Denmark, shareholder pressure may be more powerful than governmental pressure.
According to Berlin, sometimes legislative requirements are so specific that they fail to see the big picture.
He continues, "Analysts and investors should have an interest in being able to review country-by-country data and explanations as a sanity check."
Berlin adds that the GRI standard is a good way for his company to reduce its exposure to tax risk before public CbCR or any other incoming reporting obligations.
According to Berlin, "the standard requires you to think about your processes and your risks, and therefore helps you prepare for potential controversies."
He continues, "you’re better off being prepared for what might come rather than waiting until the last minute."
Investors will increasingly ask public companies to release their financial records as the GRI grows. However, it might be easiest for businesses that have already adopted the GRI standard to control reputational risks.
By fLEXI tEAM