TAX RISK IGNORED
However, a study for the Local Authority Pension Fund Forum (LAPFF) shows FTSE 100 companies taking what appears to be a lax approach to tax policies and governance. According to PIRC’s MacDougall, this gives rise to a “general concern that boards are not paying enough attention” to the problem.
The LAPFF’s report, which was sparked by the OECD’s BEPS Package, surveyed the FTSE 100 focusing on specific tax risks that corporate behaviour exposes investors to and on tax governance. Tax Research UK’s Murphy, who wrote the resulting report, says the results were “not terribly encouraging”. “The majority of companies duck the issue,” he says, pointing to a lack of communication around tax risk strategies or willingness to share more information from all but a few exceptions.
The report revealed a number of risks regarding tax, which Murphy says is “not getting the attention it deserves”. Few companies, for example, review tax risk at board level and there remains an inappropriate level of risk appraisal in many companies. Some aspects of tax risk, including reputational risk, shareholder pressure, the disclosure of country-by-country reporting and enhanced anti-avoidance regimes were overlooked. Some companies believed there was little risk arising from their use of tax havens, citing outmoded transfer pricing rules. Three companies said they were protected by the kinds of tax agreements that are currently being investigated by the European Union, but believed this didn’t create any tax risk (Apple investors may care to differ).
The LAPFF report says the possibility that material tax risk was simply being ignored must be real. If the goal of an investor is to reduce risk in an effort to obtain more consistent and reliable returns on investment, then this is a material challenge to overcome.
As PIRC’s MacDougall says: “Shareholders should be concerned when there is an area of corporate activity where a clear internal policy doesn’t exist. Does the corporate know what its tax risk is and are steps being taken to mitigate those risks?”
