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If companies are ignoring tax risk at the same time anti-avoidance sentiment is mounting, then there is a high likelihood of more tax shocks, consumer boycotts, earnings downgrades and even dividend cuts in the future. None of this is good news for investors.
Murphy points to a general lack of transparency from companies around governance decision-making regarding tax. “This leaves shareholders in the dark about tax risk,” he says. Murphy is a strong advocate for disclosure of country-by-county tax reporting, for example, which is among the recommendations included in the OECD’s BEPS Package.
However, what gets measured, gets managed and investors can play a big part in improving disclosure around tax governance and tax policies, and how companies manage tax risk.
One of the important outcomes of the LAPFF survey, MacDougall says, has been to raise awareness among the forum’s members of their need to consider tax risk and to push their fund managers to get answers at the local level.
By demanding greater transparency and engaging with companies regarding tax risk, investors would be helping to hold global companies to account at the local level. By encouraging them to take a more progressive approach to tax governance and policies before the tax bear bites, investors would also be working to improve the sustainability of those companies. That, in turn, helps to minimise unrewarded risk and ensure the sustainability of returns.
PIRC’s MacDougall says: “From long-term shareholders’ perspective, they don’t want to damage the company’s performance, but they do want the company to behave responsibly and bring additional comfort to shareholders that they are doing the right things. In the long-term, that will lead to better performance through lower reputational risk and tax policy risk, which could lead to more stable returns.”
