August 24, 2021

“Tax Impact” as an Emerging ESG Issue: Is Your Board Prepared?

I blogged earlier this summer about a bill in the House that would require disclosure in SEC filings about tax havens & loopholes. Another bill introduced in both the House and the Senate is also aiming to amend the Exchange Act to require more detailed info about state, federal & foreign taxes paid.

This Cooley blog says that investors are split on whether “tax planning” is a good thing. The “shareholder primacy” model says that companies need to return as much money as possible to shareholders. Yet several investors signed on to support this lawmaking effort, because they’re starting to think that minimizing taxes creates reputational, customer & employee risks to individual businesses – as well as systemic risks that affect entire portfolios.

Similarly, a recent ISS ESG report suggests that a paradigm shift – from a focus on “tax burden” to a focus on “tax impact” – may be underway. Here are their views:

– Funding the Covid-19 recovery has led to a revived global debate about tax policy and rates, with 130 countries agreeing on a global minimum tax rate.

– Corporate tax avoidance is a major ESG issue, but disclosure on responsible tax practices is noticeable by its absence.

– Responsible investors are increasingly taking into account the implications of fair taxation for social issues such as global inequality, particularly given an increased focus on outcomes-based investing and stakeholder capitalism.

It seems unlikely that you’ll have to start filing a “tax report” with the SEC in the near-term – if ever. But with society’s “eat the rich” sentiments and at least some investors saying they want companies to proactively consider ESG issues, boards should probably add “public backlash” to the list of risks they consider during tax planning conversations. Also see this Accounting Today article, which predicts that a “global minimum tax” is getting more likely.

Liz Dunshee