News reports occasionally detail how large corporations, like Amazon and FedEx, manage to avoid paying any federal taxes. Adding to my personal dismay, the Institute on Taxation and Economic Policy (ITEP) report that, in fact, 60 Fortune 500 companies avoided all federal income tax in 2018, including: Chevron, Delta Airlines, Eli Lilly, General Motors, Gannett, Goodyear Tire and Rubber, Halliburton, IBM, Jetblue Airways, Netflix, Principal Financial, Salesforce.com, US Steel, and Whirlpool. The full list of those that did not pay a dime is available here. We also know of companies that relocate to tax havens or companies that undergo a “corporate inversion” so that the foreign subsidiary becomes the parent company. At the end of the day, one asks: how do we better understand and compare the tax practices of different companies?
At the conclusion of the ICCR Fall conference (November 1), I went to Bloomberg for an event on Tax Transparency organized by AFSCME, the Fact Coalition, Global Financial Integrity, Oxfam America, and the Patriotic Millionaires. Yesterday (December 5), these same organizations announced the launch of a new global standard for tax transparency. The new global standard includes:
- Reporting within the context of corporate sustainability;
- Disclosures on tax strategy, governance, and risk management;
- Public country-by-country reporting of business activities, revenues, profit, and tax;
- And disclosure of the reasons for difference between corporate income tax accrued and the tax due.
A few of the remarks from the launch event have been shared with me, and I pass them on to you:
- Remarks by Senator Chris Van Hollen [.docx]
- Remarks by Eric Hespenheide, Chairman of GRI [.pdf]
- Remarks by John Keenan, AFSCME [.docx]
Why is tax transparency important?
Like most voluntary disclosures, companies that are doing the right thing disclose because the market rewards this behavior. Companies that are not doing the right thing are less likely to disclose, reflecting the potential for a financial risk and/or reputational risk. Efforts like the new standard issued by the Global Reporting Initiative aim to allow for apples to apples comparisons.
A well-grounded tax strategy must be sustainable. These tax disclosures are valuable for investors because, for instance, a company with a very low tax rate raises questions about the sustainability of the rate and, consequently, a risk to earnings down the road. For investors, knowing the tax rate paid by a company discloses something about the risk tolerance of management and board. Bad practices have a habit of catching up with companies. A company may be exposed to penalties, fines, and clawbacks. The leaking of the Panama Papers resulted in recovery of $1.2 billion in taxes and penalties to date.
More importantly, taxes finance important undertakings like roads, schools, and government, things that companies and investors rely upon. A bedrock principle is that one should pay taxes where value is created. The Tax Standard clarifies how much companies contribute in taxes to the countries where they operate and, thereby, allows us to better see the impact of tax avoidance on the ability of a government to fund critical services and to encourage sustainable development. As the late Oliver Wendell Holmes, Jr., U.S. Supreme Court Justice, put it: “Taxes are what we pay for civilized society.”
We at SGI believe that this new standard is an important step forward and encourage companies to disclose according to this standard.
For more information:
- DEVELOPMENT OF GRI 207: TAX 2019 (Global Reporting Initiative)
- Fact Sheet (Global Reporting Initiative)
- Trending Toward Transparency: The Rise of Country-by-Country Reporting (FACT Coalition, April 2019)
- Muddled Markets: Investors Increasingly at Risk from Lack of Disclosures about Corporate Tax Practices (FACT Coalition, Nov. 2018)
- Sustainability Panel Finalizes Public Tax Transparency Standard (FACT Coalition, Dec. 2019)