Regarding tax transparency among corporations, Etica Funds has signed the investor letter to the OECD for action on the Base Erosion and Profit Shifting Project (BEPS) and on Country-by-Country reporting (CbCR).
The document incorporates many of the issues contained in another letter signed by Etica Funds and sent last year to the American Financial Accounting Standards Board (FASB), which is successfully attempting to make tax transparency standards for companies more stringent.
Why has Etica made these commitments on taxation?
Etica asks for tax transparency because this leads to greater tax justice, i.e. revenues that countries can invest in welfare (education, health care, support for the vulnerable), innovation and environmental protection, etc.
Tax transparency helps with growth. Improvements in infrastructure, the rule of law and the provision of basic services are integral to a functioning economy. The Committee on Growth and Development, led by Nobel laureate economist Michael Spence, has found that the best-performing countries in terms of growth are those that have invested higher percentages of their GDP in public services.
What does this mean? Stable sources of revenue are key to market growth.
Our approach to responsible investment supports increased tax transparency for businesses operating in multiple markets in order to properly assess and manage investment risks for the composition of our mutual funds and for the economy in general.
To this end, our company believes it is time that members of the OECD Inclusive Framework move to ensure that big business publishes country-by-country reports as soon as possible. This is to provide investment firms with transparent information to make sound decisions when evaluating a company’s profitability and the financial risk country by country.
This is an important strategic and political issue for investors who are interested in long-term value creation, such as Etica Funds.
Large companies that adopt strategies with low tax transparency tend to minimise their tax obligations, gain hidden competitive advantages and even generate artificial profits through tax refunds and other benefits.
Analysis shows that when governments take action against these aggressive tax practices, the financial consequences for the companies concerned can be very serious.
Without adequate tax transparency, investors may therefore not have sufficient information to properly assess the level of tax risk of the companies in which their funds invest.
Poor tax transparency opens the door to enormous risk, undermining future profitability and long-term financial stability.
Country-by-country reporting is therefore essential to provide investors with the material information they need to properly assess what is now a largely hidden risk.
If greater tax transparency leads some companies to reassess their tax strategies, it will be because management no longer believes these practices can survive investor scrutiny over the long term. This outcome will provide an additional reason for adopting tax transparency strategies to attract investment as well as avoid future risks.
It is also time to abandon the idea that secrecy is capable of protecting companies from reputational risk. Quite the opposite, in fact: tax transparency can help avert risk by minimising scandals and removing any element of surprise.
Luca Mattiazzi, Director General of Etica Funds
Responsible finance Tax transparency