The Sustainable Development Goals (SDGs) have been estimated to require an additional $2.5 trillion a year of financing in developing countries. Matti Kohonen, PhD, describes how responsible tax behaviour by businesses, supported by investors, forms a critical part of ensuring that taxes are fairly paid and accountably used to fight poverty.
The UN’s Sustainable Development Goals (SDGs) agreed, where world leaders agreed a set of 17 goals underpinned by a series of ‘targets’ in September in New York at the United Nations General Assembly. The SDG goal 17 explicitly talks about the importance of mobilising greater tax and other domestic resources, while also highlighting the importance of multi-stakeholder partnerships in complementing the Global Partnership for Development between states. The financing of these goals was discussed at the UN Financing for Development (FfD), which agreed the Addis Ababa Action Agenda (AAAA). Taxation is a critical element of financing development as the IMF recently estimated the costs of tax base erosion and profit shifting are highest in developing countries.
In October 2015 Christian Aid, ShareAction and IBIS hosted a conference in London to introduce the Tax Dialogue approach to UK-based businesses and investors. The Tax Dialogue is a multi-stakeholder initiative launched in 2014 in Denmark between pioneering businesses and civil society actors. Its role is to discuss between stakeholders the issues relevant for responsible taxation, and engage in constructive dialogue around what constitutes good practice rather than focusing on just bad practices that have gained the most media attention – for right or wrong reasons.
For businesses the dialogue offers a safe space to exchange ideas on what good looks like in terms of responsible taxation, which for a long time has been confined to a relationship between tax specialists and tax advisors that the company works with. At the Tax Dialogue event in London, businesses were keen to test ideas with a receptive audience of civil society and investors and look at issues likely to be important in the future and review ongoing processes. Businesses wanted to hear what ‘good’ looks like, and many agreed that responsible taxation is an issue as tax practices involve strategic choices.
Businesses are slow to adopt responsible tax practices according to benchmarks in this area. At the conference it was said that most companies rate low scores on the FTSE4Good indicator, as many companies do not adhere even to minimal tax transparency standards. Danish companies and selected banks were among the early adopters. The Dutch Association of Investors for Sustainable Development (VBDO) published a tax transparency benchmark, which noted that a total of 45% of Dutch listed companies had published its tax strategy in 2015 (compared to 16% the previous year), but only 3% publishes a country-by-country break-down on taxes paid.
A joint discussion paper by ActionAid, Christian Aid and Oxfam called ‘Getting to Good’ on responsible corporate taxation highlighted eight propositions where companies can address their responsibility, some of them can be adopted immediately, while will take more time. They include:
- Publish country-by-country reports to show how much tax they are paying in every country they operate in. If companies are regularly paying zero tax in particular countries this could point to tax avoiding practices.
- Publish the outcome of any significant deals that they reach with tax and revenue authorities. This would shine the light of transparency on what are currently private dealings.
- Assess and begin to address the human rights impacts of their tax behaviour. By depriving developing world governments of revenue, so too might companies be depriving them of the ability to provide fundamental rights such as education.
- Regularly audit their use of tax incentives and reliefs to ensure they are delivering investment, employment or other benefits to developing countries. If companies are getting tax breaks there should be a net benefit to the country they are operating in.
At the Tax Dialogue conference in London, investors were keen to mention that they too require greater disclosure on tax practices in order to advance their understanding of risks and reputational issues that companies face in terms of tax issues. The Engagement Guide on Corporate Tax Responsibility by the UN Principles for Responsible Investment shows many such examples where companies that are household names have been exposed in the press for poor tax conduct, and proposes greater disclosure of tax payments, but also greater attention of tax risk by company boards. The risk in developing countries is higher due to the importance of corporate tax in developing countries as corporate tax payments as a share of total tax revenue are roughly twice as important as they are in rich countries.
There are also positive reputational gains when companies take steps towards responsible tax practices. Initiatives such as Responsible 100 has seen Legal and General, a UK-based investor, report more fully to wider stakeholders on tax, while the UK-based energy company SSE has been awarded the Fair Tax Mark (FTM) based independent verification of tax policies and public tax disclosure. Reputation and trust are also key themes in the Confederation of British Industry (CBI) responsible tax principles, while Unilever and SAB Miller already disclose tax payments geographical and globally by type of taxes paid.
Regulation requiring making tax payments a matter of public record are starting to emerge across the world. Extractive industry firms that are listed in the US or EU jurisdictions need to comply in 2016 with EU’s Accounting Directive and a section in the US Dodd-Frank Bill on making payments to governments a matter of public record on a country-by-country basis. This is already happening, for instance BHP Billiton’s disclosure of payments to governments was $7.3 billion in 2014 across the world where it operates – detailed on a country by country level. This is a good start where further steps could include increased detail of broader financial reporting and publishing tax incentives.
The Tax Dialogue is a concrete example of how multi-stakeholder partnerships can bring new innovative policy measures forward and build a growing consensus around a controversial issue in the public eye and the media in particular when actors coalesce around the Sustainable Development Goals as a common objective – and especially the urgent financing needs for health, education water and sanitation to mention a few areas. Christian Aid hopes to continue with the initiative along with other partners in the UK and more widely with the international Tax Dialogue initiative.