Hi, I'm Andy Howard. I'm a tax partner in Ropes & Gray's London office. In this video, I'm going to talk about tax coming out of the shadows and becoming part of an environmental, social, and governance agenda.
Tax as an ESG issue
I wouldn't immediately think about tax as an ESG (environmental, social and governance) issue. However, in May 2018 the UN-backed Principles for Responsible Investment investor group published a paper on corporate tax. It turns out that the PRI has included tax as part of its remit since 2014.
PRI's new paper focuses on transparency and
The PRI's new paper focuses on transparency and disclosure. Increased transparency and disclosure is also the direction of travel in tax law in both the UK and within Europe more widely. To give just a couple of examples, the UK has recently required large corporates to publish their tax policy, whereas the EU continues to mull over whether to make companies make public their country by country reports. It therefore wouldn't be surprising to see elements of the PRI's agenda becoming adopted by lawmakers in the near future.
Potential impact to the private equity
The private equity industry has always paid careful attention to tax matters. My recent experience in negotiations on fund raising on both sides of the table is that investors are now more than ever focused on tax issues, particularly as a result of changes coming out of the BEPS Project. It's also the case that a lot of investors are focused on ESG issues. It is, however, still rare to hear a link being drawn between the two, but that may change. Some private equity houses may see an opportunity here to make a virtue out of a necessity by embracing the ESG agenda. We've already begun to see some large corporates take this approach.
Embracing the ESG agenda does not mean abandoning tax
Embracing the ESG agenda need not mean abandoning tax efficiency. According to the PRI, it's about striking a balance between controlling the tax bill and paying a fair share. There's no question of voluntarily and unnecessarily paying additional tax.
What does PRI tax transparency involve?
So what might be involved? First, publication of a comprehensive tax strategy. Second, information on the company's governance of tax matters. And thirdly, performance transparency about the tax strategies that are being adopted by the company.
Risks in embracing the ESG agenda
Of course there are risks in embracing this agenda. Uncertainty remains as to what constitutes appropriate tax planning. Even the most conservative firms may find that some historic practices could be questioned. In addition, there's extra work involved in trying to work out what additional and voluntary disclosures to make, and how best to present it. However firms react to this initiative, this is another example of the new risk perspectives that are driving change in the tax world.
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