Companies’ tax planning is an issue that engages both the Council on Ethics and the AP Funds. The risks that can be associated with “aggressive tax planning” makes the area a core issue for investors.
Tax planning and companies’ tax payments have been discussed extensively in recent years. The media has noted many cases where companies indeed follow the letter of the tax legislation, but might not the spirit of the law, using “aggressive tax planning”. Regulations have changed and discussions on making them even more stringent are under way. For example, the OECD guidelines for multinational enterprises have established that it is the responsibility of the boards to “adopt tax risk management strategies to ensure that the financial, regulatory and reputational risks associated with taxation are fully identified and evaluated.”
Politicians make the rules
How high taxes should be, how taxes should be charged and how they should be distributed between various tax subjects are political issues not to be decided by financial market players. How the tax payments should be distributed between different countries are issues for the parliaments and tax authorities for the respective countries. Investors, companies and individuals should comply with the tax legislation and its application. They thereby have the right to reduce the tax payments by working within the boundaries of the law, with tax planning.
Aggressive tax planning
When companies use aggressive tax planning, the risks increase that the company’s and owners’ credibility is negatively impacted. Aggressive tax planning also entails an increased financial risk, which can affect the value of the company negatively. These are the main reasons why the Council on Ethics and the AP Funds get involved in the tax issue. Further risks of aggressive tax planning include:
- It can lead to tax legislation becoming more stringent so as to strongly reduce the company’s future profits after tax.
- The company’s reputation among customers and other stakeholders is negatively impacted if its tax behavior enters the lime light.
- The risk that tax investigations and audits affect the company’s tax expenses creates a financial uncertainty.
- There is also a risk that the relationships to local or national authorities are degraded, which can in turn entail delays in obtaining or losses of permits to conduct business.
Reducing the tax payments through transactions or other measures that lie outside the boundaries of the law, tax evasion or tax fraud is not permitted.
The AP Funds presuppose that all companies comply with current laws and regulations, both in the tax area and other areas. The responsibility for this ultimately lies with the company’s board of directors. Checking that this is done is not a matter for the owners or investors, but rather for national tax authorities, the company’s auditors and justice authorities.
The Council on Ethics and the AP Funds’ view is that greater openness and voluntarily reporting contributes to reducing the risks. Greater openness also makes it easier for the investors to analyse and assess the companies’ tax risks. The companies’ boards should decide on a tax policy that includes the principles that govern the handling of taxes.