The Council on Ethics of the AP Funds (the Council on Ethics) believes that companies’ boards should decide on the company’s tax policy and that the board is responsible for ensuring that the companies comply with the policy and applicable laws in the tax area. The companies have the right to tax planning in order to reduce their tax burden within the framework of the law. Companies should not engage in aggressive tax planning because they then risk that the credibility of the company and its owners is negatively affected.
Background
Tax levels and the distribution of taxes between domestic and foreign tax subjects are political issues that are not decided by financial market participants. The responsibility for checking that the correct tax is paid lies with national tax authorities, company auditors, and law enforcement authorities.
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 decided by financial market players. How the tax payments should be distributed between different countries are issues for the parliaments and tax authorities for respective countries. Investors, companies and individuals should comply with the tax legislation and its enforcement. 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 and its 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 gets involved in the tax issue. Further risks of aggressive tax planning include:
- Tax legislation becoming more stringent which may 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 is observed.
- The risk that tax investigations and audits affect the company’s tax expenses creates a financial uncertainty.
- 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 Council on Ethics’ view on Corporate Tax – Responsibility and transparency
The Council on Ethics presupposes 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’ 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.