March 01, 2022

Tax Meets ESG: Preparing for Bad Press

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In a recent Legal Update[1], we discussed the intersection between Tax and ESG and the challenges companies will face responding to external pressures for greater transparency into a company’s global tax position.  We predicted that once the SEC reporting season began this month, the press would focus on the effective tax rates of high-profile companies.  That is exactly what happened recently when a leading national news outlet reported on the tax position of a well-known multinational.  The article paints an unflattering picture of the multinational’s global tax position and makes generalized observations on structures it might have used to achieve its tax results.  In this blog post, we discuss how companies can prepare for similar reporting.

The global tax position of a company is driven by a variety of factors including the mix between US and non-US revenue and profitability, US and non-US tax rates, differing US and non-US tax systems, and a multitude of other criteria.  The results of this inherently complex analysis are summarized by a company in the tax footnote disclosure included in its annual and quarterly audited financial statements which a public company reports to the SEC.

Complexity and nuance do not make for good press. An article for the general or even the financial press discussing a company’s global tax position will often be selective, incomplete, and perhaps even a bit inflammatory in order to reach its intended audience, which may include customers, employees, investors or other internal or external stakeholders.  This is the reality facing a multinational company today, especially one with a low effective tax rate.  Regardless of whether a company decides to publicly respond, every company should be prepared for press about its global tax position.

Form a Tax ESG Working Group

A first step in preparing for press is marshalling internal and external resources into a Tax ESG Working Group.  These resources should include a representative from the tax, legal, finance, communications, ESG and investor relations teams.  This group, often working under the auspices of the company’s Audit Committee, should develop the company’s strategy for tax transparency and public disclosure that would complement the company’s existing tax disclosures included in its public filings.

This strategy should include evaluating the benefits of the global tax policy statement discussed in our prior Legal Update.  The Audit Committee or Tax ESG Working Group often engages an external advisor to help guide the process.

Understanding your tax messaging

The global effective tax rate of a multinational company is the by-product of a multitude of decisions on how the company operates.  These decisions include where the company conducts operations, where and how it invests in R&D, how it rewards employees, its current and prior operating history, and its plans for the future.  Its global effective tax rate also is driven by tax policy in the United States and other countries around the world and thus will be influenced over time by US and global tax reform.

These factors and many others drive the effective tax rate and should therefore form the basis of how a company communicates its global tax position.  Too often, companies take a defensive posture with respect to their global tax positions particularly in response to negative press.  Understanding the factors driving the effective tax rate enables a company to ground its tax messaging in its business operations and core values.

Develop a communications protocol

The Tax ESG Working Group should be tasked with the development of a communication plan that covers decisions on internal and external tax communications.  This plan should include consideration to the development of a global tax policy statement as discussed in our prior Legal Update.  A global tax policy statement provides an outlet for the company to direct press and other inquiries about the company’s tax position.

The communications protocol would also include a strategy for deciding whether and how to respond to tax related inquiries from the press.  A company does not need to respond to every article however incomplete or misleading.  However a company should have a strategy for deciding when and how to respond.

Equally important is determining who within the company should respond and the internal approvals necessary before the response is released.  Frequently, a company will issue a response to a tax related article or inquiry without consulting the tax or finance departments.   The Tax ESG Working Group can often serve as the internal approval authority for tax related disclosures.

Concluding Observations

The press is not the only external stakeholder focused on the effective tax rates of multinational companies.  Multiple internal and external forces are driving changes in this area.  As more fully discussed in our prior Legal Update, a company must be prepared to respond to the increased pressures for increased tax transparency and take the necessary steps to control its tax narrative. In this area, it’s better to be proactive, than reactive.

[1] Tax Meets ESG: Emerging Corporate Governance Risks and Opportunities | Perspectives & Events | Mayer Brown

The post Tax Meets ESG: Preparing for Bad Press appeared first on Eye on ESG.

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