Over the last ten years, responsible tax has become an increasingly prominent concern for companies in Denmark and around the world. International scandals, like the Panama Papers and the Luxembourg Leaks, have exposed tax avoidance on a significant scale. And in Denmark, the dividend arbitrage scandal of 2012-2015, which defrauded the Danish government of billions, put responsible tax practice firmly in the spotlight.
In the years since these revelations, scrutiny of corporate tax practice has intensified considerably. Policymakers everywhere are responding with wide-ranging tax reforms and new transparency requirements. Meanwhile, investors are asking companies to demonstrate that they are not adopting structures or tax positions that risk their long-term profitability or sustainability.
Any company that is serious about meeting these shifting expectations must not only embrace the importance of responsible tax, but consider it a fundamental part of wider Environmental, Social and Governance (ESG) efforts. Responsible tax can no longer be viewed as solely a technical manner for finance or tax departments.
Danish institutional investors, particularly pension funds, can provide a blueprint for any industry or corporate leader to follow when it comes to making tax an ESG priority. As the CEO of one of the largest pension funds in the country, I knew we had an opportunity to ensure that tax was firmly on the ESG agendas of our peers. While we had expressed support for the responsible tax agenda and joined many in developing a tax policy, it was clear that there was more we could do.
Photo by OECD/Hervé Cortinat
Responsible tax can no longer be viewed as solely a technical manner for finance or tax departments."
In August 2019, PensionDanmark together with the three large Danish pension funds—ATP, PFA and Industriens Pension—published a common set of tax principles embedded in a Tax Code of Conduct.
The Code, which is the first of its kind, outlines the principles that we expect and encourage our external managers to follow. Its purpose is two-fold. First, it aims to provide savers with more efficient and sustainable investments from a tax perspective, by ensuring both tax-optimal and robust structures. Second, and crucially, it seeks to support and contribute to the development of a common international framework for responsible tax behavior, while recognizing the centrality of responsible tax to the achievement of the UN’s Sustainable Development Goals (SDGs)—a framework many companies use in developing and measuring ESG metrics.
Additionally, the Code clarifies what the founding pension funds consider to be acceptable and unacceptable tax behavior. These are sensitive questions, so these key parameters have been framed very carefully. On the one hand, participating pension funds encourage managers to consider tax planning opportunities that prevent double taxation and maximize the after-tax-return for investors. To aid better understanding of the intention behind this statement, the Code offers examples of measures that are considered acceptable—e.g. the use of tax treaties to prevent double taxation.
On the other hand, the Code makes it very clear that aggressive tax planning is considered unacceptable. Aggressive tax planning is defined as the exploitation of technicalities in a tax regime or as the exploitation of inconsistencies between tax regimes, to reduce tax liability. Again, the Code offers concrete examples of aggressive planning, including the use of financial instruments and hybrid entities and the abuse of tax treaties through treaty planning without sufficient substance.
The Code also supports international tax initiatives implemented at OECD and European levels, including those focused on tax transparency. Participating pension funds avoid investments in jurisdictions that are deemed non-compliant or non-cooperative according to OECD and EU definitions.
COVID-19 and Responsible Tax
The COVID-19 pandemic has made responsible tax an even more important ESG agenda item. Our Chair, Paul Polman, explores why corporate leaders should take action now to contribute to a just and inclusive economic reset.
The Code offers a promising pathway to ensure that responsible tax is firmly on the ESG agendas of organizations—in this case, pension funds. Momentum is now increasing. Since its inception, the Code has been adopted by an additional seven Danish pension funds and more investors are following suit. By no means is this trend unique to Denmark—similar calls by investors for responsible tax can be seen in other parts of the world.
As companies set and evaluate their ESG goals, they cannot afford to overlook the importance of responsible tax practice. Investors’ expectations are changing, but so too are those of policymakers, revenue authorities, civil society organizations and others. And the global pandemic has put all of this in further focus. The COVID-19 crisis has not only highlighted the imperative of companies acting responsibly and making a fair contribution to public funds, it has also magnified the importance of reaching the SDGs and the need for an economic reset that allows for a just and sustainable future for all.
Companies and investors alike have a responsibility to help catalyze this transformation. An early opportunity lies in responsible tax.