The 2022 proxy season is underway, and it is chaotic. At Shell PLC’s recent annual general meeting, climate protestors bombarded the room, reportedly gluing themselves to seats, forcing company Chair Andrew Mackenzie to delay the meeting until they were all cleared out.
At Twitter, the specter of Elon Musk’s pending $44 billion takeover hung over the company’s annual general meeting as investors and the public continue to question what it will mean if Musk, one of the world’s most mercurial billionaires, controls this free speech platform.
At the same time, one of Twitter’s largest institutional investors, the New York State Common Retirement Fund, announced it would vote against all of the company’s directors and urge other shareholders to do the same in protest against growing violence on the social media site.
Meanwhile, Amazon stared down a record 15 shareholder proposals in the lead-up to its May 25 annual general meeting. Shareholders wanted transparency on issues like the company’s gender and racial pay gap, its charitable donations, and how its retirement plan options align with its climate action goals.
Amazon also had the honor this year of being the only company to receive a tax transparency proposal, according to the U.N. Principles for Responsible Investment’s environmental, social, and governance resolution database. The proposal, filed by two institutional investors, would compel the company to release public country-by-country tax reports and share insights into its tax payments.
It was initially viewed as a long shot because investors have tried and failed over the years to push tax transparency proposals on major companies. Amazon relied on that history when it asked the SEC for permission to ignore the proposal, offering a convincing case by listing several tax proposals that the SEC has deemed excludable over the years.
Despite the history, the SEC wasn’t moved by Amazon’s arguments; it denied the company’s request. We don’t know the SEC’s reasoning because it didn’t offer any explanation in its one-page response to Amazon.
But for investors, the reasoning may be less important than the fact that the SEC determined that the proposal was worthy of a vote. This could clear the path for investors at other companies to do the same.
Pensions & Investment Research Consultants Ltd. (PIRC) and the Centre for International Corporate Tax Accountability and Research, which supported the proposal, have signaled that they plan to support similar bids at other companies.
On May 25, Amazon’s shareholders rejected all 15 proposals at the annual meeting, but it would be wrong to call the tax proposal a failure.
Rather, the experience presents an opportunity for tax-minded shareholders to tighten their strategy moving forward and be clearer about the tax information they want, why it is material to their investment decisions, and why it is important for companies (that claim the information is privileged) to publicly release it.
Amazon Shareholder Proposal
Two years ago, before becoming president, Joe Biden infamously singled out Amazon, telling CNBC that the company “should start paying their taxes.” By that time, Amazon was well accustomed to scrutiny of its tax affairs, having endured a yearslong EU state aid investigation into a tax ruling between the company and Luxembourg.
Shareholders were also eyeing Amazon; in 2019 U.K. institutional investors representing the Methodist Church and the Church of England vowed to vote against the chairs of major corporations like Amazon, Exxon Mobil Corp., and others if they bottomed out on tax transparency ratings.
Meanwhile, taxing authorities in a few countries were after Amazon. Notably, French tax authorities settled a €200 million tax claim in 2018, and in 2017 Amazon agreed to pay €100 million to settle a tax dispute with the Italian Revenue Agency.
All these developments culminated in something that’s still uncommon in the corporate governance world: a shareholder resolution filed by the Oblate International Pastoral Investment Trust and the U.K.-based Greater Manchester Pension Fund compelling Amazon to publicly detail its tax activity.
The shareholders want Amazon’s board to release a tax transparency report for shareholders prepared under the Global Reporting Initiative’s 207 tax standard (GRI 207). That standard contains four parts.
The first, disclosure 207-1, asks for the organization’s approach to tax. Participants must:
- share whether they have a tax strategy;
- link to it if it is publicly available;
- describe who is internally responsible for reviewing and approving the strategy;
- share their approach to regulatory compliance; and
- discuss how their tax strategy ties into their overall business and sustainable development strategies.
The second, disclosure 207-2, seeks information about the organization’s tax governance, control, and risk management. Organizations must:
- disclose who is internally responsible for ensuring compliance and share how they evaluate compliance;
- discuss their approach to identifying, monitoring, and managing tax risks; and
- explain how their approach to tax is embedded within their organization.
GRI 207 also asks organizations to describe their reporting mechanisms and their disclosure assurance process.
The next disclosure, 207-3, concerns stakeholder engagement and management of tax concerns and asks organizations to describe their:
- approach to public tax policy advocacy;
- strategy for engaging with tax authorities; and
- procedure for addressing feedback.
The fourth, 207-4, is the heart of the standard: CbC reporting. Organizations must reveal all jurisdictions in which they are tax resident and share specific pieces of information for each jurisdiction, including:
- number of employees;
- corporate income tax paid on a cash basis;
- corporate income tax accrued on a profit/loss basis;
- revenues from intragroup transactions involving other jurisdictions; and
- revenue from third-party sales.
Why do the investors want GRI 207? They argue that Amazon’s tax activity is too opaque for their comfort in light of the investigations and scrutiny the company has received over the years.
“Currently, Amazon does not disclose revenues, profits or tax payments in non-U.S. markets, challenging investors’ ability to evaluate the risks to our company of taxation reforms, or whether Amazon is engaged in responsible tax practices that ensure long term value creation for the company and the communities in which it operates,” the shareholders said in an explanation.
They also argue that the disclosures are eminently doable. First, Amazon is already reporting the requested CbC data to taxing authorities under the OECD’s base erosion and profit-shifting action 13 standard, albeit privately. Second, other multinationals are already reporting under GRI 207, including Phillips, Allianz SE, and BP.
SEC No-Action Request
In its no-action request to the SEC, Amazon argued that the proposal should be excluded from this year’s proxy because decisions on tax law and policy relate to the company’s ordinary business operations. Rule 14a-8(i)(7) of the Securities Exchange Act of 1934 allows companies to exclude shareholder proposals that relate to ordinary business operations.
The company’s argument essentially hinged on two issues. First, Amazon is subject to complex tax rules and regulations all around the world that are intricately tied to the company’s day-to-day operations; and second, the regulatory and legal maze is too intricate for investors to follow.
“Assessing and addressing these and similar tax-related issues requires an intimate knowledge of complex tax rules and practices along with detailed operational business plans, forecasts, and other competitively sensitive business plans, all of which are more appropriately left to day-to-day management,” Amazon said.
In support of its argument, Amazon listed a slew of other tax transparency proposals that the SEC had ruled excludable at other companies, including Home Depot, the TJX Companies Inc., Walmart, and several earlier proposals targeting Amazon itself. Those proposals generally had sought information on whether and how the companies’ actions to minimize various U.S. taxes had created business risks.
But this time around, the SEC was not persuaded. “In our view, the proposal transcends ordinary business matters,” it said.
What has changed between now and then? Well, the SEC is now more likely to allow shareholder proposals that involve significant social policy issues.
In November it said it would evaluate proposals based on their broader societal effect instead of its earlier company-specific approach. Although the SEC didn’t provide an explanation in Amazon’s case, a few possibilities come to mind. The EU has embraced tax transparency and is preparing to launch public CbC reporting in 2024.
In the United States, lawmakers are increasingly focused on corporate tax transparency, including Sen. Chris Van Hollen, D-Md., and Rep. Cynthia Axne, D-Iowa. The duo have become dominant transparency voices in Congress and are among 33 senators and representatives who wrote the OECD in 2020 requesting public CbC disclosures. They’ve also introduced public CbC reporting legislation, including the Disclosure of Tax Havens and Offshoring Act, which would amend the Securities Exchange Act of 1934 to require public CbC financial reports.
Also, public pressure and scrutiny keeps mounting in ways it hadn’t before. About a month before the SEC issued its decision, over 100 asset owners and management groups, including 24 Amazon investors, told the SEC in a letter that they support the tax transparency proposal.
Who Should Control the Narrative?
In the lead-up to its annual meeting, Amazon said the information sought in the proposal is not “useful or informative” for shareholders, which begs the question: What qualifies as useful information, and should Amazon or its shareholders make the determination?
Here is what Amazon thinks investors need to know. In its proxy statement, it said that it is paying taxes — in fact, billions of dollars in the United States and internationally — and publicly reports many of those figures in its annual and quarterly reports to the SEC and international regulators.
Over the past few years, Amazon has publicly disclosed some of its tax payments in the United States, United Kingdom, and other select countries via so-called total tax contribution reports. These provide a high-level overview of the company’s payments on items like employer payroll, customs duties, and indirect taxes.
Amazon says the information it already provides is sufficient for two reasons:
- it is more detailed than what other U.S. companies provide; and
- the company is concerned that CbC income tax disclosures like those in GRI 207 fail to capture a business’s entire tax story, including the investments and jobs it creates through tax incentives.
“Providing disclosure solely on our rate of income tax distorts the other significant tax contributions we make such as property taxes, payroll taxes, taxes on gross receipts, and the many other taxes we pay in the communities in which we operate,” Amazon said.
These are interesting arguments considering that Amazon will have to release CbC tax data in the EU. If public CbC reporting is good enough for the EU, why isn’t it good enough for the other jurisdictions in which Amazon operates? The company thinks that GRI’s standard is too probing and could require it to share commercially sensitive information about its operations and cost structures.
“This type of disclosure would require us to provide additional granular data that is neither useful nor informative to our investors,” Amazon said.
The company’s argument is one that the business community has made for years. Rather than implement public CbC reporting, businesses want their tax activity to be measured through total tax paid.
In 2020 the International Business Council, in collaboration with Deloitte, EY, KPMG, and PwC, stepped into the debate with its own guidance for reporting total tax paid.
Under that guidance, total tax paid measures a company’s full tax activity, including corporate income tax, property tax, noncreditable VAT and other sales tax payments, employer-paid payroll taxes, and other taxes that constitute costs to the company.
Why total tax paid? The International Business Council says it is a more realistic and “balanced” metric because it accounts for the fact that different governments rely on different tax mixes, and different business lines shoulder different types of tax mixes. Multinationals want to get away from the public narrative that business taxation is just corporate tax.
Proxy Advisers Weigh In
In some ways, the shareholder proposal at Amazon could be seen as a mini-referendum on whether public CbC reporting or total tax contribution reports are more persuasive and more helpful to investors.
What did some proxy advisers have to say about this? Glass, Lewis & Co., Institutional Shareholder Services Inc., and Institutional Shareholder Services’ Sustainability Advisory Services all evaluated the proposal.
Two of the three reports supported it. Glass Lewis, which favored the proposal, said that increased transparency could help Amazon mitigate regulatory and reputational risks.
“We recognize that issues of tax avoidance can be extremely controversial and have received increasing attention from governments and regulators. As a result, we believe a best effort should be made by companies to manage this issue in way that considers all stakeholders,” the adviser said.
Amazon’s tax contribution reports are a start, but GRI 207 reporting would give shareholders even more information, Glass Lewis said. The fact that Amazon will also have to start reporting information in the EU tipped the scales in favor of the proposal.
The Institutional Shareholder Services’ Sustainability Advisory Services, which also supported the proposal, noted that Amazon will likely soon start making CbC reports in the EU, so it would make sense for it to report under GRI 207 so it can address investor demands on a global scale.
Institutional Shareholder Services, which advised against the proposal, said Amazon’s total tax contribution reports are sufficient. It also suggested the proposal is premature, considering that GRI 207 just went into effect in 2021 and is not yet commonly used in the United States or among the company’s peers.
Investors Weigh In
In the meantime, PIRC and a few others are sharing the metrics they think are useful, and there’s room for more stakeholders to weigh in with their priorities. This is especially true in the United States, where PIRC noted that asset managers are typically silent on tax expectations, unlike their European counterparts.
In May PIRC released a tax brief with voting recommendations for asset owners and managers. Those recommendations are based, in part, on voting guidelines, public policies, and stewardship reports of 33 asset owners and managers of funds around the world that actively engage on tax matters.
Some of the main things they want to see are companies:
- treating tax strategy and practices as the responsibility of the board;
- publishing a tax policy and a tax governance framework based on GRI 207-1 and
- GRI 207-2;
- aligning tax policy with business and sustainability strategies; and
- publishing CbC reports, among other suggestions.
When it comes to voting, they advise shareholders to vote for proposals seeking things like tax policy-related disclosures and public CbC disclosures. Shareholders should vote against management proposals to reincorporate in another jurisdiction if the move appears primarily to be motivated by aggressive tax planning.
Shareholders should vote against financial statements that lack public CbC disclosures, and they should scrutinize auditors and vote against members of an audit committee if there is no evidence of corporate tax management.
These are similar to the metrics that Norway’s sovereign wealth fund, Norges Bank Investment Management, uses when it scrutinizes companies:
- taxes should be paid where economic value is generated;
- company tax arrangements are a board responsibility; and
- public CbC reporting is a core element of transparent corporate tax disclosure.
At the time this article was written, Amazon had yet to release additional details about the shareholder vote tally. But the bottom line is that we are in a new world.
Between the launch of GRI 207, the SEC’s shareholder-friendly review standard, and the placement of a tax transparency proposal at Amazon, it is not far-fetched to expect similar proposals at other companies in the future and more debate about total tax contributions vs. public CbC reporting.