Danish investors join forces in establishing a common framework for Responsible Tax behaviour

Joint Tax Code of Conduct

At the end of August 2019, a group of Danish pension funds (the Investors), published a joint Tax Code of Conduct with principles and recommendations for unlisted investments.

It set out how the Investors consider the external managers (the Managers) of investment structures should consider tax. The clear and articulated purpose of the joint Code is to strengthen the global focus on Responsible Tax behavior with the aim of preventing aggressive tax planning and promoting transparency in investment structures. These Investors state that the intention behind the principles is to provide pension savers with “more efficient and sustainable investments from a tax perspective”. They encourage Managers to consider tax planning to avoid double taxation and enhance the after tax return on investments, provide they only engage in “non-aggressive” tax planning.

Creating a global standard in tax

Numerous initiatives have been launched over the past few years to develop a set of common principles for Responsible Tax conduct and most recently also the Global Reporting Initiative has set out an ambition to create a global standard for disclosures of taxes and payments to governments. While many of the initiatives have been aimed at multinational enterprises (MNEs) (such as the B-team's "A New bar for Responsible Tax practice" and "Getting to Good" from Action Aid), the Principles for Responsible Investment (PRI) took the lead on the investor side and released an "Engagement guidance for corporate tax responsibility" in 2015.

To our knowledge, this is however the very first time that specific investors join forces and create their own set of expectations for external fund managers when it comes to tax. The investors link this initiative directly with the importance of tax as an integral measure in achieving the UN sustainable development goals (SDGs) as well as the need for a common framework for Responsible Tax behavior.

Five key areas of focus

The Investors touch upon a number of very relevant topics relating to the debate of Responsible Tax and in particular present their view on:

1. Aggressive tax planning - The investors do not accept aggressive tax planning and define this as exploitation of technicalities in a tax regime or as exploitation of inconsistencies between tax regimes in order to reduce a tax liability;

2. Acceptable tax planning - The investors give some indication of what they consider to be acceptable tax planning, such as;

• General use of holding companies
• General use of available double taxation treaties where the business substance justifies the use of a specific double taxation treaty
• General use of debt financing, and use of hybrid entities for non-aggressive tax planning

3. Restricted jurisdictions - The Investors encourage Managers to avoid investing in companies located in jurisdictions that are listed as not completing the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes peer review process or which have completed the process but are deemed “not compliant” at the time of the investment, or jurisdictions listed on the EU’s list of non-cooperative tax jurisdictions at the time of the investment.

4. Developing countries - The Investors encourage Managers to display caution when using shareholder loans as financing in developing countries and avoid the use of highly leveraged acquisition structures in jurisdictions without general interest limitation rules in line with OECD/US principles

5. Transparency - The Investors expect Managers to be transparent on their approach to tax and further expect Manager to engage cooperatively in dialogue with the Investors

Who is the code aimed at?

The Tax Code is aimed at external managers of investment funds, not specifically at publicly listed companies that Danish pension funds may invest in. But it is noteworthy that the Investors emphasis its purpose is to facilitate efficient and sustainable investments. Therefore they encourage “acceptable” tax planning while clearly considering that “aggressive” tax planning creates undue risk and instability.

The Code is not prescriptive and whether or not any particular tax planning could be described as aggressive may depend in many cases on the exact context and, to a certain extent, the eye of the beholder. Nevertheless, it is likely to increase transparency and to facilitate a productive conversation between the Investors and the Managers.