Nordea Asset ManagementResponsible corporate tax practices

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March 2014.

Responsible corporate tax practices Thematic Report Nordea Asset Management 2014.

MISSION

Nordea Asset Management’s commitment to Responsible Investment was formalized in 2007, when Nordea Asset

Management among the first Nordic banks signed the Principles for Responsible Investments. It is Nordea Asset Management mission to create

Returns with responsibility.

This is achieved through analysis, dialogue and engagements in selected companies and integration of key environmental, social and governance issues into

our investment processes.

TABLE OF CONTENTS

Background 3

Nordea Asset Management signatory to EITI 3

Tax issues at a glance 4

Business case for Responsible tax practices 5

Present situation among researched companies 7

Transfer pricing and loans 8

Conclusions 9

Summary impact on Nordea Asset Management practices 11

APPENDIX: SOURCES

NORDEA ASSET MANAGEMENT SIGNATORY TO EITI

Nordea Asset Management is a signatory to the Extractive Industries Transparency Initiative (EITI). This initiative calls on governments to publish financial statements disclosing the payments received by them through taxes, royalties and other charges and payments from mining companies and companies in the oil and gas industries. The companies are expected to disclose the payments made by them to governments.

In addition, Nordea Asset Management is a signatory to a large number of responsible investment initiatives that indirectly address tax issues.

BACKGROUND ON THIS PAPER l The purpose of this paper is to research corporate tax practices in terms of companies’ policies, strategies, manage-ment practices and transparency. The conclusions in the paper are meant to provide guidance for us as an investor as well as recommendations to companies.

The conclusions are based on Nordea Asset Management’s internal research which has included a number of meetings with tax experts, NGOs and company representatives.

BACKGROUND

3 RESPONSIBLE CORPORATE TAX PRACTICES

TAX ISSUES AT A GLANCE l Recent years’ weak economic development has put pressure on many governments and increased their need to generate tax revenues. Along with this companies’ tax practices have come under scrutiny in the public debate raising risks associated with aggressive tax planning practices.

Multi-national companies (MNCs) have the legal right to minimize their tax burden by for example utilizing specialised economic zones (SEZs) or by shifting their profi ts to jurisdictions known as low-tax jurisdictions.

According to the OECD there are several studies indicating that there is an increasing segregation between the location where companies’ business activity takes place and the locations where profi ts are reported and taxes are paid.

This is likely not only a result of increasingly complex corporate tax structured but also due to globalization in general.

Even though a majority of companies’ tax schemes comply with laws and regulations they can still be aggressive and perceived as irresponsible by stakeholders. Aggressive corporate tax structures lead to several problems, such as an uneven playing fi eld between MNCs and local businesses, while also undermining national development by eroding countries’ tax bases.

The latter is crucial for successful state-building, especially in developing markets; furthermore, taxation is known to render such countries more independent as it reduces their reliance on aid and foreign loans.

RESPONSIBLE CORPORATE TAX PRACTICES 4

RESULTS FROM OUR STUDY

5 RESPONSIBLE CORPORATE TAX PRACTICES

BUSINESS CASE FOR RESPONSIBLE TAX

PRACTICES l There are apparent reputational risks associated with aggressive tax practices. In recent years, global media has reported several cases of corporate tax avoidance which has increased public awareness of the issue. For example Starbucks has been covered in several media stories due to its tax avoidance strategy which has led to boycotts as well as parliamentary hearings in the UK.

As a result, Starbucks announced that it would not claim certain legal deductions in 2013 and 2014 which means that the company will “voluntarily” raise its UK tax payments by GBP 10 million per year.

A modern way of doing business goes beyond delivering returns to shareholders; consideration is also paid to the impact businesses have on the environment and communities in which they operate. By paying taxes companies contribute to for example the development of health care systems, schools and the local infrastructure.

Tax avoidance, especially in developing countries where the need for funding is often acute, may erode peoples’ trust in the companies and in turn damage their local community relations and, possibly, in the long-term, their license to operate.

RESPONSIBLE CORPORATE TAX PRACTICES 6

There are also direct fi nancial risks associated with aggressive tax practices as it increases the likelihood of a tax audit, which can lead to an increased tax liability. The Convention on Mutual Administrative Assistance in Tax Matters, developed already in 1988 and amended in 2010, is a multilateral cooperation open to all countries, which aims to tackle tax evasion and avoidance.

Currently over 60 countries have signed the Convention, representing a wide range of coun-tries, including all G20 countries, almost all OECD countries, major financial centres and a growing number of developing countries.

Hence, while tax avoidance could be profi table in the short term, in the long term it can infl ict ´considerable damage on a company’s reputation, along with its relationship with tax authorities and local communities.

7 RESPONSIBLE CORPORATE TAX PRACTICES

PRESENT SITUATION AMONG RESEARCHED

COMPANIES l In our meetings with companies we have addressed questions related to their corporate tax policy, strategy, management and transparency.

A majority of the companies have a tax policy, but none of them have published it externally.

In general, the companies demonstrate a low level of transparency both on a policy and management system level.

There are several reasons for this; one being that companies, generally, have not had a dialogue with external stakeholder on the topic as the latter has paid little attention to the topic. Corporate tax practices used to be a subject reserved for tax administrators and specialists.

However, recently, politicians, economists and NGOs have realized the importance of companies’ tax payment, which puts new demands on compa-nies and how they communicate their tax practices.

Besides aspects related to transparency on a policy and strategy level there are on-going discussions about country-by-country reporting. In 2010, the US implemented the Dodd-Frank Act which requires extractive companies listed in the US to publish their payments on a country-by-country and project-by-project basis.

During 2013, the EU decided that all EU listed, and large non-listed, extractive companies and companies involved in logging of primary forests are obliged to publish their payments on a coun-try-by-country and project-by-project basis.

RESULTS FROM OUR STUDY

RESPONSIBLE CORPORATE TAX PRACTICES 8

EU member states now have until the summer of 2015 to implement the new guidelines.

Moreover, in early 2013, the OECD published an initial report on its activities related to base erosion and profit shifting (BEPS) which among other things address this type of reporting. During the production of this paper, the OECD is in a consultation phase related to a new guidance on transfer pricing and country-by-country reporting.

Most of the companies researched are open to country-by-country reporting, but for compe-titive reasons they do not wish to be front-runners and will likely not publish this type of information unless requested by regulators. We consider that this information could be relevant to publish, but - more importantly - companies would sub- sequently need to explain the data and its context. Otherwise, a risk arises that the data will be misinterpreted and misunderstood by the reader.

TRANSFER PRICING & LOANS l As part of our research we discussed with the companies how they work with transfer pricing and intercompany loans. In the media, transfer pricing is often used as a synonym to tax avoidance. This is obviously not correct; however, transfer pricing, as well as intercompany loans, can be misused by companies to shift profits to low-tax jurisdictions from countries where they would have been taxed at a higher rate. Given recent years’ weak economic development, governments have increased their efforts on corporate tax collection.

A majority of the companies acknowledge an increased reputational risk associated with aggressive tax planning. As a result, proactive companies have integrated aspects such as stakeholder opinion, brand implications and reputational risks as part of the tax planning decision process.

An aspect that these companies consider is, for example, how a specific tax structure would be perceived by external stakeholders, such as media and NGOs. This more comprehensive approach might facilitate a shift in how companies view taxes, from a value-eroding cost that needs to be minimized, to a constructive contribution to the societies in which they operate.

An integral part of all corporate tax policies is compliance with law, regulations and international guidelines. However, as with other corporate responsibility aspects, the legality of certain behaviour doesn’t automatically make it moral, ethical or responsible.

We believe it’s important to also view tax through the corporate responsibility lens, and thus go beyond legal compliance. In line with this, some companies have integrated into their tax policies that they will not employ aggressive tax planning.

9 RESPONSIBLE CORPORATE TAX PRACTICES

CONCLUSIONS l As a responsible investor, Nordea Asset Management seeks to invest in companies that manage all relevant corporate responsibility risks and opportunities adequately, here amongst tax practices. There is a clear reputational risk associated with aggressive tax planning, which is indicated both by our meetings with companies, NGOs and tax experts as well as recent years’ media coverage.

Tax transparency can also be viewed as an oppor-tunity to strengthen the brand as it demonstrates how the company contribute to the society.

We assess that aggressive tax planning can largely be tackled through improved corporate reporting and transparency. This would limit the ability of companies to work with aggressive tax planning and would allow for them to build greater trust with their stakeholders. However, action is needed not only by companies and investors, but also by governments and regulators.

We favour companies that have a responsible tax policy that is approved by its board. Companies should also have a tax strategy that explicitly considers brand- and reputational risks.

CONCLUSIONS

RESPONSIBLE CORPORATE TAX PRACTICES 10

In terms of transparency, we as a first step encourage companies to publish their tax policy and/or a statement reflecting their tax policy and strategy.

As mentioned the OECD, the G20, and the EU have all published plans calling to increase companies’ tax transparency in order to fi ght erosion in the tax base.

Countries that have proposed changes to close gaps include Germany, UK, Canada, Netherlands, Australia, Ireland, India and the US. Hence, from a regulatory and public perspective there is likely to come a push for increased transparency for all sectors.

11 RESPONSIBLE CORPORATE TAX PRACTICES

SUMMARY IMPACT ON NORDEA ASSET

MANAGEMENT’S PRACTICES l Conclusions presented in this paper will have an impact on Nordea Asset Management’s ownership and asset management practices.

The exact application varies across different funds and this paper provides background information for the different applications.

SUMMARY IMPACT

ASPECTS CONSIDERED IN OUR ANALYSIS FOR STARS FUNDS

• We will avoid investing in companies that do the most aggressive tax planning

• We will review companies tax policies, strategies and practices

• We will review how much taxes companies pay against their relevant peers

• We will review where companies’ legal entities are registered

• We will especially review if companies have legal entities registered in low-tax jurisdictions while having no or limited business in these jurisdictions while considering whether they have other legitimate reason to have presence there

RECOMMENDATIONS TO COMPANIES

• Companies shall have a tax policy which is approved by the board

• Companies shall integrate a taxation statement into the Code of Conduct/Code of Ethics/Sustainability policy

• Companies shall have a tax strategy which includes brand and reputational risks

• Companies shall publish their tax policy and/or a suitable statement reflecting the principles in the policy

• Companies shall have continuous dialogue on tax aspects with relevant stakeholder

RESPONSIBLE CORPORATE TAX PRACTICES 12

APPENDIX: SOURCES

Sustainalytics (2013) “It’s Time to Call For More Responsibility” Multi-National Corporations and Tax Transparency: Issues for Responsible Investors

ActionAid (2013) Tax responsibility an investor guide

ActionAid (2011) Addicted to tax havens, The secret life of the FTSE 100

SustainAbility (2006) Taxing issues Responsible business and tax

OECD (2013), Addressing Base Erosion and Profit Shifting, OECD Publishing http;//dx.doi.org/ 10.1787/9789264192744-en.

OECD (2011) “Tackling aggressive tax planning through improved transparency and disclosure” http://www.oecd.org/tax/exchange-of-tax-informa-tion/48322860.pdf

MSCI ESG Research (December 2013) “The Tax Gap in the MSCI World”

http://www.publishwhatyoupay.org/about/advo-cacy/country-country-reporting