Eight years after setting out its five principles of tax responsibility, the Ethos Foundation is publishing a new version of its Engagement Paper, on the eve of the deadline for the first country-by-country tax reports required under European Union legislation. The new version sets higher standards for governance and transparency and also serves as an assessment tool: it will underpin a study of the 46 largest listed companies in Switzerland, to be published by the end of the year.
Since 2018, corporate tax responsibility has been a key focus of Ethos’ shareholder engagement with listed companies, alongside corporate governance, climate change, and digital responsibility. Aggressive tax planning poses a major reputational and financial risk to companies and, by extension, to their shareholders. Ethos therefore considers it part of investors’ fiduciary duty to require companies to pay their taxes where they operate and generate their profits.
To structure its dialogue with the governing bodies of listed companies, Ethos set out five principles of tax responsibility as early as 2018. Eight years on, Ethos is publishing an updated version of its Engagement Paper and requirements. It reflects changes in regulation, particularly at international level, developments in corporate practice, and the marked rise in social inequality.
The changes mainly concern the first two principles, which have been reworded. The first now links tax strategy to the company’s business and sustainability strategy. The second no longer stops at inclusion in the code of conduct: it also requires companies to publish their tax principles and to have rigorous, independent control mechanisms in place. These two updated principles complement the three existing ones: the company pays its taxes where economic value is generated (principle 3), intra-group transactions are carried out at arm’s length (principle 4), and the company discloses the taxes it pays on a country-by-country basis (principle 5).
In practice, Ethos expects companies to publish a group-wide tax policy and to designate explicitly the body responsible for it. Implementation should be entrusted to a member of executive management, and the link with sustainability objectives made explicit. Companies should also describe their approach to tax risk (identification, management, and monitoring) and the internal or external process for verifying their tax disclosures. Finally, where the first version merely stated a general principle, the new one sets the standard of the Organisation for Economic Co-operation and Development (OECD) as the reference for country-by-country reporting, together with a hierarchy of fallback options, by region or for the main countries in which the company operates. It also defines best practice beyond legal requirements: qualitative commentary, total tax contribution (taxes borne and collected), and the effective tax rate by jurisdiction, with an explanation of any variances.
Considerable room for improvement remains
“When the first version of our Engagement Paper was published, tax was still rarely seen as a topic in its own right in sustainable and responsible investment,” says Vincent Kaufmann, CEO of the Ethos Foundation. “Since then, the tax transparency and governance of many listed companies have certainly improved, driven by both shareholder dialogue and tighter regulation, but there is still considerable room for improvement.”
The other major change from the first version is that the Engagement Paper no longer simply sets out principles: it now also serves as a tool for assessing corporate practice. A new chapter translates each principle into an assessment grid of concrete questions to evaluate companies’ tax policies.
Ethos will use this grid to assess the practices of the 46 largest listed companies in Switzerland (SMI Expanded index) and will publish a study with a benchmark by the end of the year. In keeping with its approach, Ethos will also continue its constructive dialogue with listed companies on tax responsibility, encouraging them to go beyond minimum legal requirements.
