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«TRANSPARENCY BENCHMARK 2016 TA X T R A N S PA R E N C Y B E N C H M A R K 2 0 1 6 A c o m p a r a t i v e s t u d y o f 6 8 D u t c h l i s t e d c o ...»

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TAX

A comparative study of 68 Dutch listed companies

TRANSPARENCY

BENCHMARK 2016

TA X T R A N S PA R E N C Y B E N C H M A R K 2 0 1 6 A c o m p a r a t i v e s t u d y o f 6 8 D u t c h l i s t e d c o m p a n i e s

Tax Transparency Benchmark 2016

A comparative study of 68 Dutch listed companies

Authors:

Rudy Verstappen (VBDO), Marit van den Akker and Leonie Kamp (PwC)

Input and support:

Vicky van Heck, Frank Wagemans (VBDO), Eelco van der Enden, Dave Reubzaet and Manon van Aalst (PwC)

For information:

Please contact Sigi Simons, PR and Communications VBDO (sigi.simons@vbdo.nl) Dutch Association of Investors for Sustainable Development (VBDO) Utrecht, the Netherlands October 2016

This report has been made possible thanks to the contribution of:

PwC the Netherlands This publication was exclusively prepared as a general guideline for relevant issues, and should not be interpreted as professional advice. You should not act on the basis of the information contained in this publication without obtaining further professional advice. No explicit or implicit statement is made or guarantee offered in respect of the correctness or completeness of the information contained in this publication and, insofar as permitted by law, PricewaterhouseCoopers Belastingadviseurs N.V. and the Dutch Association of Investors for Sustainable Development (VDBO), its employees and representatives accept no liability whatsoever for the consequences of any action or omission made by yourself or any other person on the basis of the information contained in this publication or for any decision based on that information.

© 2016 PricewaterhouseCoopers Belastingadviseurs N.V. (KvK 34180284) and VBDO (KvK 40538966). All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details.

The contents, conclusions and recommendations of the report are the sole responsibility of the VBDO.

TA X T R A N S PA R E N C Y B E N C H M A R K 2 0 1 6 A c o m p a r a t i v e s t u d y o f 6 8 D u t c h l i s t e d c o m p a n i e s TA X T R A N S PA R E N C Y B E N C H M A R K 2 0 1 6 A c o m p a r a t i v e s t u d y o f 6 8 D u t c h l i s t e d

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When companies do not pay their taxes where they actually add value to economies, it becomes increasingly difficult to sustain the favourable environments which attracted them to do business there in the first place. Furthermore, the growing public perception that multinational companies are allowed to determine where and how much taxes they pay, threatens to undermine the credibility of both the tax system and the principle of fair competition. In short, it looks like the debate about ‘good tax governance’ and ‘paying your fair share in taxes’ is here to stay.

TA X T R A N S PA R E N C Y B E N C H M A R K 2 0 1 6 A c o m p a r a t i v e s t u d y o f 6 8 D u t c h l i s t e d c o m p a n i e s The Tax Transparency Benchmark aims to contribute to this debate by presenting a clear picture of the state of socially responsible tax governance by multinational companies listed in the Netherlands. As a general trend it can be concluded that the companies in scope are becoming increasingly transparent on tax. Nevertheless, still more than one third of the examined companies ranks in the lowest transparency bracket, demonstrating that a lot of work remains to be done.

From a strategic perspective, multinational companies need to see taxes not merely as a ‘technical’ matter but as part of the wider business picture, more specifically, as part of the role they have to play as corporate citizens. Not only because the growing public outcry indicates that tax behaviour has emerged as a serious reputational risk - ‘if a company is not transparent about its taxes, it must have something to hide’ - but also because creating shared value for both company and society is the only sustainable way to do business.

By including tax behaviour in corporate social responsibility strategies and being transparent about profits and tax remittances, multinational companies can demonstrate their commitment to fair distribution of tax revenue in the global economy. Fair distribution of tax revenues is a key factor in fostering the business climate and economic growth that both multinational companies and societies need to thrive.

Transparency is the first requirement for an informed and constructive dialogue on fair taxation by multinational companies. I trust this second edition of VBDO’s Tax Transparency Benchmark will make a meaningful contribution to meeting that requirement.

Angélique Laskewitz Executive Director VBDO

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Executive Summary In this report we share the results of the second Tax Transparency Benchmark. The study ranks 68 Dutch multinational companies on the transparency that they provide regarding their responsible tax strategy and its implementation. The methodology of this benchmark is based on the six Good Tax Governance principles, which were published in 2014 by the VBDO and Oikos.

(VBDO & Oikos, 2014)

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An independent jury has named DSM as the winner of the Tax Transparency Award 2016 and acknowledged the improvement of NN Group, BinckBank and Vastned on the Tax Transparency Benchmark 2016.

Our research has included discussions with multinational companies, governments, NGOs, tax

advisory firms and investors. Based on this, we are able to offer the following recommendations:

To multinational companies Governance

• Organise a proactive dialogue about your tax strategy, with the different stakeholders, such as investors, NGOs, trade unions, governments and clients, and ensure that this is an ongoing process.

• Keep the Executive Board up to date and share knowledge about the tax strategy.

• Incorporate your tax and CSR strategy in the decision-making processes.

–  –  –

Implementation

• Based on the tax strategy, create tax criteria that are implementable (design them in a way that you can actually work with them in your daily operations).

• Implement, execute and monitor the tax strategy and criteria in the company’s business operations and include KPIs for the tax department.

• Raise awareness around tax and the strategy, by organising training and communication programmes on an ongoing basis.

• Provide comfort to stakeholders on the execution of the tax strategy (including risk management) by communicating in a clear way via publicly available documentation.

Accountability

• Consider reporting on your corporate income taxes and other taxes, such as VAT, wage taxes and withholding taxes, on a country-by-country basis. Give a more complete picture by including information on revenues, profits, assets and FTEs on the same basis.

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To tax authorities

• Increase the transparency of compliance management strategies and accountability on tax affairs with companies.

• Be transparent about how rules are applied.

To NGOs

• Create an open and constructive dialogue with companies and focus on encouraging them to change. Differentiate in approach for the leaders and the laggards.

• Provide companies with best practices regarding responsible and transparent tax behaviour.

• Do not only focus on multinationals and tax advisors but also on tax administrations.

• Enter into dialogue with governments to promote transparency.

–  –  –

To investors

• Design and implement a tax strategy (with criteria) that applies to a) your own organisation,

b) your investments and c) how you structure your investments.

• Integrate tax in the valuation of investee companies by including it in investment and ESG policies. Collaborate with stakeholders to develop common standards.

• Enter into a dialogue with portfolio companies on the public and political debate on responsible and transparent tax behaviour.

–  –  –

1 Introduction

Tax is vital to society and by paying taxes companies contribute to society. However, some companies perceive taxes only as a cost. According to the European Commission, these companies use aggressive tax planning strategies to minimise their tax burden. By exploiting loopholes in tax systems and mismatches between national rules, they reduce their tax bill (European Commission, 2016).

This undermines the credibility of the tax system. In general, people want the tax burden to be shared fairly amongst taxpayers. However, this is not the case if some companies and citizens have to carry a disproportionate share of the tax burden. This undermines the ethical and voluntary compliance by all taxpayers (OECD, 2013). In recent years, there has been a large public outcry regarding companies that use aggressive tax planning strategies. This was fuelled by revelations from Luxleaks in 2014, Swissleaks in 2015 and the Panama Papers and Bahama Papers in 2016. The investigations by the European Commission on illegal state aid to Starbucks, Apple and others are still fresh in our minds.

The Panama Papers ‘The Panama Papers’ refer to the exposure of documents from the internal administration of a Panama-based law firm, Mossack Fonseca. This company sets up offshore companies for clients in locations where their assets are limitedly taxed (International Consortium of Investigative Journalists, 2016). Not all activities uncovered in the Panama Papers were illegal and even though the journalists who broke the news had a relatively nuanced stance, all companies mentioned in the Panama Papers seemed to be perceived as ‘guilty’ by the general public.

The Panama Papers resulted in the resignation of the prime minister of Iceland and officials in different countries, indicating that they were beginning investigations into possible malfeasance, from money laundering to tax evasion (New York Times, 2016).

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Furthermore, companies that evade or avoid taxes can gain a competitive advantage over companies that pay their taxes. It therefore undermines fair competition between businesses (European Commission, 2016).

Finally, aggressive tax strategies reduce government revenues, which are used to provide society with public services. A study commissioned by the European Parliamentary Research Service claimed that the revenue loss amounted to EUR 50 – 70 billion (17 – 23%) of corporate income tax (CIT) revenue in 2013 (European Commission, 2016). According to the OECD/G20 BEPS report, an empirical analysis estimates that the scale of global CIT revenue losses could be between USD 100 and 240 billion annually at 2014 levels (OECD, 2015).

Guiding principles for Good Tax Governance In 2014, the VBDO and Oikos published a report entitled ‘Good Tax Governance in Transition’. The intention of the report was to create awareness of good tax governance. Good tax governance aims to take the interests of all stakeholders into account when drafting and implementing the company’s tax strategy, rather than simply minimizing the corporate tax burden by all means within the boundaries of the law. The report provides a set of guiding principles, which were developed with the intention of helping to create a common understanding and language on what good tax governance

could be. The good tax governance principles are as follows (VBDO & Oikos, 2014):

A. Define and communicate a clear tax strategy B. Tax must be aligned with the business and is not a profit centre by itself C. Respect the spirit of the law. Tax compliant behaviour is the norm D. Know and manage tax risks E. Monitor and test tax controls F. Provide tax assurance Following the introduction of the Good Tax Governance Principles, the VBDO published the first edition of the Tax Transparency Benchmark in collaboration with PwC in 2015 (VBDO, 2015). The aim was to benchmark 64 Dutch listed companies on their level of transparency on tax, based on the publicly available documentation of 2014. The methodology was based on the six guiding principles for good tax governance. For the overall ranking of the Tax Transparency Benchmark 2015, refer to the overall ranking on page 8.

TA X T R A N S PA R E N C Y B E N C H M A R K 2 0 1 6 A c o m p a r a t i v e s t u d y o f 6 8 D u t c h l i s t e d c o m p a n i e s VBDO asks questions on tax transparency to stock-listed companies Each year the VBDO attends the Annual General Meeting (AGM) of the largest Dutch companies. Good tax governance and tax transparency have been one of the three focus themes in the period 2013 The VBDO asks companies whether they are willing to adopt the good tax governance principles.

The impact of addressing this theme for the fourth year is high; 29 out of 37 analysed companies (78%) have a responsible tax policy in place to which they comply, going beyond national and international regulations. If exactly the same companies are compared to those of last years, this percentage increases to 90%, compared to a mere 13% in 2013.

Nevertheless, the number of companies that report on a country-by-country basis as well as on their total tax rate is still lagging behind. Adopting country-by-country reporting seems to be a smaller step to firms with a local (Dutch) scope of activities (e.g. Sligro). However, most multinational companies are concerned that country-by-country reporting will reveal competition-sensitive information. In addition, they argue that they lack precedents of comparable companies with country-by-country reports. It appears that the main driver for companies to start country-by-country reporting would be a mandatory requirement (e.g. enforced by legislation). The awareness and relevance of reporting a total tax rate in their annual reports still need to be emphasized further for most of the analysed companies.



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