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Tax Strategy METHODOLOGY UPDATES CSA 2021 Tax Strategy OVERVIEW: As part of the methodology development process for the 2021 CSA, we have created new questions and updated existing ones to ensure we are capturing the most material sustainability topics. Please find below the new and updated questions for this criterion in 2021. The question texts and methodology presented may be subject to change at any time before the end of March 2021. In addition, questions may look different in the Online Assessment Tool in terms of question structure and layout. Please note that all questions may not be applicable to your industry so please carefully consult the Industries Impacted section. Introduction Criterion Rationale Tax competition between tax territories (countries or regions within countries) has left room for companies to optimize their tax spending. While tax optimization has a positive impact on profitability and hence company value, a too-aggressive tax strategy might not be sustainable in the mid- to long-term and adds some risk to long-term profits. First, there is a reputational risk because of increased public and regulatory scrutiny which could result in lower brand value. Second, the relationship with the host country may be negatively impacted. This could result in approval delays or rejection of expansion projects or, in the worst cases, companies risk losing their license to operate. Third, earnings might be impacted if the tax authorities decide to change tax regulation which leads to direct financial risks. Finally, economic development risk arises if governments receive inadequate tax receipts for funding local infrastructure or education. Reason for update There is an increasing demand for tax transparency from investors and other stakeholders, and regulatory bodies are considering further requirements for detailed public reporting on a country- by-country level. With the updates to our questions, we aim to obtain a better understanding of a future expectations in this area. Summary of changes 1. Updated question: Tax Strategy and Governance 2. Updated question: Tax Reporting 1. Updated Question1 Question: Tax Strategy and Governance INDUSTRIES IMPACTED: ALU Aluminum ITC Electronic Equipment, Instruments & ATX Auto Components Components AUT Automobiles LEG Leisure Equipment & Products and BNK Banks Consumer Electronics BTC Biotechnology LIF Life Sciences Tools & Services BVG Beverages MNX Metals & Mining CHM Chemicals MTC Health Care Equipment & Supplies CMT Communications Equipment OGR Oil & Gas Refining & Marketing CNO Casinos & Gaming OGX Oil & Gas Upstream & Integrated COL Coal & Consumable Fuels OIE Energy Equipment & Services COM Construction Materials PUB Media, Movies & Entertainment COS Personal Products REX Restaurants & Leisure Facilities CSV Diversified Consumer Services RTS Retailing CTR Containers & Packaging SEM Semiconductors & Semiconductor DHP Household Durables Equipment DRG Pharmaceuticals SOF Software FBN Diversified Financial Services and STL Steel Capital Markets TEX Textiles, Apparel & Luxury Goods FDR Food & Staples Retailing THQ Computers & Peripherals and Office FOA Food Products Electronics FRP Paper & Forest Products TLS Telecommunication Services HOU Household Products TOB Tobacco IMS Interactive Media, Services & Home TRT Hotels, Resorts & Cruise Lines Entertainment TSV IT services INS Insurance QUESTION RATIONALE Tax avoidance strategies are usually set up in a legally sound way. Therefore, general statements operation are not enough. Every company should be able to give a coherent justification of their approach to key tax issues such as the use of tax minimization techniques in line with their approach to other CSR issues. The adoption of a formal tax policy serves to guide company practices and provide investors, 1 Updates are included within a red frame which practices, and disclosures can be compared. An effective policy should be overseen by the board of directors, created in conjunction with relevant senior management, and regularly reviewed to ensure emerging risks are addressed. This question seeks to determine if there is a group-wide tax policy or strategy available in the public domain that addresses sensitive or high-risk tax issues in a clear and sustainable way. KEY DEFINITIONS Tax avoidance: Tax avoidance is an abuse of the tax system, a deliberate attempt to get out of an obligation to pay tax by entering into a set of artificial financial arrangements which have little or no commercial purpose other than the reduction of a tax bill. Tax avoidance is unethical in that it seeks to undermine tax law and public policy and it is frequently found to be unlawful. Tax avoidance can be within the letter, but not the spirit, of the law. (Source: TaxWatch) The spirit of the tax laws refers the intention of the policy maker who wrote the respective law. The letter of the law refers to the literal interpretation of the law only. A low tax jurisdiction, for the purpose of this question, is any jurisdiction with significantly lower tax rates than other jurisdictions in which the company operates. Tax structures without commercial substance are artificial structures that are not based on the economic activities and the value generation of a company, but only serve to reduce the tax bill. iple: This valuation principle is commonly applied to commercial and financial transactions between related companies. It says that transactions should be valued as if they had been carried out between unrelated parties, each acting in his own best interest. Tax havens are (offshore) countries or jurisdictions offering little or no tax liability. Tax havens may only share limited or no financial information with foreign tax authorities and may not require businesses to operate out their country to receive tax benefits. The board of directors: For the purpose of this question, this can refer to the board of directors, its sub-committees, or a single named director. The tax policy must be approved or signed by the respective board representative(s), and /or clearly state their involvement in the creation of the tax policy. General statements regarding the responsibilities of the board of directors or regular reporting to the board are not enough. DATA REQUIREMENTS While many companies have group-wide tax accounting policies with clearly defined roles and responsibilities within the organization in place, we specifically look for taxation policies that address issues such as responsible taxation, transparency, transfer pricing, etc., going beyond minimum legal tax disclosure requirements. REFERENCES GRI: 207-1, 207-2 are relevant for this question. QUESTION LAYOUT Requirement: The question requires publicly available information. Does your company have a publicly available and group-wide tax policy, strategy or principles in place which indicate your approach towards taxation? o Yes, we have a publicly available, group-wide tax policy covering the following elements. Please provide the relevant web link: Reference box (max. 3 allowed) A commitment to compliance with the letter as well as the spirit of the tax laws and regulations in the countries in which the company operates A commitment not to transfer value created to low tax jurisdictions A commitment not to use tax structures without commercial substance A commitment to undertake transfer prici A commitment not to use secrecy jurisdictions or so-called "tax havens avoidance An approval process of the tax policy by the board of directors o No, we do not have a publicly available and group-wide tax policy. o Not applicable. Please provide explanations in the comment box below. o Not known. 2. Updated Question2 Question: Tax Reporting INDUSTRIES IMPACTED: ALU Aluminum ITC Electronic Equipment, Instruments & ATX Auto Components Components AUT Automobiles LEG Leisure Equipment & Products and BNK Banks Consumer Electronics BTC Biotechnology LIF Life Sciences Tools & Services BVG Beverages MNX Metals & Mining CHM Chemicals MTC Health Care Equipment & Supplies CMT Communications Equipment OGR Oil & Gas Refining & Marketing CNO Casinos & Gaming OGX Oil & Gas Upstream & Integrated COL Coal & Consumable Fuels OIE Energy Equipment & Services COM Construction Materials PUB Media, Movies & Entertainment COS Personal Products REX Restaurants & Leisure Facilities CSV Diversified Consumer Services RTS Retailing CTR Containers & Packaging SEM Semiconductors & Semiconductor DHP Household Durables Equipment DRG Pharmaceuticals SOF Software FBN Diversified Financial Services and STL Steel Capital Markets TEX Textiles, Apparel & Luxury Goods FDR Food & Staples Retailing THQ Computers & Peripherals and Office FOA Food Products Electronics FRP Paper & Forest Products TLS Telecommunication Services HOU Household Products TOB Tobacco IMS Interactive Media, Services & Home TRT Hotels, Resorts & Cruise Lines Entertainment TSV IT services INS Insurance QUESTION RATIONALE Leading companies have realized that public reporting on their revenues, operating profits and tax on a country-by-country basis helps to build trust in their corporation and complements the reporting on their broader economic contribution. In combination with key information about the names and tax residence of all constituent entities, the main activities by tax jurisdiction as well as the average number of employees, these numbers help investors better understand a 2 Updates are included within a red frame rates in a given jurisdiction, pro-active companies can steer and facilitate the discussion about
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