ABP’s approach to responsible tax

This article is part of our recent publication, Tax: An Investor Guide.

Astrid Durgaram is Expert Advisor Legal and Tax at Stichting Pensioenfonds ABP, where she advises on legal and tax matters regarding asset management, third-party agreements, and financial regulations. She contributed to the development of ABP’s Tax Principles, which describe ABP’s approach to responsible tax.

Why is tax an important topic to ABP?

ABP wants to build people a good pension in a livable and sustainable world. This principle forms the foundation for our pension administration, management, and investment activities. For us, this also includes responsible tax behaviour, since this aligns with the broader goals of responsible investing to promote not only good governance, but also social and environmental sustainability. Taxes contribute to healthy public finances and a stable society, where social services are readily available and where people feel connected to each other and society. By responsibly managing taxes, we can contribute to a livable world where our participants can enjoy their retirement.

Understanding and managing tax implications allows investors to optimise after-tax returns and comply with legal requirements to avoid potential penalties. This not only protects their investments but also supports the integrity of the financial markets. Moreover, policymakers increasingly use taxation as a tool to achieve sustainability goals, by subsidising sustainable behaviours and taxing non-sustainable ones. These taxes and subsidies impact the companies in which ABP invests. Considering responsible tax behaviour therefore allows us to better assess tax risks, while at the same time contributing to the stability of the global financial system and a sustainable society.

How did ABP approach developing its Tax Principles?

Our primary objective was to ensure that our tax practices align with our broader investment principles, which include considerations of risk, return, costs, and sustainability. To achieve this, we undertook a comprehensive process that involved several key steps:

1. Integration with investment processes: We integrated our Tax Principles into APG’s alternative investments process. This involved performing a tax technical analysis to assess the returns, risks, and costs from a tax perspective. We translated our Tax Principles into specific tax criteria, which are assessed using a tax criteria checklist (TCC) prior to making any investment.
2. Compliance and transparency: We have ensured that our Tax Principles comply with relevant tax laws and regulations, and are committed to being transparent about our tax practices. This includes public reporting on key business, financial, and tax information for each tax jurisdiction where we operate.
3. Collaboration and engagement: We collaborate with international organisations that promote responsible tax behaviour and engage with companies in which we invest to encourage them to adopt responsible tax practices.
4. Continuous improvement: We continuously review and update our Tax Principles to ensure they remain relevant and effective. This involves regular assessments and adjustments based on feedback and changes in the regulatory environment.

We apply our Tax Principles to all our investments and actively engage with the companies in which we invest about responsible tax behaviour through our pension administrator, APG. Our engagements are based on our Socially Responsible Investing (SRI) policy and we inform companies about our ambitions and objectives and assess their compliance with our standards.

What are some criteria ABP considers when assessing an investee company’s tax practices to mitigate tax risks?

We monitor all our investments on their compliance with our Tax Principles and fiscal policy. For our capital market investments, we monitor their compliance based on three core criteria:

• The presence of a publicly available tax policy, strategy, and principles through which they indicate their approach to taxation;
• The presence of public tax reporting in which they disclose key business, financial, and tax information for each essential tax jurisdiction;
• Their effective tax rate being at least 15%, or if it is below 15%, the company is to report on the causes for its low ETR and its commitment to paying fair tax (at least 15%) going forward.

If we determine that investee companies are non-compliant with these three criteria, we actively engage them through our Engagement, Focussed Engagement, and Risk Engagement frameworks.  

How do you move beyond the risk perspective as an investor to make a positive impact on investee’s tax practices?

By positively engaging with investees on their tax practices, highlighting best practices of companies that comply with international best practice standards for good corporate governance, and showing how responsible fiscal behaviour can generate long-term value. Moreover, we hold those who practice irresponsible fiscal behaviour accountable through our voting practices. We make voting decisions based on the specific context and markets in which a company operates, such as provisions in national codes of good governance and local laws and regulations.

The Tax Principles emphasise collaboration; how do you work together with other investors, organisations, or tax authorities on tax?

We promote responsible tax behaviour on both a national as well as a global level through cooperating with other reputable and responsible (institutional) investors. In 2019, we took the initiative to start a structured dialogue with other major institutional investors on the importance of responsible tax behaviour. This “tax platform” is still active today. We discuss effective criteria that can be used for assessing investee companies in our investment portfolios, best practices, lessons learned, and the use of tax reporting standards within our own organisations.

In addition, we collaborate transparently with regulators and lawmakers. Often, the perspective of global institutional investors can provide helpful insights to lawmakers and regulators on the effectiveness of policies. When lawmakers, for example, organise public consultations on relevant new legislation, we aim to provide our input in order to contribute to sustainable and adequate legislation.

Have you seen changes over the years when it comes to responsible tax?

Among our investee companies, we have seen a growing awareness and adoption of responsible tax practices. Initially, there was a lack of common understanding of what responsible tax behaviour entailed. However, through our engagement efforts and the evolving regulatory landscape, more companies are now recognising the importance of tax transparency and ethical tax practices. This shift is evident in the increased disclosure of tax-related information and the adoption of practices that align with global standards such as the GRI 207 tax standard.

What are some key things that could still be improved in the future?

There is still a gap when it comes to the availability of public data on tax at the level of our investee companies. This makes it a challenge in practice for a global investor such as ABP to effectively assess investee companies in our global investment portfolio against the same criteria. Often data is not available, the data is fragmented, or the way data is reported differs significantly among the listed companies that we invest in. We would, therefore, highly welcome a harmonised global reporting standard on tax criteria. We are committed to moving this topic forward on a global level in collaboration with policy-setting organisations, such as the OECD.