NBIM wants companies to be transparent, but are not specific on which information they need as investors

Norwegian Bank Investment Management (NBIM) asked PWYP Norway for feedback in an Expectations document on taxes and transparency.

Norges Bank Investment Management (NBIM), or the Norwegian Oil Fund, as it is commonly called, presented NBIM`s Expectations document on taxes and transparency on April 7th.

PWYP Norway presented feedback on the Expectations document on taxes and transparency 

In connection with considering Meld. St. 23 Management of the State Pension Fund of 2015, Parliament agreed to "request that the government ask Norwegian Bank to consider developing an Expectations document concerning taxes for the companies they invest in."

In working with the Expectations document on taxes and transparency, NBIM wanted to have a meeting with PWYP Norway. The meeting with NBIM was held on March 8th. 2017. PWYP Norway received advance access to documents which we were requested to handle in confidentiality. We respect that there is a need for an internal work process in NBIM. At the same time, we would like to share some of our observations and positions which we shared with NBIM concerning how to create more transparency around financial transactions and prevent tax evasion.

NBIM afterwards expressed that the meeting was "very useful", but PWYP Norway sees few results of the meeting in the final document, and think that NBIM could have been much more clear on what information an investor needs where country-by-country reporting is concerned.

What did PWYP Norway report to NBIM?

The general:

  • The State has different roles which influence SPU (State Foreign Pension Fund), as owner, investor, tax collector, party responsible for allocating the common resources. SPU has grown and the investment universe has become more difficult to follow. Taxes and transparency have macroeconomic consequences for the State´s various roles in Norway. SPU can, given their size, also have consequences globally and for individual states. PWYP Norway has produced relevant knowledge concerning what information investors and the majority society need on taxes and transparency, and why. PWYP Norway believes this is the type of information that NBIM and other investors are in need of.

  • SPU today invests in a number of companies that have been registered in secrecy jurisdictions, whose common denominators are that they do not have an informative public company register, none or very limited accounting duty, no safe-keeping obligation, no accountancy duty, and no obligation to inform who are real owners. The business idea of such secrecy jurisdictions is to offer legislative structures which obscure and hide information concerning activities and ownership in the companies´ home countries. This often occurs in such a way that the companies avoid paying taxes to their home countries, or the countries where they have access to resources, or where resources are converted to products and services. The consequence is that profit which should have gone to the common good in the companies´ home countries, or where the wealth creation happens, instead is drained out of the country.

  • The extensive secrecy can be effectively counteracted by SPU and other investors and stakeholders demanding the transparency agreement extended country-by-country reporting (ECBCR).

The concrete:

  • PWYP Norway, in meeting with NBIM, pointed out that the economic value in a company consists of three things: investments that require a return and income and costs which in total make up the return itself. The investments say something about how the future pressure will be in respect to generating future income, and income and expenses are important to understand tax capacity. This is information investors should have available, and the basis for the eight key numbers which PWYP Norway thinks are the minimum information, in addition to the payments themselves, to authorities.

  • PWYP Norway thinks investors need insight into the eight central key numbers per country; number of employees, production (per type), investments, income, costs, and taxes (taxes consisting of three key numbers). This insight, if it is produced as part of the notes in the financial statements and for all countries, will be very valuable for all investors and the majority society, and not least SPU which invests across the spectrum of listed companies.

  • A transparency demand for the companies would be the best guarantee that investors can acquire objective information about the companies. Country-by-country reporting of taxes alone is already adopted in the EU and the USA as of now. At the same time this "simple" type of country-by-country reporting yields little information to investors. Extended country-by-country reporting, as suggested by PWYP Norway, and which is currently being introduced in Norway and EU, and subsequently the rest of the world, gives investors insight in the eight central key numbers per country, and which is then produced as part of the notes in the financial statements and for all countries, will be valuable indeed for all investors, not least for SPU. This transparency requirement is called extended country-by-country reporting (ECBCR) and will be the most effective and relevant measure for attainment of the goal.

PWYP Norway´s assessment of the Expectations document:

  • It is positive that NBIM wishes and encourages companies to be transparent within taxation. At the same time, it is concerning that NBIM is not clear about what information they specifically need. NBIM speaks of "economic value", yet does not define what economic value is: investments and profit from investment (income minus expenses). We are therefore left with the impression that NBIM really does not ask for information, but rather a stamp of approval from management in the companies that they are taking management responsibility seriously. This is the opposite of transparency. Then they continue to not have insight into significant country-by-country numbers.

  • It is positive that NBIM in their Expectations document makes clear the three main principles: that taxes should be paid where economic value is generated, that companies´tax arrangements are the responsibility of the companies´ management, and that public country-by-country reporting is a core element in transparent companies´ information about tax matters. But NBIM should be more clear about what constitutes "economic value".  It is not "tax information" which gives information about "economic value". The information investors need insight into in order to decide economic value are the eight central key numbers per country; number of employees, production, investments, income, costs, and taxes (taxes being understood as consisting in three key numbers which also show reconciliation between taxes and payments to authorities).

  • Conclusion:  If NBIM had been more clear on what creates economic value, they would also have clarified the goal with responsible investment practice, in line with the Strategy council`s pillar 1, it would have communicated a set of overriding principles for responsible investments, and it would have developed an applicable ownership strategy which supported the goal and principles for responsible investments for taxation and transparency, in line with the Strategy council´s pillar 1.

Must demand transparency

Already back in 2014, PWYP Norway pointed out that the Oil Fund had to demand transparency in their opinion piece "The Oil Fund must demand transparency" which was printed in Dagens Næringsliv (Norwegian newspaper on economy, business, and politics) on January 28th,  2014 and in a consultation input; "Transparency-demand for responsible investment practices in the State Foreign Pension Fund (SPU)", which was sent to the Ministry of Finance on January 24. 2014.