Amid news (6 Nov) that Luxembourg helped multinationals save millions in tax, charities ShareAction and Christian Aid are urging shareholders to ask companies about ‘seven pitfalls of corporate tax practice’ that could impact their share price.

According to the two organisations, evidence that stricter global tax regulation is on the horizon includes an action plan released by the Organisation for Economic Cooperation and Development, aimed at curbing tax avoidance by multinational corporations, and heightened White House rhetoric on US companies using foreign takeovers as an opportunity to relocate and avoid higher taxes.

Despite such signs, the two parties say many firms continue to rely on non-transparent tax strategies to protect their profits.

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A 2014 report by Christian Aid shows 36% of FTSE 100 constituents are enthusiastic users of so-called ‘opaque tax jurisdictions’, with subsidiaries located in jurisdictions where authorities don’t require company accounts to be publicly accessible for a fee of less than $10.

ShareAction director of engagement Louise Rouse says: ‘The lack of disclosure around corporate tax practices right now really could be described as sinful, as far as investors are concerned, and shareholders could be left carrying the can for the bad behaviour of these companies.

‘With regulatory change on the horizon, investors need to understand how vulnerable companies might be to any changes which could increase their tax payments.’

The seven questions proposed by the charities are:

• Do you ‘profit-shift?’, and if so, how might regulatory changes leave you vulnerable to a drop in corporate profits?

Many companies have the vast majority of their assets and staff in one country but state that the profits from their activity actually arose in another country with much lower tax rates.

• Do you use secrecy jurisdiction, and if so, what regulatory risk does that represent for investors?

Investors should encourage companies to publish a tax policy that sets out the company’s approach to tax beyond mere legal compliance, including a code of conduct, defining the level of aggressiveness of the company’s tax planning, ruling out certain tax practices, and communicating where the company is headquartered for tax purposes.

• How much do you rely on tax incentives in certain jurisdictions, and can you be sure that those incentives are secure?

Investors may wish to ask how much a company relies on incentives in the jurisdictions in which they operate, examining the duration and financial value of the incentives against the likelihood of regulatory reform, and what financial impact that may have.

• Do you rely on transfer pricing, and if regulation changes on this practise, can you model the financial risk to investors?

Many companies rely on the pricing of sales between related companies within the same multinational group of companies, but the deliberate mispricing of sales of goods and services in this area raises legal concerns.

• Does the company favour country by country reporting of the taxes paid in each country where they operate, and if not, could such disclosure impact the share price?

Very few companies currently do this on a country-by-country basis, leaving them open to suggestions that there could be material risk in the absence of such disclosure.

• Does the company use intra-group financing, and if so, what is the risk to investors of relying on this practice?

Many companies currently make loans from subsidiaries in low tax jurisdictions to those in higher tax jurisdictions, sometimes at above market rates.

• Does the company use ‘treaty shopping’ and what is the risk of indulging in it?

This is the practice of structuring investments in order to route payments through jurisdictions with beneficial tax treaties.