Brookfield faces shareholder calls for transparency on tax payments

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Brookfield Corp. BN-T is facing pressure to be more transparent about its taxes as a shareholder proposal to ramp up its disclosure is set to go to a vote at the asset manager’s annual meeting next week.

The proposal submitted by the BC General Employees’ Union, or BCGEU, calls on Brookfield to draft and release a tax transparency report that meets standards set out by the Global Reporting Initiative, an independent standard-setting organization.

The move toward calls for tax transparency has been gathering steam in the United States, as similar proposals have been put forward at major companies such as Amazon.com Inc., Microsoft Corp. and ConocoPhillips Co. in recent years. And though none have yet come close to passing, some have garnered more than 20-per-cent support in voting, showing signs of momentum and potentially pushing companies to pay attention.

The union believes this is the first such proposal submitted to a large corporation headquartered in Canada.

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Brookfield opposes the proposal, which takes aim at its low effective tax rate and complex corporate structure composed of a network of subsidiaries, some of them registered in tax-friendly jurisdictions.

But BCGEU’s push for a report has won backing from Glass Lewis & Co., which is one of the two most influential proxy advisers, increasing the likelihood that institutional shareholders could throw their support behind the vote.

The thrust of the proposal is an attempt to require Brookfield to disclose country-by-country data that would shed light on its revenue, profit, employee counts and other info relevant to its tax obligations in the various countries where it makes investments and does business.

The BCGEU proposal notes that Brookfield’s operating businesses are carried out through limited partnerships formed under the laws of Bermuda, which imposes a minimal tax burden on companies registered there. And it argues that it is too difficult for shareholders to assess whether Brookfield is conducting its tax practices in a way that adequately manages risks, especially as governments around the world seek to crack down more aggressively on tax avoidance as a way of raising new revenue.

Brookfield’s effective tax rate – income taxes, as reported on its income statement, divided by pretax income – has been below the 26.5-per-cent statutory rate in Canada in nine of the past 10 years, according to data from S&P Global Market Intelligence. In five of those years, it was below 13 per cent.

Critics of corporate tax avoidance call this difference between effective tax rates and statutory rates the “tax gap.” In an October, 2022, study, advocacy group Canadians For Tax Fairness said Brookfield had the largest tax gap in Canada for the five-year period 2017 to 2021, totalling more than $6-billion.

“We are pushing for enhanced tax transparency at Brookfield because we want to see an equal playing field for all companies,” BCGEU treasurer Paul Finch said in an e-mailed statement. “We believe that best practices by industry leaders will not only create long-term shareholder value but will also push regulatory change in a positive direction.”

In supporting the resolution, Glass Lewis said in a proxy research report on Brookfield that issues of tax avoidance “can be extremely controversial” and that rising global scrutiny on corporate taxes “could lead to regulatory and reputational risk.”

Though the adviser acknowledges that Brookfield provides some disclosure on its taxes, Glass Lewis argues that a Global Reporting Initiative-compliant tax transparency report would give shareholders “understandable information on which they are able to base assessments of the company’s tax-related risks.”

In urging shareholders to vote down the proposal, Brookfield has responded that such detailed disclosures could reveal sensitive information that would put it at a competitive disadvantage – the secret sauce of its business – and would be too granular to be truly useful to investors.

“Brookfield and our perpetual affiliates are in full compliance with all applicable tax laws and are committed to providing relevant disclosure while balancing the need to not disclose confidential and proprietary competitive information that could put us at a disadvantage,” Brookfield said in its proxy circular.

Institutional Shareholder Services, the largest proxy adviser, backs Brookfield and urges a “no” vote on the measure. The service calls it “overly prescriptive” and says “the requested action is outside the scope of shareholder oversight.”

As BCGEU has reached out to Brookfield shareholders on the issue, the union has had a substantial number of supportive responses, said head of capital stewardship Emma Pullman in an interview. With the issue not unique to Brookfield, she said, it is “entirely within the realm of the possible” that similar proposals could be lodged with other large Canadian companies and financial-services organizations in the near future.

“Regardless if it’s us as an investor or it’s somebody else, this proposal is being filed for the first time in Canada but this is absolutely not the last time that this proposal will be filed,” Ms. Pullman said. “Investors’ attitudes seem to be shifting on this issue and a lot of long-term investors are focusing in on this issue.”

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