The importance of tax transparency


The general perception is that the responsibility for sustainable development rests solely with governments. This is far from the truth. In fact, low-income countries tend to have a lower share of public spending compared to private spending. On the other hand, public spending in high-income countries tends to be more focused on social protection, which includes the social aspect of environment, social and governance (ESG). It is time for the responsibility for sustainability to be shared between government, business and citizens for effective action on ESG.

Interestingly, the heightened concern about ESG has been limited to environmental aspects alone. Governments and companies have affirmed their commitment to ESG primarily through their net zero commitments and are increasingly considering various policy designs (including with respect to carbon taxes and carbon markets) to reduce carbon emissions. These emerging trends in government policies require companies to anticipate, participate in the development and take them into account in their strategy to make businesses sustainable and competitive. These policy designs are typically based on a system of incentives and disincentives that create both opportunities and risks for existing business models. Most of these incentives and disincentives take the form of taxes, subsidies and other non-fiscal regulations (eg waste, water, recycling, funding regulations). Over the years, stakeholder expectations of companies in tax matters have exceeded regulators’ expectations in this regard.

Over the past decade, a remarkable body of work has been developed by institutions such as the Organization for Economic Co-operation and Development (OECD), the United Nations (UN) and the Global Sustainability Standards Board (GSSB) to raise awareness stakeholders, policy makers, the media and the general public on the need for transparency and the expectations of multinational companies to pay their fair share of taxes.

Already, the OECD’s G20 Inclusive Framework requires companies in most countries to report key economic and financial indicators and taxes paid in each jurisdiction as part of BEPS country-by-country (CbC) reporting.

More recently, in 2021, the European Union (EU) approved a new directive on CbC public reporting which obliges multinational groups with a total consolidated turnover of at least 750 million euros to publicly disclose the main economic and financial indicators as well as the corporation tax they pay in each EU Member State as well as in each of the countries which are, inter alia, on the EU list of non-cooperative jurisdictions at tax purposes. This would make new information and data available in the public domain, accessible to all stakeholders, including the investigative reporting community, NGOs, competitors, industry bodies, and various tax and non-tax regulators. Enforcement of the regulations is still a few years away, so it may be worthwhile for companies to prepare for a more balanced and matured view in their disclosures and documentation, lest such regulations fuel unproductive work.

Similarly, the UN Principles for Responsible Investment (PRI) (2015) provide guidance on what investors need to know to encourage responsible tax behavior. A subsequent progress report on “Advancing the Tax Transparency Outcomes of the PRI Collaborative Engagement 2017-2019” was released by the PRI in 2020.

Ensuring responsible tax behavior and governance is also tracked by tax administrations around the world to profile taxpayer risk and adapt audit methodology. For example, India’s recently updated Goods and Services Tax Audit Manual prescribes the methodology for obtaining information on tax audits and the implementation of the IT system and related processes for obtain assurance on the quality of statements in tax returns.

It is expected that in the future, more regulators will rely on auditable information regarding tax strategies, tax policies and internal control. This would put companies that are more mature than others and provide adequate public information (mostly voluntary so far) on a different pedestal than companies where tax controls and governance seem opaque.

Important initial work on tax transparency was done with the publication of GRI 207 by the GSSB’s Global Reporting Initiative in 2019. GRI 207 is the leading public global standard for comprehensive tax reporting.

The key elements of GRI 207 reporting encompass companies’ qualitative reporting on (i) their approach to taxation, (ii) governance, control and management of tax risks, (iii) stakeholder engagement and management tax concerns, and (iv) country-by-country reporting.

Other major global initiatives include the spread of the Total Tax Contribution (TTC) measure, which was presented at the World Economic Forum (WEF) in Davos in January 2020. The TTC requires multinational companies to present a geographical analysis taxes borne and taxes collected on behalf of the government.

All of the above initiatives are tied to the fundamental principle that taxes are the most important source of revenue for governments to fund social protection programs and businesses have an obligation to society as a whole to contribute equitably and transparent. Therefore, it is paramount that companies’ ESG commitments transcend net zero commitments and include tax transparency.

Adopting a transparent tax reporting framework also provides crucial information for ESG rating agencies to analyze the inherent threat to sustainability faced by companies due to aggressive tax policies.

Australia and the United Kingdom were the forerunners in adopting these standards to develop tax transparency codes. The Australian Tax Office is mandated to publish public information made available to it by large businesses

The Voluntary Tax Transparency Code was adopted by Australia in 2016 to guide medium and large businesses in publicly disclosing tax information. The code provides a set of principles and minimum standards developed by the Tax Board. The voluntary framework is strongly embraced by large companies in Australia.

Similarly, the UK introduced legislation in 2016 requiring qualifying groups (typically companies with a turnover of over £200m) to publish their UK tax strategy. Other countries such as the Netherlands, Poland and Spain have also introduced frameworks that solicit cooperative action from businesses to raise awareness of sustainable tax practices and encourage voluntary reporting of taxes to stakeholders.

In the Indian context, the introduction of Business Responsibility and Sustainability Reporting (BRSR) by listed companies has been one of the key initiatives to raise ESG awareness among companies. The BRSR was made mandatory for the top 1,000 listed companies (by market capitalization) from fiscal year 2022-23. The BRSR can be done voluntarily by companies for the 2021-2022 financial year.

BRSR encompasses a wide range of ESG aspects such as gender diversity, waste management and greenhouse gas emissions based on globally recognized standards. However, the BRSR refrained from stipulating any framework for increased tax transparency and reporting.

Even in the absence of a legislative framework, companies like Cipla and Vedanta in India have followed in the footsteps of large fiscally transparent companies such as Johnson & Johnson (US) and Unilever (Netherlands) in terms of adoption of the GRI 207 standard. for their tax declarations well before the introduction of the legislation.

These voluntary corporate tax disclosures mark an era where companies are showing their relevance to society by disclosing taxes as a direct indicator of their contribution to all stakeholders (e.g. customers, suppliers, regulators, employees and investors) rather than as a legal obligation. It also allows companies to additionally channel their ESG contribution much faster compared to other climate and net zero interventions that tend to be noticeable to stakeholders over several years.

Voluntary tax transparency related information also serves the interests of stakeholders by making high quality information available for transactions. Tax transparency disclosures complement traditional models that analyze value creation through improved productivity, better customer experience, inventory cycle management, better financing structure, and more. taxes, the difference between the tax rate and the actual tax, and tax choices in sectors and geographies.

In addition, increased tax transparency disclosures by companies based on global best practices can be an effective tool for governments, which face the dilemma of reducing the compliance burden and improving tax disclosures.

In conclusion, it is time for companies to take stock and prepare by creating capacities and an information system to anticipate new taxes and regulations around ESG and the capacity to take them into account in their planning. of business. In addition, a deeper review of auditable tax strategy, tax policies where implementation and control framework would be in order to achieve more deliberate assurance on tax behavior and governance. In the absence of legal requirements on the disclosure of key elements, the time has come for companies to make the choice to gradually adopt voluntary disclosures in order to be able to meet the demands of broader stakeholders, in particular investors. , customers and employees. Regulators would be well advised to encourage voluntary disclosures by prescribing a non-binding disclosure framework to ensure consistency in the disclosures that companies seek to make regarding tax behavioral matrices. Reliable information on the societal contribution of companies through taxes can now be obtained using a reasonably matured framework available globally to inform their stakeholders of their contribution.

The authors are partners of Price Waterhouse & Co LLP

Opinions expressed are personal


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