Over the past 10 years, the concept of a ‘fair tax’ and ‘paying the right amount of tax’ has become increasingly established in the consciousness of both tax authorities and governments, not just in the UK, but globally. Significantly, the concept also has gained currency with the public, media, NGOs and other stakeholders. The notion that responsible corporate citizens must pay the ‘right amount of tax’ and ‘do the right thing financially’ is becoming accepted doctrine.
Internally within organisations, boards of directors strive for a culture of no surprises when it comes to tax risk. Many multinationals report concerns about meeting increased tax regulatory requirements, as well as unexpected media coverage, over the taxes they pay. This has been the case particularly during the COVID-19 pandemic and the resulting financial turmoil, which have seen heightened attention to corporate tax behaviours.
This intensified interest in the tax practices of corporations was also reflected in BDO’s Global Tax Outlook survey, which provided evidence that senior management is focusing on tax assurance and governance and the need for a robust tax control framework and tax risk management.
Today’s challenge for CFOs and tax directors is to first determine how at risk their corporations are and then consider how best to respond if they are challenged.
In response, many large businesses are adopting and articulating tax principles aligned to their broader environmental, social and governance (ESG) agenda. Tax is increasingly a key ESG metric, with external stakeholders focusing more on a business’s corporate income tax behaviour. Moreover, stakeholders are seeking evidence of a company’s level of tax responsibility in terms of aggressive tax strategies, as well as the economic contributions the business makes to society.
“Investors would benefit from an enhanced level of corporate income tax related disclosure by companies… Companies are encouraged to disclose information, addressing tax policy, governance and performance to the highest degree possible and with increasing quality over time … To that end, investors would benefit from clear links between tax risks, tax strategy and performance, wherever possible.
from PRI’s Investors’ Recommendations on Corporate Income Tax Disclosure
We see this clearly in the transaction arena, where investors may have an ESG agenda that includes evaluation of the investee entities’ tax framework. This is best reflected in the guidance provided in the Principles of Responsible Investment (PRI), which includes clear statements on tax.
On a global basis, many jurisdictions have introduced unilateral legislation related to tax transparency. The UK, for example, has multiple regulations encouraging responsible tax behaviours and introduced legislation on tax transparency. These measures include the UK requirement that certain entities publish their tax strategy online, as well as other initiatives, such as the recent consultation on notification of uncertain tax treatments by large businesses.
Other countries have enacted similar measures. For example, Poland introduced in 2021 a requirement that large companies must publish a report on their tax strategy, Australia has a public disclosure requirement of taxable income, and there are various global requirements on tax transparency for extractives. And of course, public country-by-country reporting (CbCR) is on its way in the EU.
In June 2021, representatives of EU institutions reached an agreement on the proposed CbCR directive. This means that public CbCR is on its way to being implemented across the EU (including for non-EU headquartered groups) by as early as 2023.
Many businesses are already ahead of the game, publishing broader tax statements and signing up to increasing transparency standards, including the OECD Principles of Corporate Governance and the Global Reporting Initiative.
For businesses at the start of this journey, a first step is for finance and tax leads to have informed internal conversations about how best to demonstrate good tax behaviours and their wider economic contribution. Corporate heads of tax should be able to provide meaningful insights to the board about the business’s tax strategy and tax behaviours across all jurisdictions in which it operates.
For businesses looking to publish externally, many organisations are already setting a benchmark, with several publishing tax reports separately from their financial statements (see examples, including BT Tax Strategy Report and VF Tax Report).