Authors: Martin Callaghan and James Egert
Businesses are increasingly adopting and articulating tax principles, aligned to their broader Environmental, Social, and Governance (ESG) agenda. This is a critical element in providing them with their ‘social licence’ to operate which is ever more important to shareholders, investors and wider communities.
Tax is a key ESG metric: external stakeholders are interested in a business’s corporate income tax behaviours, and expect to see evidence of the level of tax responsibility it adopts in terms of aggressive tax strategies as well as the level of economic contribution the business makes to society.
In response, many businesses are publishing wider tax statements and also signing up to increasing transparency standards including the OECD/G20 Principles of Corporate Governance, the GRI (Global Reporting Initiative) for comprehensive tax disclosure and the International Business Council (IBC) of the World Economic Forum – Stakeholder Capitalism Metrics.
It is also important for finance and tax leads to be able to have informed conversations with stakeholders about taxation and wider economic contribution. This is vital in the M&A space where an investor’s ESG program will include evaluation of the investor’s and investee entities’ tax framework. We also see this as part of the Principles of Responsible Investment (PRI).
Our goal is to support businesses in being transparent about how they approach tax matters and tax payments. Greater transparency means providing relevant and meaningful insights about your tax strategy and tax contribution across all jurisdictions in which you operate.
GLOBAL REPORTING INITIATIVE 207
First global standard for tax transparency
The GRI207 is a tax reporting standard that seeks to ensure multinationals are much clearer about how much – and where – they pay their taxes. It has received widespread international support.
Introduced in 2019, it is a voluntary standard that builds on OECD’s country by country reporting rules, which came into force in June 2018. The GRI207 is a public disclosure and is the first global standard for comprehensive tax disclosure at the country-by-country level. It supports public reporting of a company’s business activities and payments within tax jurisdictions, as well as their approach to tax strategy and governance.
The disclosures in this Standard are designed to help an organization understand and communicate its management approach in relation to tax, and to report its revenue, tax, and business activities on a country-by-country basis.
Every company reporting to GRI’s standards should use GRI 207: Tax 2019 to provide tax information in its sustainability report or an integrated report. Any company that has made a public declaration in support of the Davos Manifesto 2020 should do so as well. Any company wrapping itself in the cloth of ‘stakeholder capitalism’ that isn’t paying its fair share of taxes and being transparent about how it is doing so will look thread-bare clad to me.
GRI: https://www.globalreporting.org/ Forbes article: The Time Has Come
Tax transparency enables businesses to demonstrate that not only do they ‘talk and live’ ESG, but they action…it’s about demonstrating actions not just sharing a message
- TALK THE TALK…
TAX POLICY, PRINCIPLES & RISK APPETITE
Disclosure of a tax policy, principles and tax risk appetite outlining the company’s approach to taxation. This should demonstrate how the approach to tax is aligned with the business’ ESG vision and its sustainability objectives.
- …WALK THE WALK…
TAX GOVERNANCE AND RISK MANAGEMENT
A governance and risk management framework provides comfort and assurance that there are the mechanisms in place to ensure awareness and adherence to tax principles. This should include clear procedures on tax compliance and tax risk management.
- …AND SHOW PEOPLE WHAT YOU’RE DOING
Shareholders, investors, regulators and increasingly the wider community expect transparency on tax-related risks, total tax contribution or total tax liability, and country-by-country activities.
MANAGING YOUR TAX PROFILE
Many will remember large businesses and accountants being publicly quizzed by the Public Accounts Committee in 2014 regarding their tax behaviours. The resulting media backlash drove a public expectation that businesses should be paying ‘the right amount of tax’. That expectation remains with us still today. SARS is focusing on eliminating tax planning involving aggressive tax avoidance schemes, and we expect that businesses will have to publish their tax strategies and approach to tax planning very soon.
The financial turmoil arising from the COVID pandemic is the latest catalyst driving a heightened level of government and public attention. Paying the ‘right amount of tax’ and ‘doing the right thing, financially’ is very much in the news cycle.
Boards of Directors and NEDs are increasingly seeking to implement a culture of no surprises within their organisations when it comes to tax risk, and many multinationals are reporting concerns about meeting increased tax regulatory requirements. Not being aware of tax matters is no longer an acceptable course of action for a board member. Today’s challenge for CFOs and Tax directors is to determine how much they are at risk, how best to respond if challenged, and making sure the board and audit committee is adequately aware.
WHAT TO PUBLISH?
ESG is influencing what MNCs are choosing to disclose, with OECD CbCR rules and GRI207 acting as a foundation for tax reporting and sharing KPIs. Many SA organisations are already setting a benchmark and winning awards for tax disclosures. At BDO, we support and advise many businesses on tax disclosures, with a few tax transparency awards winners in our global stable.
At the very least, organisations are publishing their tax principles. Increasingly however, they are seeking to demonstrate their wider tax contribution through publication of a Tax Report and Global Tax Footprint.
GLOBAL TAX TRANSPARENCY REQUIREMENTS
Global businesses are impacted by several parallel tax transparency initiatives across many jurisdictions. To add complexity, many multilateral requirements relating to tax transparency are in force, such as CRS, OECD, BEPS and EU regulations.
Some examples to consider:
- OECD Common Reporting Standard (CRS)
- EU votes on public CBC Reports
- GRI Sustainability Reporting Standards–GRI207onTax
- Australia: ATO public reporting to disclose taxable income
- Canada: Extractive Sector Transparency Measures Act
- China: Implementation measures for Special Tax Adjustments
- Netherlands: Horizontal monitoring
- Nordics: increasing peer pressure to disclose tax payments
- Poland:2021requirementto publish a Tax Strategy
- South Africa: Filing obligation for non-resident companies
- UK: requirement to publish a Tax Strategy
- United States: Dodd-Frank act and FATCA
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