Historically tax communication was a confidential matter between taxpayers and their tax authority. Confidentiality is regarded as important as it encourages taxpayers to be open and honest in their communications, and to share documents with the tax authority that may include sensitive business or personal information. It also recognises that, although tax laws apply equally to all taxpayers, each taxpayer’s facts will be different.
However, today, organisations have a wider range of stakeholders to consider than ever before, not only in relation to tax but also regarding other business regulations whether environmental, health and safety or supply chain – key parts of their ESG commitments.
These stakeholders include tax authorities (from multiple countries) and other regulators, shareholders and the broader investment community and a range of other parties that may interact with the company, such as employees, customers, and suppliers.
Press coverage and social media commentary about tax has evolved substantially and it now plays a key role in how tax information is communicated, and perceived.
The journey so far
There have been many steps along the way, but these can be summarised as:
- Phase 1 – the Organisation for Economic Co-operation and Development’s (OECD) initial move to modernise the tax system via its base erosion and profit shifting (BEPS) analysis in the years following the global financial crisis. This focused on increased information disclosure by taxpayers, and initial moves on aggressive tax planning, tax havens, and sharing of cross border information by tax authorities;
- Phase 2 – a recognition that the digital economy was increasingly out of step with both the historical global tax system and the emergence of a new environment that requires organisations to accept a broader social responsibility towards tax planning. This is illustrated by the current OECD (“BEPS 2.0”) project, seeking a global minimum tax rate and a reallocation of the profits of large global companies that more fairly aligns their tax burden with their economic presence.
What ESG reporting is required for tax?
Tax reporting originally took place only by way of disclosure in an organisation’s financial statements (typically an income tax expense, and assets and liabilities on the balance sheet). Given the complexity of tax, and the different treatment of items for tax and accounts, the significance of the disclosures was often difficult to interpret.
Therefore, countries have introduced measures to provide more information. For example, the UK requires large companies (with a turnover of over £200 million, or where balance sheet assets exceed £2 billion) and companies that are part of large Multi-National Enterprise groups (“MNE’s”), to publish their tax strategy. The strategy must include matters such as how the business manages its tax risk, its attitude to tax planning and how the business works with the tax authority. This information must be published and be available free of charge, thereby significantly expanding the information that is publicly available.
Let’s take a closer look into country comparisons -
In Australia, a Tax Transparency Code (“TTC”) has been developed. Adoption of the TTC is voluntary and intended to complement Australia’s existing tax disclosure measures. It is estimated that 160 organisations, representing approximately 60% of the taxable income and tax paid by companies potentially subject to the TTC, have committed to complying with its principles.
Although voluntary, the Australian Tax Office (“ATO”) encourages medium and large companies to follow the TTC. The TTC is designed to encourage greater transparency by the corporate sector, and to enhance the community’s understanding of the corporate sector's compliance with Australia’s tax laws. The type of information that is disclosed includes:
A reconciliation of accounting profit to tax expense and to income tax paid or income tax payable;
- Identification of material temporary and non-temporary differences;
- Effective company tax rates for Australian and global operations (pursuant to accounting standards);
- The company’s approach to tax strategy and governance;
- A tax contribution summary for company taxes paid;
- Information about international related-party dealings.
Both the UK and the Australian examples share common principles (which are likely to be adopted more broadly):
- Businesses need to consider not only what information is disclosed, but how it is disclosed;
- The volume of information that is required to be disclosed will continue to increase;
- The role of boards and senior management is critical to establishing the “tax culture” of the organisation and duly reporting thereon;
- Voluntary information sharing is as much part of good tax governance as tax compliance.
In summary, ESG reporting and its impact on tax is evolving, and no single tax reporting system explains everything about how an organisation manages its tax position. Indeed, tax fits into all three aspects of ESG – Environment, Social and Governance.
Increasingly there are environmental requirements such as the European Union’s (“EU”) Green Deal. The ‘Social’ aspects include communications with employees, understanding the role of other parties in the supply chain and explaining the broader interaction with the communities in which the company operates. ‘Governance’ is taking many forms, board reporting, senior executive officer sign offs, codes of conduct, and so on.
Therefore, regulation is only the starting point for disclosure and is unlikely to fully explain the tax position of an organisation. In the second article in this series, we will further discuss how organisations should develop their disclosure policy and procedures and develop a best practice reporting process.
Discover more on ESG reporting here.