Businesses are increasingly adopting and articulating clear 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
As part of this, businesses are publishing details of their approach to tax within broader ‘total economic contribution’ tax reports. This approach recognises that simply complying with the strict ‘letter of the law’ may not be enough to avoid damaging media coverage and negative public perception.
ESG criteria are taking a prominent position on the agenda for most Boards and are seen not only as the ‘right’ thing to do but also as a driver of value. There are a number of commonly recognised ESG metrics against which businesses can be judged from the Global Reporting Initiative, to the Principles of Responsible Investment and Dow Jones Sustainability Index. In addition, the direction of travel is for this important area to be subject to increasing government regulation.
There is also increasing recognition that each element of the ESG agenda has a direct relationship to tax – from environmental taxes to the linkage between executive remuneration and ESG metrics. The move towards greater regulation in the area of corporate and tax governance also falls under the umbrella of ESG.
The challenge for businesses, in particular CFOs and tax directors, is to determine where they may be at risk in terms of their tax profile and reputation, and how best to respond if they are challenged.
Environmental, Social and Governance (ESG) and tax transparency
International tax transparency initiatives have placed tax policy and reporting in a more central role in achieving environmental, social and governance (ESG) objectives.
As part of their ESG agenda, multinationals should prepare for a more transparent future. Businesses should proactively consider the current transparency of their tax disclosures and how they want to be perceived in terms of their tax behaviours. This work helps to underpin the message that businesses make significant contributions to society across a number of taxes.
What should you publish?
ESG is influencing what businesses are choosing to disclose, with OECD CbCR rules and GRI207 acting as a foundation for tax reporting and sharing KPIs. Many organisations are already setting a benchmark, with companies like Vodafone leading the way. We have supported many businesses in advising on disclosures and providing assurance (eg ISAE3000) over these disclosures, including those winning tax transparency awards.
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.
Defining what to publish will be different for each organisation and will be determined by your overall approach to tax and reputational risk. You can work with us to establish a coherent and consistent approach to transparency that supports your overall ESG strategy.
Tax is a key ESG metric: external stakeholders are interested in a business’s corporate income tax behaviours and 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.
Taking an appropriate, proactive approach to publishing your tax principles and your tax footprint certainly increases transparency and can serve to build trust in your tax operations with tax authorities, investors, media and other stakeholders. Tax transparency has become a recognised metric by industry groups, professional bodies and NGOs, including the Fair Tax Mark and Public Trust awards.
Importantly, it significantly reduces the risk of surprises for your Board and senior management and demonstrates strong oversight, control and transparency over your global tax operations.