April 2023 Issue
FW discusses tax transparency and ESG with James Gordon, Mark Kennedy and Diana McCutchen at Deloitte Tax LLP.
FW: How would you characterise the current tax transparency voluntary and mandatory reporting landscape? What elements of tax transparency reporting do organisations particularly need to consider?
Kennedy: Tax transparency is nothing new, and there has been a proliferation of mandatory global requirements, voluntary transparency measures, and sustainability frameworks introduced over the past 10-15 years. This trend is not expected to slow down anytime soon. These various standards are often looking for similar disclosures. This includes a narrative on the reporters’ tax strategy and tax risk profile, which is a legal requirement in the UK and Poland. Another area of disclosures is the publication of the company’s payments to governments at a jurisdictional level, which is a legal requirement for certain sectors in Europe and the US. There are also disclosures around additional commercial factors at a country level, including revenues, assets, employees and intercompany transactions, which is a legal requirement for companies with operations in the EU, with discussions of similar arrangements in the US and Australia. For the first time, ESG standards setters have issued detailed ESG reporting frameworks dedicated to tax, with the Global Reporting Initiative and the World Economic Forum (WEF) leading the way. These standards are comprehensive and borrow both from existing regulations and practices recommended by industry and other groups. They are likely to set the direction of travel for future rules. Other stakeholders are pressing for the adoption of the Global Reporting Initiative, including through shareholder votes, with more investors considering tax transparency as a board and shareholder topic. In addition, more companies are voluntarily publishing against these standards than ever before, with tax becoming a regular topic of debate in traditional and social media. This is catching the eyes of leaders across organisations, from the C-suite to legal and finance departments and sustainability teams. We expect these trends to continue.
“Companies and leaders have an opportunity to drive the organisational narrative amid potential new disclosure requirements and media scrutiny.”
FW: What benefits can companies derive from looking at their tax reporting obligations through an environmental, social and governance (ESG) lens?
McCutchen: Being more transparent about your approach to tax and being able to evidence that approach in practice positions the company well to address interactions on tax from regulators and other stakeholders, such as investors and the public. Tax is already a factor in supplier screening and ultimate contracting and is particularly sensitive in public sector procurement processes. Addressing tax through an environmental, social and governance (ESG) lens can also raise the profile of tax as a business leader within the organisation, as well as the sector or industry at large. Companies and leaders have an opportunity to drive the organisational narrative amid potential new disclosure requirements and media scrutiny. Tax reporting through an ESG lens affords the company the opportunity to tell a comprehensive story. Importantly, businesses should want their stakeholders to know that they take compliance seriously and pay and collect taxes in line with local legislation and practice across the many jurisdictions in which they operate. Finally, potential shareholders and ESG rating agencies are looking at tax governance and transparency as they assess an organisation’s tax risk profile and ESG credentials, with tax transparency as a factor in a company’s overall ESG rating.
FW: What are some of the associated risks and challenges of looking at tax reporting through an ESG lens?
Gordon: Reporters must weigh the risk of providing too much information against the risk of providing not enough at all. This includes balancing the needs of transparency with the possibility of broader stakeholders and peers gaining access to potentially sensitive information. Regardless of what a company publishes, failure to be prepared can lead to companies being on the back foot when addressing questions from their C-suite, board, investors, the media and the public. Tax is also a technical subject with a high degree of complexity, especially for international businesses subject to many different taxes across all their jurisdictions. It can be an emotive subject too, particularly in times when significant challenges require public funds. Communicating on tax clearly and in layperson terms is challenging and requires a strategic response. This should consider how the message will be received across different stakeholders with different perspectives. The sheer number of ESG reporting standards, regulations, ESG ratings agencies and industry standards that may be relevant to the organisation is itself a challenge to keep up with. Almost all companies have gaps in terms of data and practices. Getting in front of this sooner and understanding the requirements will help smart companies mitigate the risk. Implications for failing to do this in a timely manner may include penalties on executives and could also expose the company to undue brand and reputational risks.
“Voluntary tax transparency standards are increasingly being adopted by businesses, and this is absolutely an opportunity to generate trust and goodwill.”
FW: To what extent does the manner in which an organisation manages its tax affairs give investors an indication of how that organisation might manage other aspects of the ESG agenda?
McCutchen: While some companies are publishing in response to regulations, many are doing so voluntarily. This is because many see companies which are transparent about their tax affairs as demonstrating a genuine commitment to ESG, openness and transparency. Given that tax can be a defining reputational risk for a company, including impacting its ESG profile, rating and brand, there is a real risk when tax is disconnected from the broader ESG story. Fundamentally, more than publishing data, it is about having a tax strategy, and a narrative surrounding that strategy, that is aligned with the company’s overall value proposition. Reporting needs to be authentic to reflect the strategic choices organisations make to manage risk and capture value in a sustainable way. The journey needs to start with embedding purpose into the DNA of the business and delivering meaningful ESG performance information integrated into corporate reporting.
FW: With tax transparency taking different forms, how can organisations best strike a balance between qualitative and quantitative disclosures of information?
Gordon: A good first step for many organisations is to start with the qualitative side of this exercise, looking at a company’s approach to managing its taxes, including its commitment to compliance, its approach to making tax decisions, how it controls its tax risks, and how it engages with tax authorities. This includes the opportunity to craft a narrative for any stakeholder on tax issues of greatest relevance. For many multinational organisations, this is likely to include the impacts of significant international tax changes coming through Pillar 2. This also provides a framework for companies to tell their story about all taxes paid, the quantitative piece of the disclosure, including income, indirect, employment and other taxes. There are some reports out there that do a really good job of bridging the qualitative and quantitative aspects of tax reporting, notably where they do so in the format of a case study. This is an opportunity to show how a company’s approach to tax works in practice, and to further illustrate what this means for the local community.
“Reporters must weigh the risk of providing too much information against the risk of providing not enough at all.”
FW: What essential advice would you offer to organisations on conducting their tax affairs in a sustainable manner, as part of their ESG framework, measured in terms of good tax governance?
Gordon: It is clear that tax is only going to become an increasingly key component of the ESG narrative. Executives should ensure readiness work is undertaken now that demonstrates good tax governance is in place and can support their organisation’s ESG strategy and objectives. This includes making tax part of the dialogue on material ESG topics, including governance, and ensuring it has the resources and support it needs to meet demands. A key first and ongoing step is to analyse, monitor and address the evolving landscape on tax governance and transparency. This includes the impact of global regulations, the increasing remit and focus of ESG raters on tax, the ramp-up in activity of peers expanding their tax disclosures, and the expectations of stakeholders, including investors, who are curious how international tax reform may impact the business and tax profile in the years ahead. Companies should then gain an understanding of their governance, narrative and data gaps against ESG reporting standards and regulations, given that addressing some gaps may be a longer-term prospect than other quick wins. For example, collating reliable data sources for all taxes paid across global operations and systems into a complete, accurate and auditable framework is a challenging first step, before one can even begin to understand the nuances and analytics behind the numbers. In addition, a global tax policy is a governance element companies are being asked increasingly to prepare and publish online.
FW: How do you envision companies’ tax transparency approach evolving in the years ahead? Do you expect more companies to view it as an opportunity to generate trust and goodwill?
Kennedy: Voluntary tax transparency standards are increasingly being adopted by businesses, and this is absolutely an opportunity to generate trust and goodwill with the businesses’ various stakeholders. Tax and finance managers and executives from across the globe were asked about topics that were high on their agenda as part of our 2022 Global Tax survey. Sixty percent of respondents expect their group to align its external communication in relation to its tax performance with a transparency standard. Thirty-three percent expect to increase their level of voluntary tax transparency over the next year. Forty-two percent have an up-to-date tax transparency strategy for their group, which has been tested with the senior leadership. And 55 percent expect that a tax transparency strategy for their group has been or will be set up within 12 months. Moving forward, as tax compliance becomes more of a real-time management matter, tax transparency will certainly be of interest to those in the capital markets who are looking to assess ESG credentials, as that would provide them with an additional perspective on the position of a business. Finally, we expect that the tax transparency agenda will remain dynamic, responding to the evolving expectations of businesses’ stakeholders and the landscape. This means that businesses will need to scan the horizon for changes, assess their relevance to their business, and respond accordingly.
James Gordon is a senior manager in Deloitte Tax LLP’s business tax services practice. He previously held a national leadership role on tax governance and transparency in Australia and now co-leads the Deloitte offering in the US. He has deep experience advising clients on tax governance, risk, controls and ESG reporting matters across sectors. He can be contacted on +1 (212) 436 6296 or by email: jagordon@deloitte.com.
Mark Kennedy is a Deloitte UK partner in the tax technology consulting group. He leads Deloitte’s tax governance and risk management services in North & South Europe and specialises in helping large, complex groups manage their biggest tax compliance, reporting and risk management challenges. He can be contacted on +44 (0)20 7007 3832 or by email: markennedy@deloitte.co.uk.
Diana McCutchen is a partner in Deloitte Tax LLP’s business tax services practice. She advises companies across all sectors on tax governance, risk, process and policy issues, as well as their tax transparency and ESG reporting, helping tax leaders add value to their company’s overall ESG initiatives. She can be contacted on +1 (714) 436 7702 or by email: djmccutchen@deloitte.com.
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