There is currently a significant mismatch between the high importance the public places on companies paying the right amount of tax, and the lower emphasis that tax has in discussions on ESG.
This mismatch provides an opportunity for businesses to differentiate themselves and create stronger relationships with stakeholders (whether suppliers, investors, customers or employees) on the basis of developing responsible and sustainable tax policies. A previous blog here provided some of the reasons why commitment to responsible tax conduct and related disclosures could be a leading rather than lagging sector of ESG disclosure. However, what does best practice look like? The two foundations are the creation of a public tax policy by the business and maximum tax transparency in its financial reporting in relation to that policy. Whilst there are some formal reporting requirements for larger companies in relation to publishing a tax policy and for multi-nationals on country by country reporting we are here looking at best practice whether these apply to your business or not.
Creating a public tax policy
A public tax policy would broadly commit the business to paying the right amount of tax, in the right place, at the right time. Simple enough to state but rather more difficult to define since most stakeholders would not regard adherence merely to the letter of tax law as being a full expression of responsible best practice any more than it would be for compliance with Health and Safety regulation. Developing a tax policy requires a whole range of value judgements to be made by the business. It will include possible commitments to ensuring that tax is paid where economic value is created or generated. It will include thinking about the meaning of paying the right amount of tax (although no more than the right amount) and the extent to which it wants to engage in any planning which, whilst it might be within the letter of the law, is outside of its spirit or purpose. Any business will quite rightly seek to take advantage of all available tax incentives, reliefs or exemptions in line with the spirit and purpose of tax legislation when undertaking transactions, but it will need to think about whether it wishes (for example) to use tax havens within its structure where there is little or no economic substance to the activity in that location, and where the main purpose is tax minimisation. It will also need to consider whether it wishes to be involved in the artificial structuring of transactions for the purposes of avoiding tax and where it might draw the line between what is artificial structuring and what is simply taking advantage of intended reliefs or exemptions. It will include commitments to transparency, and a constructive and collaborative approach to disclosure and dialogue with the tax authorities, especially where there may be potential differing views of the tax treatment of transactions.
Transparency in reporting against that benchmark
The basic principle of transparency is that a business should provide sufficient public information for any stakeholder to form a view about its compliance with its stated tax policy – that the business does what it says it does in terms of its management of its tax obligations. So, the policy will be published in some form – whether on the business website or as part of the financial accounts. The information which the business then provides in its financial reporting to demonstrate compliance with the strategy will include an account of its actual tax conduct during the reporting period, formal confirmation that it has adhered to its strategy, details of beneficial ownership of entities and related party transactions, and details of its financial presence and tax contribution in different jurisdictions.
For companies operating in multiple jurisdictions country by country reporting of revenue and profits, tax paid, gross assets, and employment numbers will give an indication of country scale and substance and can help to support any claim that tax is paid on profits where their economic substance arises.
Expanded tax notes can be used to explain any divergence of tax paid from expected headline rates. For example, where the use of tax reliefs (which might for example be a result of accelerated investment allowances of one sort or another) reduces or perhaps eliminates its country tax liability, expanded tax disclosures can comprehensively explain the reasons for this beyond the usual tax reconciliation.
The inclusion of companies based in tax havens or low tax jurisdictions, whilst it might appear problematic may not necessarily be so. This could be for reasons other than simply tax minimisation most obviously where there is economic substance in the jurisdiction. Conversely transparency might provide a challenge where, for example, technology companies have sited intellectual property in low tax jurisdictions and there is limited economic substance around this.
For those interested in the external accreditation provided by the Fair Tax Mark, their current Global Multinational Business Standard benchmarks against 19 areas around the themes of commitment to responsible tax conduct, financial transparency and beneficial ownership disclosure, with a score of 31 or more, out of a possible 48, qualifying for accreditation.
We would love to have a conversation with you about how a commitment to responsible tax conduct and financial transparency in your business can become an integral part of your ESG strategy.
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