In the spotlight: sustainable management

Contributing sustainably: what’s the role of tax in building the trust of your stakeholders?

Charalambos Antoniou
Director, Tax Function Design Leader, PwC Switzerland

Tax has suddenly jumped up the sustainability agenda. While the ESG (environmental, social and governance) frameworks used by companies to measure their corporate sustainability have so far tended to focus on the environmental side (do we recycle, what’s our carbon footprint, energy consumption, etc.?), we’re currently seeing a major shift towards the social and governance components. Among other things there are now solid reporting frameworks available for the growing number of businesses that realise that tax is increasingly perceived as a key factor in sustainability, and that greater tax transparency is an attractive opportunity to build trust.
In this article we look at four initiatives that are propelling tax to the forefront of sustainability, and why it might make sense for you to build tax into your sustainability story especially when the economy will be recovering from the current unprecedent times of COVID-19.

It stands to reason that an important indicator of a company’s social performance is the economic contribution it makes towards public revenues in the societies in which it operates – which includes the way it governs its tax affairs. This means that companies should at least be considering whether to bring tax onto their sustainability – and sustainability reporting − agenda.

Tax and trust – but whose trust?

As so often, it all boils down to trust. But whose trust? Companies have to build trust among many different stakeholders whose interests don’t necessarily coincide. While society as a whole expects a company to make a reasonable contribution to public revenues, for the sake of its shareholders and potential investors, any enterprise also has to make sure it’s delivering sustainably on the bottom line. In other words, most businesses will be trying to tread the line between tax planning and paying their share of tax.

A quote in the Principles for Responsible Investment’s Engagement Guidance on Corporate Tax Responsibility (see Engagement Guidance on Corporate Tax Responsibility, PRI, 2015) sums it up: “A total lack of tax planning is bad for investors and evasion is illegal, but we know companies operate in grey areas. The key thing for investors is to understand where a company sits on this spectrum: how light or dark grey its tax practices are.”

In this article we argue that a) companies should be thinking more carefully about the trust implications of how they manage this balance, and b) if they are doing good, they should be talking about it.

The approach you choose is by no means a foregone conclusion. Views on how these different stakeholder interests should be balanced vary around the world, with some companies still putting the shareholder very much to the fore, while others are expected to take a much broader array of stakeholders into account. Especially if you’re a multinational, you have to understand these differences and how they will influence the way you report on your tax governance and your behaviour as a taxpayer. Don’t assume, however, that the goalposts are fixed. Just take a look at Blackrock’s Larry Fink’s letters to CEOs over the last two or three years (see for example A Fundamental Reshaping of Finance, Blackrock, 2020) to see how rapidly the expectations of weighty investors are evolving towards a much broader definition of the stakeholders towards whom a company has responsibilities. 

Why the sudden interest in public tax transparency?

It’s important to recognise the risk of missing the boat. Initiatives pushing for tax to be a more prominent part of sustainability and the way companies report on it are gaining momentum. Organisations that drag their feet could be not only be missing opportunities, but could also end up getting caught without a credible story. The compelling case for tax transparency is put in a nutshell in the document setting out The B Team Responsible Tax Principles (see A new bar for responsible tax, The B Team, n.a.): “We recognise that public trust in multinationals remains low, and that tax poses an increasing reputational risk for companies. Too few prominent business voices have […] articulated the case for responsible tax practice in building trust. The time to do that is now.”

The B Team is a group of global business and civil society leaders working to tackle the current problems of leadership. It’s no lightweight: the founding companies of the tax principles include Allianz, Shell, Unilever and Vodafone. In consultation with leading companies, civil society organisations, institutional investors and international institutions, The B Team has come up with seven principles designed to drive responsible tax practice. They call on businesses to endorse these principles, work towards reflecting them in practice, and improve their reporting on tax and tax strategy. They also call for governments to consider the sustainable development implications of tax and work together to create more certain, stable and effective tax systems.

Heavyweight support for tax sustainability

It’s not just The B Team that’s arguing the case for better tax reporting. A milestone along the road to more mainstream inclusion of tax in sustainability reporting was the publication in late 2019 of the GRI 207: Tax standard issued by the Global Sustainability Standards Board (see GRI 207: Tax 2019, Global Sustainability Standards Board, 2019). This firmly establishes responsible tax practice as a formal component of the GRI Sustainability Reporting Standards, a set of norms followed by an increasing number of organisations reporting on their impacts on the economy, environment and society.

Like The B Team, the new GRI Standard emphasises the United Nations’ belief that taxes play a vital role in achieving the Sustainable Development Goals. It also points out that taxes are “a key mechanism by which organisations contribute to the economies of the countries in which they operate”. The GRI Standard is even more comprehensive and detailed than The B Team principles, setting down disclosures in four areas: approach to tax; tax governance, control, and risk management; stakeholder engagement and management of concerns related to tax; and country-by-country reporting. The last area is notable, as it reflects growing public concerns about where companies pay tax in relation to where their business operations are actually located.

Here it’s important to realise that there are major voices questioning the ability of country-by-country reporting alone to reflect the full picture in terms of a company’s contribution. In its 2018 study, for example, the European Business Tax Forum endeavours to shed light on the tax contribution of companies in the EU/EFTA area. It includes compelling evidence of the contribution large businesses make to economy and society, finding that 41 of the largest companies based in the EU and EFTA contributed tax of EUR 198.2 billon, comprising EUR 52.3 billion taxes borne and EUR 145.9 billion collected on behalf of governments (see Total Tax Contribution, EBTF, 2019). Note that at the time of writing, two out of the eight participating members of the European Business Tax Forum in the Total Tax Contribution working party are Swiss multinationals. So if you do decide to go down the road of broader tax disclosures, you’ll be in good company, in this country at least.

Eight key lessons from The B Team on Corporate Tax Reporting

1. Reporting on tax has benefits

2. Narrative can be as important as data

3. Effective reporting answers the questions people are asking

4. The case for reporting in the extractive industry is particularly strong

5. Tax data should remain accessible year-over-year

6. Concerns about cost, complication and usefulness need to be reconciled

7. Simple ratios of ‘misalignment’ may mislead

8. Engagement with information users can − and should − drive learning

(see Public Tax Reporting, The B Team, 2018)

What about sustainable investment?

The main stakeholders addressed by sustainability reporting include investors. Over the last decade or so, the Principles for Responsible Investment (PRI) have been advocating the view that investors should be paying much more attention to the impact of environmental, social and governance (ESG) issues on investment performance. Interestingly, the PRI has recently also been narrowing in on tax, providing guidance for investors on how to engage with their investee companies on matters of corporate tax responsibility (see Engagement Guidance on Corporate Tax Responsibility, PRI, 2015). This guidance doesn’t offer a one-size-fits-all approach, but it does underscore the growing opportunities available for companies that improve their tax approach. Again, with many prominent organisations as signatories to the PRI, this is fast becoming the mainstream view. If you need convincing of the credibility of the PRI, I refer you again to signatory BlackRock’s recent unequivocal messages to businesses about where sustainability stands on the agenda of the world’s largest passive investor (see for example A Fundamental Reshaping of Finance, Blackrock, 2020).

Another urgent consideration related to public tax transparency

The case for reporting more fully on tax is amplified by growing public tax transparency. With tax authorities all over the world investing billions to rapidly adopt advanced technology to keep much closer tabs on taxpayers, including corporations, they might soon know more than the taxpayers themselves. I won’t go into any further depth here, but you might want to check out some of our thought leadership articles on the urgent implications of public tax transparency (see What is tax transparency, PwC Switzerland, 2020).

A question to consider: will COVID-19 up the ante in terms of tax disclosures?

Any crisis can result in pressure on public revenues in the short or long term. It’s interesting to note, too, that tax transparency gained significant momentum after the 2008/09 financial crisis. Given the unprecedented amounts of government money already earmarked for COVID-19-related measures and support – plus the untold, as-yet hidden public costs of the crisis – the chances are that this will be the case once more. Will the public demand even more evidence than they do already that businesses are playing their part in footing the bill? 

To sum up: time to work out where you stand on tax disclosures

The message is clear: tax is fast being recognised as a key factor in a company’s claims to operating sustainably. Ignore this rapidly evolving trend and you risk running into problems with your stakeholders. Ride the wave and you could build enormous trust by making more comprehensive tax disclosure part of your sustainability reporting. But deciding precisely where you lie on the tax disclosures spectrum is a complex issue.

The B Team acknowledges the importance of a nuanced approach: “The companies [that have committed to The B Team Responsible Tax Principles] have adopted different approaches to reporting, however. This is informed in part by differing statutory requirements across different sectors. But it also reflects the fact that since no two companies are the same, no two approaches to responsible tax necessarily look the same − different companies report for different reasons, to different stakeholders and in different ways. Best practice in this area is still emerging and there is no ‘one-size-fits-all’ approach that is appropriate to all companies nor is there a generally accepted gold standard for tax reporting.”

In this environment there might be a substantial first-mover bonus (and a chance to positively influence the agenda) for companies that adopt public tax transparency and proactively disclose the taxes they pay and collect, as well as their approach to tax governance, and provide credible evidence to back up their claims. On the other hand, there might be very good reasons for your company to be reactive rather than proactive.

Contact us

Charalambos  Antoniou

Charalambos Antoniou

Director, Tax Function Design Leader, PwC Switzerland

Tel: +41 58 792 47 16