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.
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.
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.
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.
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)
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).
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).
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?