Tax transparency: business under the microscope
21 June 2013
According to some politicians, civil society organisations (CSOs) and journalists, a number of the world’s biggest brands are by dint of their tax arrangements “unethical”, “evil” and “disgraceful”. Wherever you stand on the issue, it’s clear that such headline-grabbing allegations can only be bad for business, which in turn can only harm the country’s economic success.
So why the scrutiny, and why now? One of the reasons why tax has been pushed to the top of the agenda is because times are tougher for ordinary people. During a period of wage freezes, benefit cuts and tightening of public spending, it’s only natural that attention turns to whether companies are paying their way.
Part of the problem companies face is that their legitimate use of tax law put in place to boost business is regarded by some as avoidance of dues owed. Commentators and the public are developing an expectation of how much tax companies should pay, and whether they are ‘doing the right thing’. There seems to be a gap between the information companies provide on their tax strategy, and information on the amount that ends up in the Exchequer’s coffers.
It’s vital therefore, that if your tax reporting comes under scrutiny, that it can be easily understood and that it helps to build trust. Part of a good tax strategy is nipping scrutiny in the bud by reporting the whole story around what you pay and its wider impact. The harder part of the strategy is getting ahead of the conversation and ensuring that expectations are appropriate in the first place. Once a negative impression has been created it’s almost impossible to dispel.
Explain developments or risk misunderstanding
What makes a well-communicated tax strategy? Well it’s not just about masses of data. Numbers alone are open to misinterpretation and increase the risk that important messages are lost in a barrage of data. Instead, showing who manages your tax and how your tax strategy fits with the business strategy - and what that means in practical terms for all your stakeholders - will reveal if what you do on the ground matches what you say publicly. Explaining the numbers, what drives them and the reasons behind them is vital. Context is everything.
One way to provide context around tax can be your Total Tax Contribution (TTC). Your TTC helps explain the full tax contribution that you make, over and above corporation tax. It can inform stakeholders about the impact on the business of all the taxes you pay, and the relative size of those taxes. TTC is designed to be easily understood by everyone, not just specialists, as it focuses on cash tax actually paid in the reporting period and separates out taxes borne and taxes collected. It helps to show what additional contribution your business makes to government through sales taxes, employment taxes and other business taxes.
Journalists, politicians and CSOs are casting their investigative net ever wider. The question of what taxes you pay at home and abroad isn’t going away. If the current climate continues as expected, country-by-country reporting could become mandatory for all large EU companies. Many businesses own assets in one place, but use them in others, and a lot of funds flow between related companies in different countries. Companies should expect that what they pay, where, will be looked at closely in the future and, in the absence of good information on tax strategy and payments, it could be misunderstood, and your business might end up taking a hit over something that’s really nothing.
The best question you can ask before deciding on anything, is: if someone were to look at your tax position, what conclusions could they draw from publicly available information, and would their conclusion be right?
At PwC, we’re taking steps to address our role in building a simpler tax system. We’re engaging all our staff in a debate about tax, and about our reputation, as well as how to build confidence in the system. There has to be an inclusive, informed and balanced global conversation about how to contribute to government revenues, without damaging competitiveness or operational effectiveness, and without destroying public trust. We’re convinced the answers lie in a co-ordinated communications effort, and you can join the debate by posting your comments below – or you can find out more on our Total Tax pages, Corporate reporting site and Kevin Nicholson’s Tax blog.