Increasing disclosure over tax

With the financial crisis, the need to repair public finances and concern about whether companies are paying ‘the right amount of tax’, there has probably never been greater public interest in how much tax is paid by companies.

You might have read in the news about companies not paying their ‘fair share of tax’.  Some companies have been targeted by Civil Society Organisations (CSOs) to explain the tax they pay and with this increased attention, a new reputational risk is emerging.  Traditionally tax was viewed as a private financial matter, a cost to be managed or a question of compliance.  But this is no longer the case.  Tax is now becoming a corporate responsibility issue, of interest to a variety of stakeholders including investors, governments, media, CSOs as well as the Board, finance department, and employees.  Are you informed on the issues and do you have an awareness of current developments in tax reporting?

In recent years, a number of proposals for increased financial reporting by companies have emerged.  These are under discussion by regulators and legislators and have the potential to have a significant impact on the disclosure requirements of companies in the near future.  In the US, the Dodd-Frank Act includes provisions requiring SEC registered extractive companies to report on all payments made to US Federal and foreign governments.  In 2011, the EU introduced a proposal for an amendment to the existing Transparency Directive to introduce new reporting requirements for listed and non-listed large companies active in the extractive industry and the logging of primary forests.  The Extractive Industries Transparency Initiative, although voluntary, has been adopted by 14 countries to ensure that extractive companies publish what they pay and governments disclose what they receive.

The main proponents of these proposals are the CSOs who see this as an important element of their campaign to ease the plight of the poor in developing countries. There are two distinct aspects. The first is the need to hold governments of developing nations to account for the revenue they collect. The second element is the issue of helping developing nations collect the “right” amount of tax from international businesses.  Although currently focused on extractive industries, certain CSOs are campaigning for a wider application of country by country reporting requirements for all MNCs.  Their primary focus is on tax planning and transfer pricing policies and a call for them to publish very detailed financial information for each country in which they operate.

It is clear therefore that there is pressure on businesses to improve transparency around the taxes they pay to government in the individual countries in which they operate.  So how are companies responding?  Some, mainly from the extractive industry, have been leading the way in tax reporting.  The focus from CSOs is on corporate income tax but companies pay and collect a wide range of taxes which are not always fully recorded in financial accounts or recognised.  A number of companies such as Rio Tinto are reporting their tax payments using this Total Tax Contribution approach.

A few companies are going further to assess their wider economic impact, taking into consideration macroeconomic impacts, tax contributions, socio-economic and environmental impacts, for example British Land.  The aim is towards greater transparency and for better engagement with key stakeholders. 

Whether for corporate responsibility purposes or to address a reputational issue, greater disclosure in tax reporting is high on the agenda in the current climate.  Corporates should keep up to date with the latest trends and developments in tax reporting and consider whether there is a business case for increasing disclosure over tax.

Contact details
Email: Stuart Wallace
Tel: +44 (0) 121 265 6555