Tax transparency – are companies disclosing more about their tax affairs?
04 August 2017
Ten years ago, the words ‘tax’ and ‘transparency’ were rarely found in the same sentence, but in the current environment, tax transparency is an increasing focus for tax departments. One question I am often asked is ‘what are the trends in tax transparency – are companies disclosing more?’
Looking at 2016 disclosures in the FTSE100, (the subject of our fourth annual report on trends in tax transparency, the answer is ‘yes’. While greater disclosures over tax will not add value for all companies, for this group of large, UK listed companies, we found an increasing number of companies talking about their approach to tax (66 companies compared to 64 last year). The increase isn’t a surprise, and with the requirement for a public tax strategy applying to accounting periods starting after 15 September 2016, I’d expect this number to be 100 in 2018.
What is more revealing, however, is the increase in the number of companies disclosing details around their tax governance and risk management (66 companies), an increase of ten companies compared to last year (56 companies). So what are companies trying to achieve by disclosing more details on their tax governance (ie who has oversight of tax affairs) and risk management (ie the processes and controls in place to manage tax risk)?
One answer is that it is a way of giving the reader confidence that the strategy is embedded in the business. For a company without board oversight of their tax affairs and with no tax control framework in place, the reader lacks confidence that the statements in the company’s approach to tax are carried out in practice. Disclosures give comfort to readers that tax affairs are overseen at an appropriate level and provide insight into the system of internal control to monitor the operating effectiveness of key tax controls.
Many companies agree that thoughtful tax transparency will help to increase understanding of the tax system. I believe that disclosures around tax governance and risk management will become increasingly important going forward, as companies look to build trust over their tax affairs, and should be an area of focus for companies considering increased tax transparency.