The post COVID-19 landscape of insurance tax: reputation
August 28, 2020
Read the introduction to this series.
Through a lockdown-created lens of media and social media, companies across all sectors have found their commercial activity - and reputation - under scrutiny. Verdicts have been swift - and influenced by a public preference for environment, social and governance (ESG) criteria. Those who switched their operations to making hand gel or masks emerged with reputations enhanced. Others - perceived to have taken advantage of furlough schemes for example - were not so lucky. Insurance companies, in particular, were criticised for their reaction in ensuring that consumers and businesses have the cover needed to navigate the pandemic.
As focus shifts to a green recovery, we expect this trend to continue. Tax functions will have an essential role to play in supporting their organisations to demonstrate transparency and build public trust.
How might the tax landscape change?
As the economy rebuilds, the trend of increased transparency will likely accelerate again. New information will be used by tax authorities, the media and the general public to assess the actions of large businesses.
This demand for increased transparency will likely prompt companies to increase the number of disclosures in their financial statements, as well as provide more detail about their effective tax rate. Some governments restricted access to COVID-19 stimulus packages where groups use perceived “tax haven” arrangements, something the insurance industry should note given the prevalence of insurance activity in traditionally low or no tax jurisdictions. This is unlikely to be a trend that goes away anytime soon.
The introduction of the EU Mandatory Disclosure Regime (“EU MDR/DAC6”) will enable greater sharing and transparency between European countries. Additionally, the new Global Reporting Initiative (“GRI”) Tax Standard requires groups to publicise their CbC report. From 2021 a number of groups will publicly release their CbC report, which will increase the pressure on others to do the same.
Looking over the horizon, we could also see:
- a requirement to disclose transfer pricing documentation, specifically the master and local file.
- a requirement for large businesses to notify HMRC of uncertain tax treatments, something that is currently under consultation and could be introduced from April 2021.
- DAC7, the seventh revision to the Directive on Administrative Cooperation in tax, focusing on digital and shared services platforms. It will aim for fair taxation of income generated via digital platforms and, unlike its predecessors, will cover both direct taxes and VAT.
Practical steps for tax teams to proactively manage your reputation
Getting the wider business to engage in the conversation around tax reputation and respond appropriately is a challenge for the tax function. But it’s one that will pay dividends. Businesses can proactively build and maintain their reputation and ward off the risk of damaging large tax disputes or media attention.
These are the practical steps that we recommend to proactively manage your tax reputation:
What is your business's total tax contribution?
- The tax conversation often starts with corporation tax but this continues to be misleading. Including indirect and employment taxes will show a truer contribution. Understanding your contribution and how it compares to others, in your sector and beyond, is increasingly important.
How do you know if you are acting outside of your tax strategy?
- Since the requirement to publish a tax strategy was introduced, many groups include strong statements about how they identified and managed tax risk. However, more businesses need to put clear risk management processes in place for tax to evidence how their strategy has been translated into their commercial decision making process.
Is your data supporting transparency? Could your data betray you?
- There will be an increased focus on data supporting tax processes as technology improves and gathering and analysing information at a transactional level becomes easier. This will drive the transparency agenda and lead to new rules being legislated.
- Tax functions should be aware of the challenges around tax data and the difficulties in quantitatively demonstrating that policy/process has been applied consistently (across multiple jurisdictions). Identifying where these challenges could be material and proactively tackling the issue will significantly reduce the risk of a reputation-damaging tax event in the future.
Don’t underestimate the power of social media, even for tax!
- Participants in the Building Public Trust Public Opinion Day we held last year encouraged groups to communicate more directly with the public. Specific suggestions included using social media to show short, punchy, engaging videos relaying key corporate information, perhaps overseen by a regulatory body checking facts and calling out ‘fake news’.
The panellists were also keen to see companies engage with local communities through initiatives such as “open door days” and hosting pop-up shops. This will not be easy for a tax function and is part of the challenge of the future landscape.
The advancing transparency agenda and increased focus on societal responsibility will increase the focus on tax as a central part of an insurance group's reputational risk profile. The tax function will be key in highlighting risk and driving change within the organisation.
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