The Environmental, Social and Governance ("ESG") and tax transparency debate has evolved quickly and ESG issues remain relevant to corporate strategy and governance.
Tax might not be the first sustainability factor which comes to mind. However, how much tax companies pay, where they pay it, and how they manage their tax matters is evaluated as an ESG or sustainability measure, as tax revenues help fund public services and support sustainable development.
In the following sections you will find detailed information on these topics:
How is tax and ESG connected?
Taxes affect all three areas:
Moreover, tax touches many of the United Nations Sustainable Development Goalsopens in a new tab ("SDGs") as tax revenues have a huge potential to impact how communities thrive and prosper.
Reporting on tax is not only about "being transparent" or "how much tax you pay", but also about the principles applied and the impact your tax footprint makes. In other words: It helps stakeholders understand how the company’s tax practices and contribution relate to sustainable and inclusive growth.
The tax transparency landscape continues to evolve through statutory disclosure requirements and reporting standards.
Companies therefore need to distinguish applicable legal obligations from voluntary reporting frameworks and assess how their tax disclosures align with their wider sustainability reporting.
What are the driving forces?
The tax transparency debate gained prominence following the financial crisis of 2007/2008 and heightened public scrutiny of perception that large corporations’ tax practices has since developed into a broader discussion about corporate accountability, tax governance and contributions to society.
Two key drivers are: market forces and regulatory initiatives.
Market forces
Stakeholders may expect companies to explain how their approach to tax aligns with their corporate purpose, sustainability strategy and contribution to society. Tax disclosures should therefore be consistent with the company’s stated tax principles and wider public reporting. Investors may use tax governance and transparency information to assess risks and corporate practices, although expectations and the treatment of tax in sustainability assessments vary.
Regulatory initiatives
International and domestic initiatives have expanded tax-related reporting and disclosure obligations. These include confidential country-by-country reporting to tax authorities, sector-specific public reporting under the EU Capital Requirements Directive and Accounting Directive, the EU Public CbCR regime, UK tax strategy publication requirements and Australian public CbCR.
The EU Public CbCR Directive is already in force, with reporting obligations governed by national implementing legislation; Australian public CbCR applies to reporting periods beginning on or after 1 July 2024. Each regime has its own scope, thresholds and reporting requirements. Alongside statutory obligations, GRI 207: Tax 2019 provides a standard for reporting tax practices and country-by-country information.
Adoption of GRI reporting is generally voluntary unless otherwise required, but organisations reporting in accordance with the GRI Standards must apply the relevant requirements where tax is a material topic. The Principles for Responsible Investment (PRI) support investor engagement on tax transparency rather than constituting an equivalent corporate tax reporting standard.
What does tax transparency actually mean though?
Tax transparency means different things to different people. Tax transparency standards all have different positions on what is "transparent" and tax transparency can be viewed as a spectrum.
What is deemed "enough" by the business, the public, investors, and governments will change over time. Likely, "the norm" will move along the spectrum so that more disclosure will become necessary. This understanding of tax transparency can be illustrated as follows:
EU Public CbCR directive – A potential game changer?
Directive (EU) 2021/2101 on EU Public Country-by-country Reporting ("CbCR") entered into force on 21 December 2021. It requires Member States to apply the reporting rules to financial years beginning on or after 22 June 2024, with earlier application possible under national implementing legislation
Subject to the applicable exemptions and national implementing legislation, the regime covers EU ultimate parent undertakings and standalone undertakings meeting the EUR 750 million revenue threshold in each of two consecutive financial years, as well as qualifying medium-sized or large EU subsidiaries and qualifying EU branches of non-EU undertakings meeting the relevant group or standalone revenue test. Branches are also subject to a national turnover threshold.
The report relates to the latter of the two financial years and covers all activities of the ultimate parent and its consolidated affiliated undertakings, or of the standalone undertaking; it does not generally require separate financial disclosures for every subsidiary.
In addition to identifying information, including the undertaking’s name, reporting year, reporting currency and the required list of consolidated subsidiaries, the report contains information in seven key areas:
A brief description of activities
Number of employees on a full-time-equivalent basis
Revenue (including related-party revenues)
Profit or loss before tax
Income tax accrued and income tax paid
The amount of accumulated earnings
The information must be presented separately for each EU Member State, aggregating activities within that Member State.
Separate presentation is also required for each jurisdiction listed in Annex I to the Council conclusions on the EU list of non-cooperative jurisdictions for tax purposes on 1 March of the reporting financial year, and for each jurisdiction listed in Annex II on both 1 March of that year and 1 March of the preceding financial year. Information concerning all other jurisdictions may be presented on an aggregated basis.
Reports must to be published in the relevantan EU Member State business register and made accessible free of charge on the applicable undertaking’s website within 12 months of the balance-sheet date, subject to any shorter national deadline. Website access must be maintained for at least five consecutive years.
Member States may permit an exemption from website publication where the report is freely accessible in a machine-readable format through the register and the website provides the required reference and access information. For non-EU-parented groups, qualifying EU subsidiaries or branches generally have publication obligations.
The Directive provides an exemption where the non-EU ultimate parent publishes a compliant report, makes it freely accessible on its website within the prescribed deadline in a machine-readable format and at least one official EU language, and identifies a qualifying EU subsidiary or branch that has published the report in the relevant register. A parent report merely covering the subsidiary or branch is not sufficient; the applicable national exemption conditions must be checked.
Benchmarking survey
Our survey prepared in 2022 provided insights into how the tax transparency reporting landscape in Switzerland would develop and what companies were planning to do.
The focus in recent years has been on the introduction and implementation of BEPS Pillar 2 and companies have been awaiting the implementation of the Public CbCR regimes. Therefore, limited developments have been observed.
Tax Transparency Benchmarking Survey
Insights into how the Swiss tax transparency landscape