Responsible tax landscape

In this special edition, we look back at some of the news we reported on in this year's newsletters, and what they say about the current trends in responsible tax and transparency. In addition, we look forward to what 2023 will bring, and what to keep an eye on.

2022 in review

Country-by-Country Reporting (CbCR) remained very much in the news this year. On the one hand, there were a number of stories driven by the regulatory aspect of public CbCR: Germany, Hungary, Ireland, Netherlands, Romania and Sweden all reported advancing on the implementation into domestic legislation of the EU Directive on Public CbCR. And in true EU fashion, Romania also announced that they were moving faster on the implementation, and that the rules would start applying for financial years starting on or after 1 January 2023 (instead of 22 June 2024). More information on the current implementation status can be found here.

Still on the regulatory aspect, the Australian government announced their intention to pass a bill through parliament to implement public CbCR requirements for large MNEs, starting on 1 July 2023. In Australia. large MNEs are defined as having a turnover of AUD 1 billion, or just under EUR 643 million at the time of writing. In the US, whilst a similar bill passed the House but has not been put to a vote in the Senate, the SEC has signalled support for public CbCR.

Then, at the end of November, the Financial Accounting Standards Board (FASB) agreed to issue a proposal requiring US companies to increase their disclosures on income taxes paid and reconciliation rates. Their proposal would require US companies to disclose income taxes paid at state and federal level, as well as for foreign jurisdictions, on the basis of a quantitative threshold of 5%. The proposal could be issued by February, after which companies would have 75 days to provide comments. If finalised, new rules could then be issued later in 2023.

In the US, we have witnessed the defeat of a shareholder proposal at Amazon, demanding that Amazon start reporting on its tax affairs and contributions on a country-by-country basis in line with GRI 207. The lead up to this vote itself eventful, with Amazon attempting, and failing to block the proposal from being put to a vote. Similar shareholder proposals were then announced at Microsoft and Cisco.  Both proposals were rejected, with almost 27% of Cisco shareholders and 22% of Microsoft shareholders voting in favour. Even more recently, some more proposals were announced at US oil giants ConocoPhillips, Exxon, and Chevron, with PenSam one of the co-filing shareholders at ConocoPhilips. This shows that major investors are increasingly putting public pressure on large companies to demand change, where not so long ago such discussions happened behind closed doors, if at all.

Ahead of the upcoming regulatory requirements on tax transparency, we have been witnessing a remarkable increase in voluntary disclosure. We, therefore, decided to take a closer look at the state of tax transparency in the Nordics together with our colleagues in Finland, Iceland, Norway and Sweden. We elected to read through the public tax disclosures of the 111 most-traded, top-listed companies in the Nordics sifting through their annual reports, sustainability reports, tax policies and tax reports for the 2021 reporting year. To allow for comparison between countries, we then benchmarked each of these 111 companies' disclosures against GRI 207, the Global Reporting Initiative's sustainability reporting standard for tax and gave each company a rating based on their compliance with GRI 207. Published in June, our report , amongst other things, found that:

  • 96% of the companies we assessed in Denmark had made their tax policy publicly available. Numbers were much lower in Sweden (50%), Finland (44%), Norway (32%) and Iceland (0%).
  • 55% of the companies we assessed claimed to use the GRI reporting framework for their sustainability reporting. These numbers rose to 80% and 70% in Finland and Sweden respectively but were at only 25% in Denmark.
  • Despite this high rate of adoption of the GRI reporting framework, relatively few of these companies actually used or acknowledged GRI 207, and only one company out of the 111 reported on all quantitative disclosure requirements under GRI 207-4.
  • In the qualitative part of the reporting (GRI 207-1, 207-2, 207-3), we found that it is under GRI 207-2 (Tax governance, control and risk management) where there is the biggest room for improvement. In particular, the following disclosure requirements were least reported on:
    • How the approach to tax is embedded within the organisation
    • The approach to tax risks, including how risks are identified, managed, and monitored
    • How compliance with the tax governance and control framework is evaluated
    • The assurance process for disclosures on tax.

On the back of this report, we hosted a responsible tax roundtable discussion with heads of tax and representatives from leading Danish companies, investors, and fund managers, which was also attended by Dave Reubzaet, director at GRI. We discussed some of the dilemmas facing reporting companies and tried to identify what information and data investors need from companies. A write-up of the event, as well as the inspiration paper we sent to participants ahead of the event, can be found here

The OECD recently published its annual Corporate Tax Statistics covering 160 countries and jurisdictions, which includes new aggregated CbCR data on activities of almost 7,000 MNEs. As the OECD states in the accompanying news release:

"The new CbCR data show that the median value of revenues per employee in jurisdictions with a corporate income tax (CIT) rate of zero is USD 2 million as compared to just USD 300,000 for jurisdictions with a CIT rate above zero. Moreover, in investment hubs, related party revenues account for 35% of total revenues, whereas the average share of related party revenues in high, middle and low income jurisdictions is around 15%. While these effects could reflect some commercial considerations, they are also likely to indicate the existence of BEPS."

OECD-driven efforts against Base Erosion and Profit Shifting therefore continue. While we did not report on BEPS 2.0 during the year, the current state of play at the time of publication is that while Pillar 2 (global minimum effective tax rate) is more advanced than Pillar 1 (redistribution of taxing rights), no jurisdiction has yet implemented the minimum effective tax rate. However, the EU is currently a front-runner, as the EU Council announced on 12 December that an agreement had been reached to implement Pillar 2 under the Minimum Tax Directive. The Directive will need to be transposed into member states' national laws by the end of 2023.

An interesting recent development in terms of international cooperation, is the resolution passed at the United Nations (UN) in November to establish a Convention on Tax. In our first newsletter of the year, we reported that a proposal for what a UN Convention on Tax could look like had been published by the European Network on Debt and Development (Eurodad), following a call by the Africa Group at the UN in 2019 for such a Convention. It is interesting to note that this resolution passed, despite what sources say was strong lobbying against it by some OECD countries.

While unclear at this stage what will exactly happen, this could move negotiations and rulemaking on global tax from the OECD/G20 to the UN. While there is a risk that moving tax discussions to the UN will slow the process down even more, it is also undeniable that this new forum should give a voice to those developing nations that have no voice at the OECD. The African Tax Administration Forum (ATAF) welcomed this result, noting that "the current global tax rules do not result in a fair allocation of taxing rights between source and residence countries to the detriment of source countries and do not effectively address the risks of base erosion and profit shifting (BEPS) in low-capacity developing countries."

The greatest challenge the world is facing today is global warming, and countries and companies around the world are setting very ambitious targets of carbon reduction for 2030 and 2050 to try and maintain the increase in average global temperatures to a minimum. As most of the technology necessary to achieve these targets does not exist yet, trillions of dollars of public and private investments will be necessary globally and annually by 2050. At the EU level, the EU Green Deal and its "Fit-for-55" package rely heavily on taxation, incentives and grants to induce behavioural change and direct investments where they are most needed.

From carbon pricing, or carbon taxes, to plastic taxes and incentives to encourage investments in carbon-reducing technologies and renewable form of energies, we are in effect witnessing a shift to green taxation. On 13 December, in a world's first, the EU announced that the EU Parliament and the Council had reached a provisional agreement to set up an EU Carbon Border Adjustment Mechanism (CBAM). Part of the EU’s "Fit for 55" package, the EU CBAM is expected to apply from 1 October 2023 and is designed to incentivise non-EU countries to increase their climate action by equalising the price of carbon paid for EU products operating under the EU Emissions Trading System (ETS) and the one for imported goods.

The business consequences of tax driving net-zero ambitions have been addressed in a recent KPMG study, while the need to rehabilitate tax incentives as a tax policy instrument was discussed in a recent blog post. We also now keep you aware of the existing and upcoming environmental-related tax regulations in more than 40 countries (and more to come) in KPMG’s ESG Tax Tracker.

2023: looking ahead

One relatively risk-free bet we will gladly make is that we expect to see more companies, both across Denmark and the world in general, disclose more information about their tax affairs – both qualitative information on their approach to tax and tax risks, and quantitative information on their tax contributions on a country-by-country basis. And for those companies that do not publish such information yet, but that either fall into scope of the EU Directive, the upcoming Australian law or use the GRI reporting framework, we expect them to be testing such disclosures internally, assessing their data collection capabilities and running draft reports through their governance process up to their Boards.

Speaking of the Australian public CbCR law, we are very curious to see the results of the consultation process that the Australian Taxation Office (ATO) ran, and what exact disclosure requirements will be set. In particular, we wonder how different the requirements will be from the EU Directive, and how closely aligned they might be with GRI 207. As the law is planned to be in place from 1 July 2023, we expect more details to be published during the first half of the year.

In the US, we will keep a close eye on the FASB's consultation process on their proposal for increased income tax disclosures and will be very curious to see what comments the FASB receives from US companies. It is the third time that the FASB floats such a proposal since 2016, and it has encountered strong opposition from US businesses in the past.

However, with these various requirements being discussed and implemented around the world, there is a real risk that the different standards being set around the world will not allow for comparison and will add confusion on what exactly is being reported, until standards and rule-makers finally align.

While we expect more shareholder proposals to be announced requesting large listed MNEs to report on their tax affairs in line with GRI 207, we would be shocked to see such a proposal get a majority of shareholder votes any time soon. However, these proposals certainly contribute to the conversation around tax transparency in the US.

We are impatient to read the first two ISSB standards, expected for 2023, and to find out how exactly they and the GRI reporting framework complement each other – and what place tax takes in the ISSB's standards.

Closer to home, we expect that 2023 will bring us more clarity on how responsible tax and tax reporting fit in the EU Green Deal, in particular within the EU Commission's Sustainable Finance programme and the European Sustainability Reporting Standards (ESRS), which complement the Corporate Sustainability Reporting Directive (CSRD).

As we noted earlier this year, CSRD does not explicitly mention tax, nor do the first drafts of the ESRS. Tax is also not mentioned in the EU Taxonomy. However, the Final Report on minimum safeguards, published by the Platform on Sustainable Finance, includes criteria on taxation in its recommended safeguards for sustainable investments and expects that the final ESRS will cover taxation too.

While the Final Report does not bind the EU Commission, the Platform on Sustainable Finance is an official advisory body to the EU Commission established under Article 20 of the Taxonomy Regulation. According to the EU Commission's website, it brings together the best expertise on sustainability from the corporate and public sectors, from industry as well as academia, civil society and the financial industry. It is chaired by Nathan Fabian from the UN PRI and held discussions with the members of EFRAG who are developing the ESRS.

This leads us to expect that, one way or another, regulatory expectations will be set in the EU with regards to companies' sustainability reporting on their approach to and management of tax and tax risks, thereby complementing the quantitative disclosure requirements set under the EU Directive on public CbCR.

In 2023 we will see lawmakers move forward on implementing the rules on minimum taxation under OECD's BEPS Pillar 2 project that must be in place by 1 January 2024. There are still a lot of unknowns for assessing the impacts on MNEs, which hopefully will be cleared up during the public consultations and through issuance of implementation guidelines from the OECD. Clarity about safe harbours and interpretation of the interaction between those rules and local regimes still mean that there are a lot of uncertainties about the impacts in terms of the compliance and potential tax payments of the affected companies.