For tax functions, transparency is a vital way to support their organisations’ ESG strategy – as my previous blog highlighted.
Tax is fundamentally a social issue: a financial measure of organisations’ contribution to society. And tax transparency is how they go about being open about that contribution.
Being transparent about tax arrangements gives an organisation licence to tell its ESG story – which is critical in today’s increasingly ethically driven climate.
As the demand for transparency grows among regulators, the public and investors, what do tax leaders need to focus on? What are the benefits of greater transparency, and what challenges will you encounter?
There’s no one-size-fits-all approach to tax transparency. The starting point is to identify the transparency ambition for your organisation.
That’s no straightforward task. You’ll need to give careful consideration to several factors:
- Priorities. Make sure you understand your organisation’s ESG reporting priorities. Do the standards committed to include tax standards (such as GRI 207)?
- Benchmarking. Assess how your approach to tax transparency compares to industry peers, best practice and the relevant disclosure standards. Where are you performing strongly, and where can you develop further?
- Regulation. Tax transparency rules continue to evolve. You must be comfortable that your ambition is suitable for the current and future regulatory context.
- Balance. Your ambition should be aligned with the organisation’s broader priorities, while taking into account any resource or data constraints it might face. Do you have the right balance between the benefits, costs and challenges?
Tax transparency benefits
- Engaging stakeholders
Public interest in tax has never been higher. As customers become more conscious, they want reassurance that the brands they buy from are behaving ethically – including when it comes to paying tax.
In recent years, we’ve seen several high-profile media stories of organisations coming under attack for paying little or no corporation tax, despite earning significant profits.
Transparency is a way to engage meaningfully with customers on this issue. A comprehensive tax transparency report is a chance to put context around the organisation’s tax position; and share a holistic view of its tax affairs. Data alone is not enough.
In addition, demonstrating that you’re a responsible taxpayer can strengthen relations with other critical stakeholders. For example, current and prospective employees, who increasingly want to work for ethical organisations.
- Investors and finance
With investment decisions being influenced by ESG factors, a responsible approach to tax becomes part of your licence to operate.
Investors tend to link the strength of an organisation’s management to its success and longevity. Many are introducing explicit ESG and tax transparency criteria into their decision-making frameworks.
Comprehensive, transparent disclosure is an effective way to meet these expectations, and demonstrate that you’re a responsible taxpayer. It will also place your organisation in a stronger position to obtain funding – at a competitive price.
Tax transparency challenges
- The evolving landscape
The tax transparency landscape is complex and fast-moving. With that mind, there are two things organisations should start doing now. First, planning. Give yourself time to address challenges such as poor quality data. And second, proactively explain your tax data, to help stakeholders understand how you approach and manage tax. Better now than with a looming mandatory reporting deadline!
Many sustainability reporting standards require more granular data, across a broader range of taxes, than tax teams have been used to gathering.
You’ll need to identify what additional data you need, where it sits within the organisation, and who can give you access to it. And you’ll need to introduce processes to extract, verify and process it.
Done manually – which it often is – data extraction takes significant time and effort, and is prone to human error. But the good news is that automation technology can help provide valuable insights with minimal effort.
While challenging, data is just the tip of the iceberg.
What’s driving your tax numbers is equally important. Ultimately, tax transparency is about sharing the full story with your stakeholders. And the best way to do that is through a combination of quantitative and qualitative information.
Increased tax transparency can mean sharing data in the public domain that might be perceived as sensitive. This will need careful thought and a secure approach. And it will require tax teams to work closely with colleagues – from the outset, and throughout the journey.
- Evidence and governance
Publishing your tax strategy is key to transparency. But it’s meaningless without action to back it up, and without evidence that the organisation is walking the talk.
That’s easier said than done, however. You’ll need clear policies, roles and responsibilities, robust governance frameworks, and controls to ensure that these are followed. And all this must be clearly communicated, and embedded across the organisation.
Find out more
The tax transparency journey will be different for every organisation, but the risk of doing nothing is universal. Being proactive is the only viable strategy.
Wherever you are on your ESG journey, KPMG’s tax experts can help. Get in touch to see how we can support your efforts to enable tax transparency.