Tax transparency has been on global executives’ minds for years, and the 2022 KPMG CEO Outlook shows it’s still front and center. About three-quarters of CEOs (73 percent) feel a heightened pressure to increase the public reporting of tax information.
One of the earliest catalysts has been the development of country-by-country reporting, followed by other developments like broad agreements on Pillar Two of the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) action plan, which establishes a global minimum tax regime. More recently, the European Commission has moved ahead with Foreign Subsidies Regulation to address alleged distortions and anti-competitive activities (e.g. preferential tax treatment and exemptions) granted by non-European Union (EU) countries in mergers and acquisitions (M&A) and procurement activities.
ESG demands on the rise
Faced with significant new regulations — and with “regulatory concerns” a top three risk — global CEOs are also weighing increasing stakeholder demand for transparency and environmental, social and governance (ESG). With ESG rising on leadership agendas, tax practices and governance are becoming critical ESG measures, with tax transparency often used as a key metric for demonstrating a responsible attitude towards tax. And this is likely to intensify in the years ahead. The KPMG 2022 CEO Outlook shows a marked jump in demand from stakeholders — such as customers and regulators — for increased ESG transparency:
- Sixty-nine percent of CEOs see stakeholder demand up significantly (from 58 percent in 2021), and 72 percent believe ESG scrutiny will continue to accelerate; and
- Increased or frequently changing regulations are seen as one of the top two challenges CEOs face in delivering on their ESG strategy.
Increasingly, there's a tendency for ESG-oriented investors and regulators to want large organizations to disclose their financials, including how much they pay in taxes, and cut back on aggressive tax planning. Reporting on tax is not only about being transparent or about how much tax a company pays, but also actively demonstrating the way the company behaves with respect to tax, so that it can support governments that are trying to achieve sustainable and inclusive growth.
As such, tax touches all three elements of the ESG agenda:
- Environmental: Environmental-related taxes (e.g. carbon taxes), green incentives (e.g. renewable energy credits) and tax changing consumption behavior, acting as a “force for good” and helping to price externalities.
- Social: Social tax credits and social investment tax relief are becoming more widely available for companies pursuing social objectives. Also, an open, transparent dialogue between businesses, tax authorities, non-governmental organization (NGOs) and consumers are key to helping build trust. The approach to tax and tax policies of businesses are increasingly evaluated as a measure for sustainability and change.
- Governance: Tax is at the heart of governance and accountability within a business. Tax sustainability is increasingly becoming a high priority topic in board room discussions about governance. More and more stakeholders are looking to companies to demonstrate their commitment and contribution to society through tax transparency reporting.
It’s also important to note that tax is typically easier to measure, and often sits alongside harder-to-measure efforts on the ESG agenda. Explore more insights around how tax and regulations are key considerations in a business’s ESG journey here.
Tax transparency and trust
With social purpose at the forefront of most businesses today, organizations should also respond to the call for tax transparency in a way that aligns with their corporate values. In my view, this is imperative to enhancing and retaining public trust. According to the KPMG 2022 CEO Outlook, three-quarters of CEOs say there’s a strong link between the public’s trust in their organization and their approach to tax matters (75 percent). Dealing with public reporting and building trust requires planning and effort to help make tax numbers meaningful so they aren’t subject to misunderstanding or misrepresentation. This is an increasing priority for organizations.
A way forward
Tax transparency can help provide multiple benefits to the tax function:
- Being transparent is about fostering trust: Being open about your activities, plans and progress can help your stakeholders understand who you are as a business.
- Regulation is increasing: In recent years, tax regulation has become a point of public discussion more frequently and in more detail, including the above-mentioned country-by-country reporting directive, BEPS and Europe’s Foreign Subsidies Regulation.
- Voluntary reporting is becoming increasingly complex: Businesses should understand the difference between reporting standards, principles-based disclosures, rating agency criteria and stakeholder preferences before deciding how to begin voluntary reporting.
- Investors are increasingly evaluating tax sustainability: Investors are requesting information to assess the value impact of the tax strategy and governance policies that an organization has adopted from an ESG perspective.
More investors are making ESG and tax transparency part of their investment strategy and sustainable finance initiatives. As a consequence, there has been a mounting interest in taxation as a ‘steering instrument’ for making an impact through contribution to society and to the ESG agenda. But one thing that has become clear: not all businesses are at the same point in their tax transparency journey, and not all have the same tax transparency destination.