Stakeholder interest in tax is without a doubt growing at pace. We are witnessing a new era of tax transparency as companies respond to these concerns, with regulatory changes and reporting frameworks for disclosing tax strategies and taxes paid emerging.
Why is tax transparency important?
Taxes are a key source of government revenue and intrinsically linked to the macroeconomic stability of governmental finances. The United Nations has also acknowledged tax and related finances will play a vital role in achieving the Sustainable Development Goals.
Investors are reacting. A UN PRI survey of pension holders, found in some countries, more than 75 per cent of beneficiaries thought it ‘very’ or ‘fairly’ important companies their pension are invested in do not exploit tax loopholes. NGOs are supporting the movement too. The OECD established the BEPS project (Base Erosion and Profit Sharing) which sets out 15 actions to support governments with the necessary framework to address tax avoidance, to ensure profits are taxed where the economic activities generating the profits are performed and where value is created.
Mobile network operators and tax
Many mobile network operators (MNOs) work across multiple jurisdictions, generating significant revenues and therefore tax income for host governments. In 2019, the mobile ecosystem contributed $490 billion to public funding – before regulatory and spectrum fees according to GSMA Intelligence. This presents an opportunity to show how tax payments – when taxation of the sector is aligned with best practice – positively contribute to development where the company is established, alongside other benefits created through employment and development of the digital economy.
Being transparent on tax shows responsiveness to a corporate responsibility issue, recognising stakeholder pressure to be more transparent and responsible with taxation. It also reduces the risk of reputational damage (and subsequent financial loss this entails) if you are judged to have acted irresponsibly.
Companies with annual reports or similar formal financial statements should already disclose basic information on tax payments, in line with legislative requirements in the regions in which they operate. Although this may respond to basic questions such as how much tax a company pays, increasingly this is seen as insufficient – lacking context and a more detailed breakdown of where taxes are paid, and the strategies and policies that underpin them.
Useful standards and principles for tax transparency
The recent GRI Standard on Tax is a helpful guide for companies seeking to demonstrate a responsible approach towards tax payments. It contains all the nuts and bolts to record a company’s approach to tax, including tax strategy, tax governance, control, and risk management.
The GRI Standard is specific about how to deal with challenges and nuances a company may expect to face through the process of disclosure. Applying the standard relies on the inclusion of narrative and contextual information too. It is only when tax information is set alongside the results of stakeholder engagement and concerns related to tax, this information takes on real meaning and engaging communications can be developed.
The standard comes into effect in 2021, although early adoption is encouraged. This does give companies one reporting cycle to work towards disclosing against the standard in 2021. While disclosing everything in the first year may not be possible, it’s advisable to ensure a clear commitment to addressing any gaps in future communications.
The GRI isn’t the only framework to shape commitment and transparency. The B Team Responsible Tax Principles also encourage transparent, responsible tax strategies and practices through:
- making boards accountable for tax policy
- publishing a tax strategy and being transparent about its implementation
- being transparent about the entities owned around the world and why
- providing information on a company’s overall effective tax rate and the taxes being paid where they do business.
In the GSMA’s latest Sustainability Assessment Framework, we found 40 per cent of companies assessed disclose a commitment, policy or strategy around tax, with 32 per cent demonstrating best practice by publishing a dedicated tax strategy. Vodafone is one such example; it publishes a Tax Strategy alongside a detailed report on total contributions to public finances, including the amount of corporate taxes paid, split out as a subset of the total direct taxes, by country. This is set alongside a narrative summary of the activities they undertake in each country they operate in. In a recent report from PWC, Building Public Trust Through Tax Reporting 2019, Vodafone is recognised as the most comprehensive across the FTSE 100 for its country by country discloses.
Is your company being transparent on tax?
Are you already disclosing your tax strategy and your contribution to public finances? Using Vodafone as an example of sector good practice and the GRI Standard on Tax can improve your company disclosures and help respond to stakeholder and investor concerns around tax transparency.