Companies Need to Consider the Challenges of Tax Transparency

Calls for tax transparency and the increasing interest in environmental, social, and governance continue to garner attention and levy expectations on what exactly this should entail, whose interests it should serve, and how these should be balanced.

Although the tax transparency landscape continues to become more regulated and increasingly complex to navigate (especially in Europe where there is growing pressure for companies to demonstrate they take a sustainable approach to tax) understanding why companies aren’t all jumping at the chance is an exercise worth exploring, as therein may lie an opportunity for further understanding.

Most change comes with a cost, and tax transparency is no exception. There are inevitably upfront costs involved, and the additional management time in establishing a reporting procedure.

In addition, the complexity of various standards combined with differing individual stakeholder interests provides examples of the many often juxtaposed positions. This begs the question whether it’s even possible to please everyone without creating confusion or producing so much data it conflates or even hides the real messages. And then there is the concern shared by many companies about how their information will be used and whether they may be giving away confidential data.

Fortunately—as many companies have shown—there are solutions to these difficulties.

Costs are Unavoidable

Unfortunately, costs are unavoidable. There will be initial costs in ensuring any existing reporting systems can be adapted so information can be reliably extracted. Some companies may have the information readily available, but for others—especially those with multiple legacy reporting systems—it can be a big task.

A company will face more complexity if it wants to report on all taxes, not just corporate tax. And the reporting requirements undoubtedly place additional time constraints on the management as it decides how and what to report, and within what timescale it should do so. However, the companies we speak to say this is largely an upfront cost that reduces dramatically once the system is set up. The benefit of internal visibility over the figures and engagement with stakeholders pays off.

A Clear Vision Needed

When considering multiple standards and shareholder requirements, a company must have a clear vision of what it wants to achieve at the start. A company’s imperative is to consider the objectives and current state of play, engage with stakeholders to decide if there is an appropriate existing standard, such as the voluntary Global Reporting Initiative or one of the mandatory standards (for example, for financial or extractive industries or under the EU country-by-country reporting standards), and develop an appropriate road map.

Whatever format is adopted, the quality of the narrative is key, but even more important is how that data is presented—companies should employ user-friendly diagrams as opposed to data-heavy slide decks!

There is often a lot of data to digest, and we find that companies who have gone on this journey are well served to not put all the information out at once with no context. The initial process tends to focus on explaining the key issues and their tax profile. The more detailed data can come later.

Some Concerns from Companies

Over and above the complexity presented by tax transparency, there are several additional objections raised by many companies:

Giving away confidential information. In KPMG firms’ experience, this only applies in a limited field—for example, where the product range is very limited and there is competition for market share based on margins.
Will the information be deliberately misused? Those companies that are transparent tend to get fewer questions or adverse press comment because there is no “story” out there.
Relationship with tax authorities. Clearly, what is said publicly needs to tie into what is said to tax authorities. But anecdotal evidence suggests tax authorities generally tend to trust companies more if they are publicly transparent.
Tax is complex—will it be understood? How do you reconcile different disclosures—for example, tax figures required for accounting purposes with tax paid that might be disclosed in a country-by-country report? This is a valid concern as differences can be very stark and confusing. The quality of the narrative and how the figures are presented are key.

Tax transparency remains a complex subject. Tax transparency reporting requires clear objectives supported by an intelligible road map. Reporting shouldn’t be a static document to be created and then filed away; emphasis must be placed on creating a living record that, above all, is the starting point for all real-time conversations with stakeholders.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Chris Morgan is global leader for the responsible tax program at KPMG International.