Businesses need to provide more transparent reporting on tax to give shareholders and the public a better understanding of their tax policy and wider contribution to society
Sustainability standard setter, Global Reporting Initiative (GRI), has issued its first global standard for public reporting on tax, GRI 207: Tax 2019, setting out requirements for greater levels of tax transparency reporting and is calling on global businesses to use the framework to provide detailed public information about their tax practices.
The voluntary standard is an attempt to improve transparency on corporate tax but would be public records, rather than only available to tax authorities.
It would build on the OECD’s country by country reporting rules, which came into force in June 2018, and are mandatory for listed businesses, requiring companies to provide detailed tax information to tax authorities in the jurisdictions where they operate. The OECD rules are inter-jurisdictional only and the data is not in the public domain. It is not even available to MPs or select committees.
By contrast, the GRI 207 tax standard would put country by country reporting data into the public domain. It would also include narrative explanation of how organisations manage tax, focusing on their approach to governance, control and risk management, rather than just data. The standard will be effective from 1 January 2021.
Tim Mohan, CEO of GRI said: ‘The IMF has estimated that there is $600bn (£460bn) a yar in corporate tax avoidance and that is probably not even the whole picture. Payment of taxes is vital to our sustainable future.
‘So it is impossible to determine how much companies are paying on a country by country basis as the information is not publicly available. OECD BEPS requires country by country reporting but only to tax authorities, but this is not the same as public reporting.
‘Paying the right taxes can be seen as a licence to operate; through leadership and training companies can demonstrate their commitment to the countries where they operate.
‘The new GRI standard covers the management approach from control to information on the tax management approach and stakeholder engagement.’
The voluntary nature of GRI standards means that adoption of the tax reporting framework will be a case of changing the corporate attitude to tax transparency, through investor and public pressure.
Criticism of multinationals’ ability to shift profits and reduce tax bills by jurisdictional decisions is viewed as increasingly unacceptable.
Speaking at the launch of the standard, Elise Bean, former chief counsel and investigator for the US Senate Homeland Security and Governmental Affairs Subcommittee, said: ‘US companies are the most secretive in the world when it comes to tax.
In the US, 86% of the tax burden is being paid by the public, not corporations, Bean said.
Figures on sources of US federal tax revenue from the US Office of Management and Budget show that corporate income tax accounted for 6% of total US tax take in 2018, and this figure has got worse, down from 8% in 2016. Payroll tax accounted for 35% of tax paid, while income tax paid by individuals was 51% of revenue.
‘There has been little action to stop corporations offshoring profit and using low tax jurisdictions like Ireland, Cayman, Bermuda.
‘Apple paid no tax in the US for four years from 2009 to 2012 after it set up subsidiaries in Ireland and charged Apple resellers royalties which were funnelled through Ireland. This saw $74bn put through three Irish shells over that period and they didn’t file a tax return anywhere. When local tax jurisdictions questioned why no tax was being paid, Apple sellers said that the majority of their sales revenue was paid to Apple, leaving no profits to tax locally.
‘The US is not doing enough to stop this, perhaps because these companies are so huge and influential. And Apple is not the only one, there’s Netflix, Starbucks, Chevron, FedEx, we investigated them all.
‘People care about infrastructure, where companies are doing business and how they are contributing. Investors who are putting their money on the line shouldn’t be surprised by a sudden $14bn charge – that is exactly what happened when the EU took action against Apple and the Irish government over their tax position.’
A number of multinationals have already taken steps to improve their tax transparency with Vodafone now one of the most progressive reporters on tax transparency in the UK, a result of harsh criticism of its global tax policy in the early 2010s following sweetheart tax deals with HMRC.
Vodafone Group publishes a detailed annual tax transparency report for public consumption. This report includes much of the information required under the new GRI tax standard, although the telecoms giant is still considering whether to adopt the new standard.
Preparing a detailed tax transparency report and taking the decision to put this information in the public domain is not a decision which companies take easily.
Andy Cale, head of financial reporting tax at Vodafone Group, said: ‘It has been a 10-year journey to get where we are today. After our name was flashed in the headlines when we were accused of not paying tax around the world we took it upon ourselves to say that this was not justified and we questioned what tax we did pay.
‘We started off trying to explain the premise of our tax policy and how we paid tax in a particular country. We started with a small set of businesses and then expanded to whole divisions. We needed to explain why we did and did not pay tax. Over the years we have seen this pay off hugely. It is about being much more proactive, not reactive, and being able to control and say what we do to government and tax authorities, and to the public.
‘For us it has been hugely valuable as we can prove what we do. It’s not just words on the page. It gives us the ability to explain things rather than just being the punching bag. We don’t expect anybody to agree with our tax approach but it allows us to have a much better dialogue rather than neither side trusting each other.’
Moving to full transparency is not easy as the data collection alone is complex, particularly for multinationals and there is often internal resistance to publishing such detailed information, but country by country reporting requirements mean that the data has to be collected so putting it in the public domain is a natural progression.
Cale said: ‘You will see resistance from parts of the business as so much data that was not public will be shared. Are you comfortable defending that data and explaining it?’
Investors are also critical influencers when it comes to changing corporate behaviour on tax and are in a position to put pressure on companies to behave more responsibly.
Wilhelm Mohn, head of sustainability at Norges Bank Investment Management said: ‘We were right behind GRI when it decided in 2016 to set expectations from companies on tax. On a macro level, there is a good case for us to benefit from a good system of tax. But we need to understand what that means. Aggressive tax behaviour is not in our interest. People who work to underpin such principles make themselves open to criticism and give rise to risky behaviour which we don’t want to see as an investor.
‘If you have detailed information you can look for outliers - this allows you to compare and contrast, and examine implementation of their policies. This is part of the puzzle but it is not clear yet how you can use it to compare and contrast, but this information is useful because of capital flows.’
GRI 207: Tax 2019 has five disclosure requirements, split between narrative reporting and financials. This includes the following:
Management approach disclosures require a narrative explanation of how organisations manage tax.
- Disclosure 207-1 Approach to tax
- Disclosure 207-2 Tax governance, control and risk management
- Disclosure 207-3 Stakeholder engagement and management concerns related to tax
Country by country reporting requires reporting of financial, economic and tax-related information for each jurisdiction in which the organisation operates.
- Disclosure 207-4 Country by country reporting
Report by Sara White