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Tax Transparency and Building Public Trust: Total Tax Contribution as a starting point for businesses on their ESG journey

The fundamental role and purpose of business in society is under an intense level of scrutiny in the current climate. Historically, the main priority of business has been to generate profit and return on investment for shareholders. In today’s world, however, stakeholders are increasingly expecting business to help address the big issues facing society such as COVID-19, climate change, sustainability and societal inequalities. The expectation is for businesses to demonstrate how tackling these issues shapes the organisation’s purpose, strategy, and vision.

The development of Environmental, Social and Governance (ESG) standards are one of the main products of these stakeholder-driven expectations placed on businesses. These metrics are broad and can range from standards such as those on energy consumption, waste disposal, and water; to standards on tackling corruption, protecting human rights and, more recently, tax.

Through this ESG lens, tax, and transparency around tax, is increasingly being incorporated into the governance heading (or under the “Prosperity Pillar”, per the World Economic Forum’s metrics), with businesses expected to address stakeholder concerns on the topic and publicly disclose how their tax strategy helps address issues around climate change and economic inequalities.

It is worth noting that, while there were recent developments in the US and EU on public country-by-country reporting, here we will focus on voluntary disclosures.

How is the voluntary tax transparency landscape changing?

The International Business Council (IBC) of the World Economic Forum issued its paper on sustainability reporting in September 2020. It is designed to address the need to harmonise the different ESG reporting frameworks that exist, and converge the various standards. The paper contains a common, core set of metrics for ESG reporting, with tax included in the form of the taxes borne element of the Total Tax Contribution (TTC) methodology. There is an expanded metric including the options of disclosing the taxes collected element of the TTC and/or geographic analysis of that data. The IBC is made of the 140 largest multinational companies globally, many of which have endorsed the metrics and stated their intention to follow them.

The Global Reporting Initiative (GRI) is an international organisation responsible for setting sustainability standards globally. The standards are widely accepted as good practice for reporting on a range of ESG topics. In December 2019, the GRI issued the 207 tax standard which was introduced to meet stakeholder demands for greater transparency around tax. The standard covers four areas: approach to tax, governance over tax, stakeholder engagement and country-by-country reporting. The main area of focus with the 207 standard is the public CbCR requirement which has data points very similar to the OECD BEPS template. The standard is applicable for reports published from 1 January 2021 and for further information please refer to our GRI 207 publication.

What is Total Tax Contribution (TTC)?

TTC is the total cash taxes and levies paid by a company to any level of government. As shown in our recently redesigned TTC framework book, TTC is split into two main categories:

  • Taxes borne, which are a cost to the company when paid and impact the company’s financial statements; and
  • Taxes collected, which are those taxes the company collects on behalf of governments as a result of the economic activity generated by the company.

The TTC framework is non-technical, meaning it is easy for non-tax experts to understand and can be applied to any regime around the world. The framework is simple and aims to classify all tax payments across five broad tax bases:

  • Profit: These include taxes on company profits that are borne (such as corporation tax) and collected (such as withholding tax on payments to third parties).
  • People: Taxes on employment, both borne and collected (including income tax and social security payments).
  • Product: Indirect taxes on the production and consumption of goods and services, including VAT and sales taxes.
  • Property: Taxes on the ownership, sale, transfer and occupation of property.
  • Planet: Taxes and duties levied on the supply, use of, or consumption of goods and services that are considered to be harmful to the environment.

This structure helps to broaden the debate beyond corporate income tax, which is often the focus with country-by-country reporting and other ESG standards, as it enables companies to measure and communicate the total tax they pay to the public finances.

How are companies responding to these developments?

Our review of the FTSE100 reports relating to 2020 year ends revealed an increase in voluntary tax disclosures, as companies respond to these developments. From reviewing annual reports, corporate sustainability reports, and other publicly available information on tax, we benchmarked companies against our bespoke transparency framework which focuses on four broad areas:

  1. Approach to tax
  2. Governance over tax
  3. Tax numbers and performance
  4. Total Tax Contribution and the wider impact of tax.

Across all four areas, our findings show that transparency continues to increase, which is shown at a high level by an increase in the number of companies publishing a standalone tax report. For example:

  • Tax havens were discussed by 47 companies in this year’s review, which represents an increase of 31% on the 2019 year-ends, where 36 companies mentioned them.
  • 47 companies provided some kind of information or data concerning their Total Tax Contribution, an 18% increase on the 2019 year-ends.
  • Transfer pricing was discussed by 60 companies in this year’s review, an increase of 30% on the 2019 year-ends.
  • 93 companies have a risk framework in place specific to tax in this year’s review, up 9% on the 2019 year-ends.

Forty seven companies made a TTC disclosure in 2020. This is an increase of 7 companies on the 2019 year ends, and an increase of 13 from 2018. The continued increase in companies making a TTC disclosure is likely a reflection of the growing attention on country-by-country reporting (CbCR) and corporate income tax in isolation. It also suggests that a significant proportion of the largest listed companies in the UK find TTC valuable in helping to shape their transparency strategies.

The shift toward tax transparency is an opportunity for companies to tell the whole story and give visibility over all taxes they pay, raising the profile of tax in the organisation, highlighting the important role businesses will play in the recovery of the economy. Companies not embracing change run the risk of being exposed to reputational risks and even falling out from the preference list of ESG-conscious investors.

How TTC can be a starting point in the transparency journey

TTC provides a holistic overview of a company’s international tax profile once data is collected from around the business and categorised against the TTC framework. While recognising that collecting international tax data on all business operations can seem like an overwhelming task, TTC is as much a journey itself as developing a wider transparency strategy. Our recommendation is for tax teams to initially focus on data collection for material taxes of the most significant locations with operations.

For those companies who are further ahead in their journey, there are still things which could be done to gain more value from TTC. Leveraging technology and automation to assist with the data collection process can save significant time and resources. TTC data which has been collected over a number of years can also be used to draw out longer-term trends. This data can help to inform public policy and support conversations on macroeconomic issues such as industry or geographically specific taxation.

Wherever you are on your transparency journey, TTC can offer you the opportunity to tell the whole story and give visibility over all the taxes your company pays, highlighting the broader economic contribution your business makes to society. Finally, this is a value creation opportunity for the business, tax transparency being at the heart of a wider ESG strategy, unlocking more value for the business.

Data & technology considerations

Collecting Total Tax Contribution data often involves many countries, companies and individuals, and data that are not necessarily routinely collected, generating a number of risks. When collecting data for the first time, we’d recommend a manual exercise, that is, one using electronic spreadsheets or online data collection platforms such as PwC Smart Survey rather than an automated solution, to create a good baseline which can be built upon in future years.

It’s important in the first year to understand what data is being requested and to record the source of the data. For many companies, it will require timely contributions from many parts of the business, which is why senior sponsorship is crucial. A Total Tax Contribution project will evolve from year to year so that, once a baseline has been established, thought can be given to how to automate the process and to gain further assurance over the data extracted.

Addressing demands for greater transparency and enhancing voluntary tax disclosures to support the company’s overall approach to ESG takes time. For many tax teams, once the data is collected, the challenge is ensuring that their company messaging on tax is nuanced, yet easy to understand whilst appropriately mitigating the risks for misinterpretation. Total Tax Contribution is a powerful tool that provides a huge degree of flexibility in meeting these requirements. For tax teams unsure where to begin on their transparency journey, or for those wondering how they can further enhance their tax transparency strategy, TTC could offer the next steps amidst an ever changing transparency landscape.

How can we help?

Wherever you are on your transparency and governance journey, please do not hesitate to contact us to discuss any of the topics discussed here in more detail and to explore how we can support you. We have decades of expertise in the area, ready to support you on tax transparency benchmarking, understanding different transparency frameworks, building tax economic reports and collecting or assessing the reasonableness of your TTC data.

Contact us

Andrew Packman

Andrew Packman

Total Tax Contribution and Tax Transparency leader, PwC United Kingdom

Tel: +44 (0)7712 666441

Janet Kerr

Janet Kerr

Senior Manager, PwC United Kingdom

Tel: +44 (0)7841 781417

Guilherme Pereira

Guilherme Pereira

Senior Manager, PwC United Kingdom

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