Transparency is not a compliance issue 

Imagine you are offered two different jobs. The first company pays well but offers no transparency on how pay is set and what other people earn. The other company pays badly but offers full transparency. Given the choice, I suspect most people would opt for a reasonable salary over transparency. So what then would be the point of transparency? Transparent pay systems might form a basis on which employees can negotiate fair wages, corresponding to an accepted market rate – but transparent pay systems themselves are not the main attraction. Here, transparency is a process – a positive means to an end, but not an end in itself.

Transparency in the world of corporate tax is not dissimilar. The question is not about transparency as a fixed concept, but rather transparency as a process: when we allow increased access to information, what end is being served? A company could tick the transparency box by laying bare all its corporate tax returns online. But who would benefit from such detailed information, other than perhaps a competitor who could analyse the data? To ensure the benefits of tax transparency benefits the many, not the few, we first need to identify who is asking for the information, how the information helps them, how best to provide it, and how best to continue the conversation.

As an issue that, by its very nature, is linked to the public domain, tax involves many different stakeholders, all with varying needs, from tax authorities to governments, from shareholders to civil society. So how and why should a corporate embrace transparency? There are (I think) three core reasons.

The first and most basic of these is compliance. There are a growing number of regimes demanding more information be given to tax authorities so they can carry out risk reviews and assessments. Complying with these rules is part of a company’s licence to operate.

But compliance alone does not equal transparency. The second reason for sharing information centres around trust. We all know public distrust of corporates is an accepted state of affairs. Increasingly, stakeholders only believe companies if statements can be verified. Without verification (or a degree of transparency that enables it), stakeholders are inclined to think the worst. The ensuing hostility damages the reputation of companies, and results in hasty, ‘knee-jerk’ policy decisions from governments, often with consequences for business as a whole.

Thirdly – and most importantly I think – transparency is about building relationships. Supplying information purely to meet requirements becomes a superficial exercise in compliance, without any real impact on restoring the compact between business and society. Therefore the real purpose of transparency is to facilitate trust through an open and honest conversation. This could be with investors about risk, with government about policy, or with civil society about how a company contributes.

So what’s stopping widespread transparency in tax reporting? Cynics might conclude it is simply not in a company’s interest to defend certain aspects of planning in public. More realistically, some companies are concerned that revealing more data may disclose commercially sensitive information. However, in my experience – based mainly on work with UK multinationals – these are not the usual obstructions to transparency.

Most frequently, companies cite the cost and administrative burden, and the risk of information being (intentionally) misunderstood and misused. The cost argument is legitimate, and depends on how the company is structured, the size of the accounting function, the state of its accounting processes and what regimes it already reports under. For some, the compliance burden of providing more meaningful disclosure is not great; for others it is considerable. As regards misuse of information there is a genuine concern that, given the complex nature of tax, providing more information to non-experts can easily lead to wrong conclusions being drawn.

How can greater transparency work for all?

So how can greater transparency be made to work for all parties? My view is that transparency is about cooperation and conversation. For companies – it is much more than a compliance issue, where the minimum is done to meet regulation. For those outside companies, transparency should not be a stick used to beat companies, by demanding more and more information and playing one company against another. First and foremost transparency depends on cooperation. It requires meaningful discussion between companies and stakeholders, so everyone understands each other’s needs, what the constraints are, and why they need to be in place. Transparency is far more than a large-scale information download. There is no point in giving total transparency over data stakeholders cannot use and may not want. To be meaningful, transparency needs to be about explanations, context, communication and mutual understanding. Transparency should be about a respectful dialogue which restores trust, aids sensible decision-making and permits change.