The Environmental, Social and Governance (ESG) agenda is gaining momentum across all facets of business and tax is no exception. While calls for tax transparency predate the recent surge in focus on ESG and the associated sustainability metrics and reporting, there is no doubt that they have intensified in recent times and that a wider variety of stakeholders than ever before have taken up that call.
While some drivers – such as calls from civil society – have been present for the last 20 years, new drivers – such as calls from investors – are emerging as one of the leading forces of change. Voluntary reporting regimes are becoming more widely adopted and, in some jurisdictions the regulatory and legislative environment is also changing, often requiring more tax transparency from companies. Not all companies are responding in the same way or at the same rate. However, when speaking to those who are leading in making increased disclosures, it is clear that they have taken incremental steps over a number of years rather than taking a “big bang” approach.
To help organizations and other key stakeholders explore and understand the tax transparency landscape, KPMG’s Responsible Tax Project hosted a webinar on the 24 June 2021 – Understanding tax transparency.
The webinar was joined by Loek Helderman, KPMG’s Head of Tax for KPMG IMPACT, who spoke about the history and development of tax transparency and provided some insights into the drivers of change in the landscape. Chris Morgan, Head of KPMG’s Global Responsible Tax Project then hosted a panel “The direction of travel” in which he was joined by Jens Christian Britze, Head of Tax at the Danish pension fund PKA, Raluca Enache Director of KPMG’s EU Tax Centre at KPMG in the Netherlands, and Matt Whipp, Partner, Transfer Pricing Dispute Resolution Lead at KPMG in the UK and Tax Impact Reporting lead. Together they discussed the investor perspective on tax transparency, the latest EU public Country-by-Country reporting developments and what KPMG professionals are seeing from businesses in the market. Lastly David Linke, Global Head of Tax & Legal Services at KPMG International, took part in a fireside chat with Zahira Quattrocchi, Group Head of Tax at Anglo American, to learn from her what it is like going through the tax transparency journey and what main challenges they faced when publishing their tax and economic contribution report and how they were overcame.
Attendees spoke in their private capacity rather than on behalf of any organization. This note summarizes the key themes which emerged. It is not intended as advice and does not necessarily reflect the views of any KPMG firm.
Opening from Loek Helderman, Head of Tax for KPMG IMPACT, KPMG International
Tax transparency, in one form or another, has been under discussion for many years. Perhaps one of the earliest and most easily identified catalysts for bringing tax transparency more into the mainstream psyche, was the development of the concept of Country-by-Country reporting in 2003.
The first big push for Country-by-Country Reporting (CbCR) began at the start of this century. Part of the focus – driven by civil society groups like Tax Justice Network and Publish What You Pay - was on getting companies to be more open; however, there was also a push to use tax transparency to make governments more accountable which led to the Extractive Industries Transparency Initiative. The next big step came after the financial crash when, in 2013, financial institutions in the EU were required to publicly report certain country-by-country data under the Capital Requirement Directive, IV. Mandatory CbCR was transformed when, in 2015, the OECD developed a common template for reporting as part of the BEPS action plan. The OECD initiative requires reporting privately between tax authorities. However, a recent agreement in the EU on public CbCR means that in the next few years any companies, over a certain size threshold, with EU operations will have to partake in public CbCR to some degree.
Voluntary tax transparency reporting standards have been emerging and developing in both the number of standards and in their sophistication.
As the ESG agenda has gained momentum in the last few years, the world of reporting has reflected this shift with many voluntary tax transparency standards emerging, such as the Global Reporting Initiative tax disclosure standard – GRI 207, and the tax disclosures required by the Stakeholder Capitalism Metrics released by the World Economic Forum. Other stakeholders, such as the B Team, have developed responsible tax principles which include a call for transparency.
The direction of travel is clear – more tax transparency is being required by different stakeholders.
An interesting example of investor activity is Norway’s sovereign wealth fund which has stated it has divested in several companies because of “aggressive tax planning and cases where companies do not give information of where, and how, they pay tax”1.
Jens Christian Britze, Head of Tax at the Danish pension fund PKA, said the fund considers taking a responsible attitude towards tax as part of their licence to operate and they also are willing to exclude investments due to the investee’s approach to tax.
PKA is one of the largest Danish labour market pension funds and its members consist of health and social sector employees. The fund considers a responsible tax approach to be part of their licence to operate. Some years ago, they took the decision to integrate tax into their responsible business approach and they believe that sustainable investments provide the best long-term returns. Just as they exclude certain investments from their portfolio for more traditional ESG reasons they are prepared to exclude investments for tax reasons: returns arising from aggressive tax planning are not ones they want to generate for their member base.
However, identifying which investee companies actually have a responsible attitude toward tax and successfully implementing those principals across their business is difficult with the information available today. Jens described many tax transparency disclosures in a group’s financial statements as being very high level and in no way standardized between companies. As a result, it is difficult to reach a conclusion on the group’s tax behaviors from public disclosures alone, so they must enter into lengthy dialogues to determine if an investee company meets their requirements.
Understanding effective tax rates (ETR) and any tax controversies a company faces is key for investors. While ETR variances in the home jurisdiction are usually explained well in the tax reconciliation, the tax impact of any overseas activities is often shown as only one line or number with little explanation. CbCR would enable a greater analysis of the impact of overseas tax.
Jens noted that the impact of overseas taxes is often just one line in the tax reconciliation, and it can be a big number. Taxes can be a significant cost and represent a high financial risk and investors would like to see how the overseas tax is actually composed and how it is affecting the overall effective rate – which is where CbCR figures would assist. Many investors are increasing the size and expertise of their tax departments looking at investee company tax risks and do have the capability to interpret the CbCR figures. However, Jens was positive that companies are opening up more now than they may have in the past about international tax charges when they are approached to discuss their ETR and other CbCR information. He noted that in more than 50% of the cases where they have dialogue, the explanations given demonstrate that tax is being paid in accordance with where the company has commercial activity.
PKA apply the same approach to investments in different asset classes, but there is currently a difference in the availability of information depending upon whether the investment is in a listed or unlisted entity and is in debt or equity.
Jens said PKA currently may obtain more detailed information from discussion with unlisted entities than listed ones. Also, there is generally a type of rulebook for what access to information they have as equity holders but that does not apply when they are debt providers. Where they invest in unlisted debt, they are trying to include clauses in the documentation about tax information. In all these cases, public CbCR information would make the analysis easier.
Companies being more willing to discuss Country-by-Country information may be, in part, due to the requirement to disclose it to and discuss it with tax authorities in recent years. However, as a result of the political agreement in the EU on public CbCR, certain companies will likely fairly soon have to make the information available publicly.
Raluca Enache, a Director in KPMG’s EU Tax Centre at KPMG in the Netherlands, discussed some of the key points which are part of the provisional agreement on the EU public CbCR to be included in the accounting directive. The disclosures proposed are based on the OECD CbCR initiative and apply to groups with a consolidated turnover exceeding 750 million euros in the previous two consecutive years. It will apply to groups headquartered in the EU, but also to those headquartered elsewhere, with EU operations. Groups will have to publicly disclose CbCR information for EU countries as well as countries on the EU list of non-corporative jurisdictions for tax purposes and countries that have been on the EU “grey list”2 for at least two years.
Under the so-called safeguard clause, member states may allow the deferral of disclosure of commercially sensitive information for a specified period up to up to a maximum of five years. However, what exactly is considered “commercially sensitive” information is unclear as of yet.
It is not certain when the directive would enter into force, but it may be approved by October 2021. Member states would have 18 months to transpose the directive into law, which is approximately April 2023. The requirement would then apply from the first financial year beginning one year after the transposition; for a calendar year taxpayer, that would be January 2025. Reporting would then be due within 12 months from the balance sheet date. It is possible though that some member states may want to impose an earlier start date.
There are concerns from companies about disclosing commercially sensitive information. While these may be legitimate, non-disclosure needs to be balanced with the need to build trust. Being open about the reasons for any redaction will likely be key.
Matt Whipp, Partner, Transfer Pricing Dispute Resolution Lead at KPMG in the UK and KPMG’s Tax Impact Reporting3 lead, discussed some concerns that companies have when considering tax transparency. One of the most vociferously voiced concerns is that of sharing confidential information. Clearly companies will not wish to put anything into the public domain which could jeopardize their competitive position; but this should be balanced with building the trust that transparency is designed to foster. Matt said in his experience it was usually possible to provide data in a way which did not reveal commercially sensitive information.
Where companies do find themselves with genuine commercial sensitivity issues however, Matt has found that often the best way to deal with this is head on. This means acknowledging publicly that certain information is not being published and explaining why.
Other concerns from businesses can generally be grouped into two main categories. Firstly, entering and trying to understand the tax transparency landscape for the first time. Secondly, there are concerns around how to collect data and obtain assurance.
Matt noted that, because the tax transparency landscape is evolving at such a rapid pace, everyone is at a different stage in their journey. There are businesses which are at the beginning of that journey trying to understand what the driving forces are, the various voluntary standards, mandatory regulations and stakeholder concerns. For example, understanding what value the customer base and employees place on your approach to and transparency around tax is becoming more important when attracting and retaining these stakeholders. Understanding how tax departments get buy-in from their senior management and the board of directors can revolve around addressing their concerns and, often, providing quality benchmarking against peers.
Once companies have made the decision to be more transparent, difficulties often tend towards how groups access and manage the data required to report on tax contributions, on say, a country by country basis. While those who have overcome all these issues should then consider how, and to what extent, they get assurance on the disclosures they have made.
Zahira Quattrocchi, Group Head of Tax at Anglo American, has witnessed large changes in the tax transparency landscape. This is a revolution and there is a clear direction of travel towards increased transparency.
Initially tax transparency was largely aimed at only one stakeholder – the tax authority. Now many stakeholders are considered and the main one is probably investors. Understanding these stakeholders is critical because, they now operate in a world awash with different disclosure standards which can easily confuse. The key issue is how to make what is complex, understandable.
Picking up on the panel debate, Zahira noted one of the biggest changes in tax transparency she had witnessed was that originally it had largely been about discussions with tax authorities and now probably the main stakeholders in debate were investors. However, Zahira expressed concern that there may be too many tax transparency standards. She emphasised that it is important to understand the difference between providing data, which is often difficult to decipher, and providing information which makes the tax story understandable. The real challenge is to take a very complex situation – which is largely particular to the individual group – and make it understandable to a wider audience. Nevertheless, there is a clear direction of travel towards greater transparency and Zahira noted she tells her team that they can be at the forefront and shape the conversation or they may face the risk of simply having to deal with the consequences of what others decide.
Anglo American’s approach to tax is grounded in their values and desire to partner with their host communities.
Zahira noted that tax is a fundamental part of the ESG agenda because it is one of the most visible contributions a company makes to a country. Anglo American has strong business values and these center around partnering with their host countries – or more particularly with the communities in which they operate. Anglo American has tax principles which are grounded in their values and these inform the tax strategy and tax control framework. By applying the tax strategy and values to how the tax function operates, they aim to make the whole approach to tax sustainable - which does not necessarily mean trying to reduce the ETR but helping to ensure it is a fair one.
The approach of partnering with their host countries is one they apply even in tax disputes. In developing countries, it can be necessary to have patience and recognize the resistance which comes with the legacy of past clashes between taxpayers and authorities. However, honest conversations and searching for cooperative compliance is beneficial as it gives certainty for companies while it helps transfer commercial acumen to tax authorities and frees their time to focus on key risks
When it comes to transparency, Anglo American seeks to explain the whole economic contribution they make as mining operations have a long life cycle.
Anglo American decided to tell their tax story through a wider economic contribution report, because, as a mining business, they have a long life cycle and therefore want readers to see the whole picture of how and what they contribute over time. Therefore, it is crucial to disclose not only what corporate income taxes are paid in each jurisdiction in a particular year, but also to describe the business and explain the value chain. Anglo American gives a perspective over their whole tax universe including taxes collected, like employment taxes. They also disclose payments which are not actually a tax but share many of the same characteristics - for example mining royalty payments to government. Without providing such explanation in a clear way, much of the information could be misinterpreted.
Being transparent about taxes is not a decision that can be made in one day as it is not just a report; it is one element of a sustainable business and the report which is released should reflect the values and activities of the company.
Going through the tax transparency process would not be possible without complete support from the business leaders and board of directors which may take time but is fundamental to ensure the tax strategy is implemented holistically, effectively and with honest intent. Tax transparency is a journey which involves investing not just money but also time.
Having a mechanism to receive, process and action feedback is also crucial. Even if great care is taken when disclosing information and providing context around it, the best way to know what stakeholders value and what they want to understand more about, is to receive direct feedback. Ultimately producing a tax transparency report will be a process that evolves over many years and is constantly refined.
Tax transparency is a journey, and it requires a firm base – looking at where a group stands and where it wants to be.
Zahira encouraged tax directors to get involved in the transparency debate and think what it would involve for their groups. One of the first things businesses should consider is if their tax control framework is strong enough to bear the weight of the transparency process. This will likely involve asking difficult questions and providing thorough explanations.
Zahira encouraged businesses to be honest with themselves during this process, if the answer is not good enough, then there is likely to be an element of putting their house in order before embarking on the journey.
The views and opinions of external contributors expressed herein are those of the interviewees and do not necessarily represent the views and opinions of KPMG International Limited.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...