Building dimension IV of your tax governance framework: tax transparency

What is tax transparency?

Tax transparency refers to the extent to which tax-related information and practices of organisations are made visible to relevant stakeholders, such as tax authorities, investors, and the public, with the aim of building trust. Each of these groups holds distinct interests in tax transparency. Tax authorities seek greater confidence in taxpayers' compliance, as well as an additional tool in assessing the risks associated with corporations. Investors desire a clearer understanding of the level of risk their investments carry. Additionally, the public benefits from a better understanding of the contributions that organisations make to their communities and the wider society in which they operate.

But tax transparency extends beyond the mere disclosure of tax-related information; it encompasses the importance of putting that information into the right context. It is about integrating tax-related information into the broader business strategy, ensuring that it aligns with previous disclosures and the company’s overall goals and values, particularly those related to sustainability. While disclosing tax information is crucial for fostering accountability and trust, it is equally essential to provide a comprehensive understanding of the underlying factors and motivations.

There are three distinct dimensions of tax transparency: tax transparency towards tax authorities, internal tax transparency, and public tax transparency.

Tax transparency towards tax authorities 

Tax transparency towards tax authorities is the most well-known form of tax transparency. It refers to the mandatory submission of accurate and complete tax information to tax authorities.

In recent years, there has been a significant increase in reporting requirements for taxpayers to ensure transparency. This can be attributed to global initiatives such as the OECD's Base Erosion and Profit Shifting (BEPS) frameworks and the directives of the European Union (EU). These initiatives have led to the introduction of various reporting obligations for taxpayers – both confidentially to tax authorities and publicly to all stakeholders. By increasing reporting obligations in these areas, tax authorities can enhance their ability to monitor and enforce tax compliance, improved now with Artificial Intelligence and the adoption of Large Language Models. Ideally, it leads to a better functioning tax system with higher compliance rates and a lower burden on compliant taxpayers.

Internal tax transparency

In contrast to tax transparency towards tax authorities and public tax transparency, internal tax transparency relates solely to internal stakeholders, including employees and management.

In this regard, several internal communication channels should be taken into account. At the forefront is the tax strategy, which outlines the key principles that define how organisations deliver tax. The tax strategy could then be implemented through a tax governance framework and further tax operating instructions, providing clear guidance to support its execution.

The purpose of internal tax transparency is to foster engagement and collaboration among multiple departments and stakeholders within the organisation regarding tax affairs that may impact the organisation. Furthermore, internal tax transparency plays a crucial role in effective tax risk management and compliance. By ensuring that certain internal stakeholders have access to tax information, organisations can manage tax exposures, comply with tax laws and regulations, and implement appropriate controls and processes to mitigate tax-related risks.

Public tax transparency

Public tax transparency refers to providing tax information to the public. This can be done through mandatory disclosures or voluntary initiatives that encompass e.g. various aspects of tax strategy, tax governance, country-by-country data, or the Total Tax Contribution (TTC).

The purpose of public tax transparency is to create a platform that supports sustainability by building trust with the public, stakeholders, and communities in which individuals and organisations operate. By providing access to tax information, it enables stakeholders to make informed judgments regarding tax compliance and the contributions made by taxpayers to society. It also plays a vital role in enhancing the overall transparency and integrity of the tax system.

In this article, we will particularly focus on various aspects of public tax transparency.

Why tax transparency matters?

Tax transparency matters because it embodies principles of fairness, accountability, good governance, and economic stability. By openly sharing tax information, organisations have the opportunity to confront and dispel the perception of aggressive tax avoidance and tax evasion practices.

Furthermore, tax transparency serves as a catalyst for sustainable development, enabling the implementation of responsible and effective tax practices that contribute to long-term economic growth. Moreover, tax transparency is increasingly becoming an integral component of tax sustainability frameworks, such as the Global Reporting Initiative (GRI) or sustainability ratings by esteemed organisations like S&P Global. Recognising its significance, these frameworks emphasise the importance of disclosing tax information as a crucial factor in measuring and evaluating an organisation's commitment to socially sustainable practices.

Also, an increasing number of stakeholders, such as clients, employees, and suppliers, are actively seeking insights into a company's tax practices. However, it is worth noting that investors have not been left behind; they continue to play a significant role in this realm. Norges Bank Investment Management and Ethos Foundation, for instance, have taken the initiative to lay down principles that govern tax practices for the companies they invest in. This growing interest from diverse stakeholders highlights the integral role that transparency and responsible tax behaviour play in today's business landscape.

Country-by-country reporting is now public too

There has been a growing emphasis on the public disclosure of tax-related information, driven not only by stakeholder pressure but also by legislative actions.

Mandatory country-by-country reporting to tax authorities has been in place for several years now. Recent initiatives by the EU, with its enforceable regulation, and Australia, with its regulation currently introduced into Parliament, have further extended this requirement to include public disclosure for many companies. These developments mark a significant milestone not only in promoting public accountability but, more importantly, in providing access to crucial tax information to a wider audience. It is of the utmost importance for companies to ensure that disclosed information is correct and accurate, especially considering the complexity of said regulations and their different scope of application and disclosure.

Total Tax Contribution (TCC)

One of the examples of how tax supports societies is their total tax contribution, which encompasses the overall amount of taxes paid and collected by individuals or organisations to the government over a given period.

The TTC demonstrates the significant contributions that taxes make to fund critical services and infrastructure to the public. It goes beyond corporate income tax and includes other types of taxes, such as value-added tax, payroll taxes, property taxes, customs duties, and other levies imposed by the government. By considering a wide range of taxes, the total tax contribution highlights the collective impact that tax payments have on society and the overall well-being of communities.

Various organisations, including WEF, GRI, and Norges Bank Investment Management, underline the importance of Total Taxes Paid and Collected. Furthermore, the minimum safeguards as laid out in Article 18 of the EU Taxonomy Regulation (Regulation EU 2020/852) require organisations to adopt responsible tax practices, ensuring compliance with both the letter and spirit of tax laws. By implementing robust tax governance structures and leveraging TTC data, organisations can enhance their tax governance, conduct effective risk assessments, and ensure compliance with the EU Taxonomy's minimum safeguards.

The collection of TTC data helps organisations understand where taxes are within the business, providing a comprehensive view of all tax types (profit taxes, people, product, property, and planet taxes). This information can, in turn, be used to develop a responsibility assignment matrix (RACI matrix) to support the Tax Control Framework (TCF). It can also inform the scope of the audit of the minimum safeguards of the EU Taxonomy by identifying material operations and teams requiring controls.

PwC developed a unique framework that assists organisations in creating their own Total Tax Contribution Framework. In light of the growing number of taxes in various territories, this framework enables a clear differentiation between taxes borne by companies and those collected on behalf of governments. We are proud that our Total Tax Contribution Framework has already been adopted by various organisations all around the globe.

What other information should I disclose?

In addition to quantitative data such as total tax contribution and country-by-country reporting, companies have the opportunity to disclose qualitative data concerning their tax strategy, tax risk management, and control frameworks.

These qualitative insights provide a comprehensive description of how organisations manage tax in alignment with their corporate strategy and business operations. These disclosures often cover crucial topics such as the tax governance framework, approach to tax planning, mechanisms for managing tax risk, defined and controlled levels of acceptable tax risk, as well as the extent of engagement with tax authorities.

By sharing these qualitative details, companies showcase their commitment to responsible tax practices, transparency, and constructive collaboration with tax authorities, all of which contribute to building public trust and sustainable business growth.