Tax reporting and transparency in an ESG world

In the latest insight in our Tax & ESG series, we explore the importance of tax transparency in the context of ESG and discuss some key tax disclosure considerations.

Tax as an ESG metric

The ESG movement is causing companies to reshape their purpose and operating model. This means finding a balance between financial returns, social interests, the environment and transparency. This balance, if struck right, can lead to better results for both businesses and society. 

Tax is an important metric in that ESG conversation. In this regard, a company’s approach to tax is no longer a question of compliance alone – it is a gauge of how a business views its role in society and its commitment to its purpose. It is a critical element of a business’s social contribution and part of the ‘S’ in ESG.

To ascertain that contribution, stakeholders now demand a greater level of transparency on tax. By disclosing tax information, companies can ‘tell their story’ to stakeholders on their approach to tax and their tax contribution.

Investor action

While all stakeholders have a close interest in companies’ tax affairs, it is investors that are more closely scrutinising the tax practices and disclosures of companies to assess their long-term sustainability.  For example, several institutional investors have released codes of conduct that set out what they expect from investee companies regarding tax transparency and their broader tax practices. One such investor is Norges Bank Investment Management, the Norwegian sovereign wealth fund, which recently divested from four companies due to concerns over their tax transparency. Meanwhile, in the past 12 months alone, several high-profile multinational corporations faced much-publicised shareholder motions urging them to publicly disclose tax data. 

Investor action is having a tangible impact on companies and is driving change in tax transparency.

Regulatory drivers 

Regulators and international organisations have introduced various reporting requirements and initiatives to increase tax transparency and promote fair taxation practices. The most significant changes for companies emanate from recent EU directives, all of which will need to be considered by companies as they define their tax transparency strategies.

EU member states are beginning to transpose the public Country-by-Country Reporting (CbCR) Directive into domestic legislation, thus requiring large multinational groups operating in the EU to publicly disclose details of corporate tax paid by 2025.

The Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy are two pillars of the EU’s sustainability reporting framework, which will require large companies to report certain non-financial information across a range of sustainability topics. While tax is not currently one of these topics, it will need to be considered in the context of these topics.

Most notably, environmentally sustainable economic activities – as defined in the EU Taxonomy – must comply with certain minimum safeguards, one of which is tax. The Platform of Sustainable Finance’s final report on the minimum safeguards suggests that a company could be considered non-compliant with the taxonomy if the company does not treat tax governance and compliance as important elements of oversight.

Tax reporting frameworks

As the focus on tax in ESG continues to grow, the requirement for tax disclosures will only increase. Companies can follow a range of reporting frameworks when considering their approach to sustainability disclosures. The Global Reporting Initiative (GRI), the B-Team, World Economic Forum (WEF) and the Principles for Responsible Investment (PRI) are just some of the organisations that have developed tax reporting guidelines and standards. One of the most adopted tax reporting standards, GRI 207, enables companies to report on tax practices as part of their sustainability reporting. It consists of four key disclosure pillars:

Management approach disclosures:

• Disclosure 207 – 1 Approach to tax. 

• Disclosure 207 – 2 Tax governance, control and risk management. 

• Disclosure 207 – 3 Stakeholder engagement and management of concerns related to tax.

Topic-specific disclosures:

• Disclosure 207 – 4 Country-by-Country reporting. 

Considering your disclosure strategy

It is crucial to understand that tax transparency isn’t just about publicly disclosing how and where companies pay taxes. It is about putting this information in the right context. Companies don’t only contribute by way of corporate income taxes, but also through other income and non-income-related taxes, including duties, levies and employment taxes collected on behalf of governments. Beyond total tax contribution, the concept of tax transparency can be broadened to include disclosing your tax strategy, governance and approach to managing tax risks.

To help inform companies’ tax disclosure considerations, we reviewed the tax disclosures made by all companies listed on the main market of the Irish Stock Exchange (Euronext Dublin). Read our 2023 tax transparency report to explore the tax disclosure trends emerging from our review.

The five key actions to take now

In deciding what level of tax disclosure is the best fit for your company, consider the following:

1. Engage the board

Increasing investor pressure on tax means tax transparency is now a board-level issue. It is important to have full engagement between the board, the tax function and those responsible for ESG matters. Tax should be fully aligned with your organisation’s broader sustainability strategy.

2. Prioritise your tax strategy 

For those companies not yet making disclosures, the priority should be developing a formal tax strategy. This will be the first document stakeholders look for when assessing the company’s approach to tax and tax transparency. It can help you control the narrative.

3. Consider what, and to whom, you are reporting

Tax is a broad subject. Understand the material tax matters your stakeholders want to know about and why. Critically review your current disclosures to see if they align with stakeholders’ expectations. Once you have decided what disclosures to make, you will then need to consider whether the target audience will be able to understand each disclosure. Including additional information to help explain the disclosure and provide additional context may be beneficial.

4. Establish the optimal reporting framework for the company

There is no optimal level or one-size-fits-all approach to tax transparency. Each company’s perspective differs and will be driven by several factors, including your brand values and stakeholder interests. Decide what reporting framework works best for you. If the company already uses a reporting framework, such as GRI, for its wider sustainability reporting, ensure that your current tax disclosures align with that framework.

5. Establish processes and procedures for tax disclosures

Regardless of what disclosures you make, establish formal procedures and governance to ensure that the company can stand over both the qualitative and quantitative disclosures it makes.