UK: Responsible Tax - An Integrated Approach To Tax Transparency

Executive summary

The information that businesses share about their taxes is being examined by a growing range of interested parties. Some companies have responded by explaining their position more fully in their financial reporting or other communications. At the same time, regulators are looking to require at least some companies to report more tax information. What should you be doing now to be ready and able to describe your organisation's tax position?

In our previous paper in the Responsible Tax series – Sustainable Tax Strategy Today – we recommended practical steps in setting the right tax strategy and a governing policy for your company, to enable you to continue to deliver the tax strategy in this evolving environment.

In this second paper, we look at how to approach explaining your tax position, and to whom. Firstly, you need to understand who the stakeholders are – the financial community, employees, customers, suppliers, broader society and of course tax and regulatory authorities will all represent potential interested (and potentially challenging) parties. Secondly, each will have different demands and expectations around the nature and amount of tax information they require. Each stakeholder will need a different level of clarity over your tax position, and some will need an overview of all the communications you and your business make about tax.

Tax is no longer limited to business and tax authority relationships – it has very much become a significant strategic business issue. The challenging part is explaining one's tax position: you need a clear and consistent approach to managing tax across all business divisions, companies and countries. This clarity cannot be achieved without a robust, effective communication policy.

We recommend that you set the context first – be clear about the environment in which you operate, including regulatory, commercial and other external factors. The taxes businesses are subject to are hugely dependent on the jurisdictions and fiscal regimes in which they operate, the phases of investment and other cycles and business models – all this needs to be made as clear as possible.

Your tax policy should have board level approval, and the board should have oversight of the tax policy. You should also be able to document all the taxes paid across your business – and make the distinction between the taxes paid and taxes borne. While you may not need to include a breakdown in your financial statements, it would be prudent to have these figures to hand should enquiries be raised by any of your stakeholders.

Finally, regardless of the nature of your communications policy, you need to be able to rely on your internal tax management processes. You need confidence in your numbers, and have a clear sense of how your future business and strategic direction impact your tax profile.

Businesses are not static – they are always evolving to adapt to shifts in their commercial drivers and changes to the regulatory environment. Our final paper in the series – Making Changes – will discuss the assessment of potential tax impact of changes in the environment, the options available, and the implementation and review of chosen strategies.

Introduction

The requirements of tax management and reporting have changed fundamentally. The pace of change has been rapid and even the most agile and responsive businesses have faced challenges in adapting to the new environment. The demand for transparency and clarity in tax communication is increasing and, we think, will continue in the coming years.

'Traditional' stakeholders (tax authorities, CFOs etc.) are as curious as ever about tax but there are also whole new groups of people with varying degrees of interest, knowledge and engagement, who want to know about your tax position.

Your key external stakeholders such as shareholders, financial analysts, lenders, customers, suppliers, employees, non-governmental organisations and the general public themselves are all increasingly interested in your tax affairs. And internally, your own boards and Audit Committees, CSR teams, brand management, marketing and public relations teams are also highly engaged in this topic. It's a long and growing list and leaves your tax position open to scrutiny from more sources than ever before.

Businesses have been reacting to this environment and are looking at ways to articulate more effectively how they manage tax. Businesses need to demonstrate that the effective management of tax supports the success of their enterprise, drives economic growth and contributes to wider society. Working out how best to communicate and 'explain tax' in a way which is clear and understandable and which enables all key stakeholders to understand your tax profile can be a huge challenge.

You need to have the right information readily available and, when it comes to communication, have confidence in it. This means you need the right supporting processes and controls in place.

Confidence is also required in tax decision making and, more than ever in this new environment, this is best supported by a clear sense of your future business and strategic direction.

All of this puts more pressure on you – businesses are responding in different ways and that is what is examined in this document.

In our previous paper in the Responsible Tax series (Sustainable tax strategy today) we recommended practical steps in setting the right tax strategy and a governing policy for your company to enable you to continue to deliver the tax strategy in this evolving environment.

This second paper examines how to 'explain tax' and, specifically, looks at:

Understanding your stakeholders

You will almost certainly have different demands for tax information from different people. It is important that you recognise the range of stakeholders, that you actively manage the information flow to them and that you have total confidence in all of the data and information provided.

Consistency of messaging is critical. Your employees, your suppliers and customers, the financial community, regulators and tax authorities should all receive a consistent message, even though the depth and breadth of information may vary. Recognising who your key stakeholders are is the starting point.

1. The financial community

Your shareholders, investors, financial analysts and banks are more engaged and interested in tax management than ever before. Tax is not their number one issue, but the financial community is now interested in understanding the current tax charge, the cash tax position and, importantly, the reasons for any differences between the two. They also want information on the key tax risks and the background to any disclosed tax uncertainties.

There is significant demand for clarity in financial statements and for targeted presentations. You need to understand and adapt to trends in reporting and be able to explain uncertainty. The tax note within the financial statements is central to delivering this successfully. The current tax position, risks and uncertainties need to be communicated simply.

There is a growing trend for analysts to ask about the potential impact of prospective tax law change – and so awareness of the changing environment, forecasting, scenario planning and impact assessments will be of increasing importance.

The better you can explain where you stand and where you are headed, the easier your access to funds and the securing of capital may prove to be.

2. Employees, customers, suppliers and broader society

2013 was a year like no other for public interest in tax.

The result is that a clear explanation of tax decisions taken is now more important than ever. For the general public, tax information is sourced from a variety of public places (such as annual reports and now also CSR reports). As a result, there is a growing trend for businesses to include greater disclosure of tax information in these documents. Some businesses have started breaking down tax paid by country, or detailing their tax policy, or explaining the use of so-called tax havens. We expect this trend to continue.

It is important to monitor developments in the public's view of your tax position; clear communication should help reinforce positive customer sentiment and may strengthen brand value. You may not stem the tide of questions but you can respond positively and straightforwardly.

3. The tax authorities

This traditional tax stakeholder remains a critical relationship.

You must remember that the tax authorities will be looking at all the communications you and your business make about tax. The increasing effectiveness of the tax information exchange (TIEA) regime, together with other information sharing methods will mean that your global tax messaging will be open to review and reinforces the need for consistency.

4. Regulatory issues

There are growing demands for tax information from many non-traditional sources. Transfer pricing is central to this and the OECD's Base Erosion and Profit Shifting (BEPS) action plan will be a key issue for multinational businesses. We recommend that businesses begin to consider how this will work in practice and scenario- plan the potential impact on the enterprise.

There are also a number of industry-focused initiatives which may well broaden in their scope. For example, the Extractive Industries Transparency Initiative is now well established and is increasing in importance. It has led to changes in the ways in which energy businesses disclose their tax results. Additionally section 1504 of the US Dodd-Frank Act adopted by the SEC on 22 August 2012 and the EU Capital Requirements Directive IV will also add more to the reporting requirements of the extractive and financial services industries.

These all show that tax is no longer limited to business and tax authority relationships, but that it has become a significant strategic business issue.

To read this Report in full, please click here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.