With the IMF estimating that companies avoid paying $600bn in tax each year, a global standard on tax transparency is long overdue, argues Tim Mohin of the Global Reporting Initiative

The media attention in recent years on tax-related scandals, highlighted by the Panama Papers, has heightened concerns around the tax practices of companies, in particular the obstacles to understanding just how much, and where, corporations pay their taxes.

While businesses do already release some tax data, it does not rise to the level of true accountability. When it is available, tax information is often aggregated through consolidated financial reports and based on country-specific legal frameworks. That is why so many stakeholders – including governments, investors, civil society, the media and the public – are seeking much more transparency on corporate tax.

These demands are not new, but they are getting louder. In 2015, the UN-supported Principles for Responsible Investment, which has 2,600 signatories who collectively manage in excess of $89tn, started the process for creating guidance on corporate tax responsibility. This was a clear signal that the tax practices of companies are a highly relevant issue for investors.

What has been lacking is an international, independently developed framework that supports comparable tax reporting

The OECD’s Framework on Base Erosion and Profit Shifting (BEPS) has introduced requirements for the largest multinationals to submit country-by-country data to tax administrations. Yet that is not the same as transparent, public reporting by businesses around the world.

Indeed, many companies would like to be more transparent about their tax payments. And some firms are starting to take a leadership approach in voluntarily disclosing more about their tax practices. Yet what has been lacking is an international, independently developed framework that supports comparable tax reporting, with clear expectations about what should be disclosed.

The amount of money at stake is staggering. Estimates by the IMF of corporate tax avoidance estimate that $600bn is being kept from government coffers each year. Obviously, this money would go a long way towards achieving the UN Sustainable Development Goals. As the International Chamber of Commerce has articulated, taxes are intrinsically linked to development because tax income enables countries to mobilise resources and invest in infrastructure.

The money at stake from tax avoidance would go a long way to realising the SDSs. (Credit: Travel Stock/Shutterstock)
 

It was against this backdrop that GRI started the process in 2017 that led to the launch this month of a global standard for tax reporting. It will, for the first time, support comprehensive, public, country-by-country disclosure of corporate tax payments.

The Tax Standard has not been created in a vacuum. Our standard-setting process follows an independent, multi-stakeholder protocol to ensure that the end result reflects global best practice. This involved convening an expert technical committee – with representation from business, civil society, labour organisations, investors, accountants and mediating institutions – to draft the standard.

That draft then underwent global consultation, including a public comment period earlier this year that saw high engagement from investors. More than 40% of responses received were from investment institutions, including organisations that collectively represent funds worth around $10tn.

Clarity on tax data, at the country-by-country level, is highly relevant for informing investors' decision-making

The consultation showed that global investors need more credible and reliable information on tax payments. This is because clarity on tax data, at the country-by-country level, is highly relevant for informing their decision-making, in terms of assessing investment opportunities and understanding risks.

The Tax Standard is now freely available to all businesses to access and use, so they can start to report on tax in line with global best practice. What’s exciting is that this new disclosure standard has the potential to revolutionise the transparency of tax practices around the world.

Using the Tax Standard will ensure public reporting of a company’s business activities and payments in tax jurisdictions, as well as their management approach to tax. This will give insight into their tax practices, including the scrutiny needed to understand investment risks.

It is already becoming clear that many stakeholders from around the world are highly supportive. Asset managers, such as Legal & General, Aberdeen Standard and Royal London, are also speaking out in favour. Wider backing from organisations as diverse as Public Services International, Accountancy Europe and Oxfam, which recognise the social and economic benefits that tax transparency can unlock, are also coming in.

Adoption and use of the Tax Standard by business is needed if we are to be able to ensure that the public debate about the role of taxes, within countries and internationally, is to be a well-informed one. That much-needed global discussion will continue to be hindered if we remain in the dark about corporate tax practices.

More transparency on tax also benefits the companies themselves. It will enable businesses to demonstrate their commitment to the communities where they operate, and directly respond to the legitimate needs of their stakeholders.

By adhering to an independently developed global standard, companies of all types can show leadership, gain recognition for their contributions in markets around the world, and demonstrate the part they’re playing to support sustainable development. This can be a win-win for everyone – companies, communities and global society.

Tim Mohin is chief executive of the Global Reporting Initiative.

Main picture credit: Creative Images/Shutterstock

 

Panama papers  Principles for Responsible Investment  BEPS  International Chamber of Commerce  The Tax Standard 

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