Tax transparency”—is this just another buzz phrase that will ultimately fade away without effecting substantial change? Or is it an emerging trend to which companies should pay attention?
Across the globe, stakeholders are becoming increasingly interested in tax transparency both as a mechanism to combat tax-planning initiatives that are perceived to be aggressive and as a response to public interest in the tax practices of multinational corporations. Mid-sized BC companies and companies that are not in extractive industries should monitor this evolution closely. Larger BC companies—especially those in extractive industries—should pay even closer attention, as the tax transparency movement may be more germane today.
Tax has started to become a strategic concern for companies, especially from a branding perspective. Emerging trends, locally and globally, are pointing towards an era of increased transparency in the form of both voluntary and legislatively enforced public tax disclosures. This increased focus will likely cause tax transparency to be elevated to the board level—just as the focus on sustainable supply chains in the 1990s (which affected competitive advantage) and on environmental and community issues around the turn of the 21st century (which affected social licence to operate) made these issues the subjects of strategic board-level discussions.
Some companies’ existing income tax models (and, therefore, their business models), will need to be re-evaluated to prepare for compliance with full tax transparency. Significant vision and insight may be required to redesign the underlying business models to ensure minimal disruption to customers and to maintain the amount of after-tax profits. Such companies will need to approach the transformation of tax within their organizations in the same way they would approach changes to a supply chain: with a focus on stakeholder relationships, trust building, and collaborative innovation. This will not occur without board-level support and direction.
The evolving international landscape
In summarizing the results of its 2014 global tax risk and controversy survey, EY reported that 94% of the largest companies with an opinion on tax transparency believed that global disclosure and transparency requirements would continue to grow in the coming years, and the past few years have proved them right. Several initiatives aimed at greater transparency have been proposed or adopted around the world, and many large multinational companies are voluntarily publishing annual tax transparency disclosures.
A brief summary of the developments in Australia and the UK are highlighted below to illustrate recent global government-led developments. Also provided is a summary of some existing voluntary disclosures from company-led developments.
In May 2016, the Australian government released the voluntary Tax Transparency Code, which was developed by its Board of Taxation in consultation with business. While billed as a “voluntary” code, the government and commentators have made it clear that businesses have flexibility in terms of how to adopt the code, but not in terms of whether to adopt the code.
For businesses with aggregate Australian turnover of more than $100 million, the minimum standard disclosures include:
- A reconciliation of accounting profit to tax expense that identifies material non-temporary differences, and a reconciliation of tax expense to income tax paid or payable identifying material temporary differences; and
- Effective tax rates for the global operations and the Australian operations as a subset thereof.
For businesses with aggregate Australian turnover of more than $500 million, the minimum standard disclosures are extended to include:
- Information about the entity’s tax policy, strategy, and governance, including:
- Its approach to risk management, governance arrangements, and engagement with tax authorities; and
- Its attitude towards tax planning and acceptable levels of tax risk.
- Key categories of dealings with offshore related parties that have a material impact on the business’s taxable Australian income, and the countries in which the related parties are located.
Legislation adopted in September 2016 introduced the requirement for businesses in the UK to publish their tax strategy as it relates to or affects UK taxation. Multinational businesses with consolidated turnover greater than €750 million and UK-registered companies with turnover of more than £200 million or gross assets of more than £2 billion are required to comply with this new requirement.
- The approach to risk management and governance arrangements in relation to UK taxation;
- The group’s attitude with regard to tax planning;
- The level of risk in relation to UK taxation that the group is prepared to accept; and
- The approach in dealing with revenue authorities.
Voluntary tax transparency
Over the past 10 years (but more significantly over the past five years), some large multinationals have gradually increased their tax transparency disclosures to combat negative perceptions of their tax practices (irrespective of the legality of said practices). Over the same period, some corporations in the extractive sector have gradually increased their disclosures to stay ahead of public demand and global government regulations.
In reviewing mature and voluntary tax transparency statements made by some of the world’s largest corporations, we found the following similarities within their tax disclosure statements:
- Makes a statement that it pays all legally owed taxes and complies with all required disclosures;
- Includes a transparent discussion about beneficial ownership, company structure, and purpose;
- Publishes a responsible corporate tax policy approved by its board;
- Emphasizes good governance practices, and transparent relationships with revenue bodies;
- Fully supports base erosion and profit shifting (aka BEPS), and asserts the commercial reality of structures within the organization and the alignment of tax with “value creation”; and
- Often uses the disclosure to perform some advocacy—for example, making statements to the effect that tax rules should be effective, efficient, and competitive.
Perceived benefits and risks
Listed below are some of the perceived benefits and risks of public tax disclosures:
- Help refute claims of not paying fair share.
- Improve government and public relations.
- Enhance investor confidence.
- Provide greater access to information, a concern of local communities.
- Can explain fluctuations in annual contributions that are dependent on revenues, commodity prices, etc.
- May expose tax shelters.
- May cause some communities to feel under-served in relation to others.
- May affect future negotiations with stakeholders.
- May lead to backlash from peers or business partners.
What is happening in Canada and why?
The Extractive Sector Transparency Measures Act (ESTMA) is the most recent example of transparency legislation that affects Canadian extractive companies. ESTMA came into force on June 1, 2015, and introduced new reporting and transparency obligations for Canadian companies operating in the extractive sector. Affected companies are required to report payments made to any local or foreign governments for the commercial development of oil, gas, or minerals. Reportable payments fall into any of the following categories: taxes, royalties, fees, production entitlements, bonuses, dividends, or infrastructure improvement payments. ESTMA reports must be filed within 150 days of the end of the financial year and must be made public via the Internet.
ESTMA stems from Canada’s commitment to contribute towards global efforts against corruption, and it mirrors similar transparency requirements implemented in the European Union and the United States. Given the perception that resource extraction is susceptible to corruption within developing countries, these requirements have emerged as one of the ways to bring transparency—on the part of both business and government—to the industry.
An emerging trend among large multinational corporations in the extractive sector is to incorporate their voluntary tax reporting disclosures with the requirements to report payments made to governments under foreign legislation similar to ESTMA.
Outside of ESTMA, the Canada Revenue Agency and the Ministry of Finance have given no indication that any other legislative public tax transparency requirements will be implemented in Canada any time soon.
What does this all mean for BC-based public and private companies?
Reputational risk cannot be effectively managed without addressing transparency, as they go hand in hand. Transparency readiness will enable companies to proactively manage reputational risks. In our opinion, the question to ask is not, “Does my company need to be transparent with respect to our global tax structures and tax benefits? Instead, the question to ask is, “Would controlling the message about my company’s tax affairs have a positive impact on its reputation or its social licence as a viable economic vehicle?”
Companies should continue to monitor developments in this area and consider whether they’re currently prepared to be more transparent if tax transparency legislation similar to that of Australia or the UK were to be introduced in Canada.
Felicity Withington-Bandic is the tax director at Silver Standard Resources Inc. in Vancouver.
Michael Sabatino is an associate partner with Ernst & Young LLP in Vancouver.
- Ernst & Young LLP, Bridging the Divide – Highlights from the 2014 Tax Risk and Controversy Survey, 2014.