Google hit the headlines again recently, facing public criticism for their corporate tax practices. Known as the “double Irish, Dutch sandwich”, it has been reported[1] that Google’s owner Alphabet were able to pay lower taxes on its non-US profits in previous years. Using a subsidiary in the Netherlands, the company are said to have shifted revenue from royalties earned outside the US to Google Ireland Holdings, based in Bermuda, where companies pay no income tax. This loophole has since closed. “We pay all of the taxes due and comply with the tax laws in every country we operate in around the world,” Google said in a statement.
This is just one example of many in recent years of companies judged to be negating their tax obligations, fuelling consumer frustration and mistrust on the sensitive and emotive issue of tax. Ever since the Panama Papers, the debate has continued on what is deemed a ‘fair’ level of tax to pay, irrespective of the legality of such exploits. Research suggests that hundreds of billion US dollars a year in corporate income tax revenues are lost due to tax avoidance techniques, depriving Governments of money to fuel investments in social infrastructure.
Stakeholders have a basic expectation that companies will pay tax in approximate proportion to revenues and profits in the locations where that economic activity took place. However, for many companies, reality is not that straightforward. The strategy of some companies will be to register revenues, profits and pay taxes, in countries with lower tax regimes than the countries where the end customers may be located. Other companies will go further, using corporate structures to take advantage of tax havens, or seeking to exploit uncertainties in specific national tax legislation.
“In aligning to ESG as an individual, company or country, transparency and ‘doing the right thing’ is at the core of it all; what is legal does not make it morally right. Transparency and emphasis on the governance of tax disclosures is essential. The act of disclosure and transparency allows investors, colleagues, suppliers and customers to make their own value judgements about investments and engagement with that entity. “ Adrian Sargent, ESG and treasury expert.
Disclosures on tax in traditional annual financial report and accounts are impenetrable, sometimes deliberately so. Until now, only a few companies have gone into any great detail on their approach to tax, in their corporate sustainability reporting. Yet the amount of tax corporations pay is both an economic and a social issue. The few companies that have explored this link, are able to create a positive message around the economic and social impacts of their business tax contributions. But this is not the norm, and often tax information is only partially disclosed and the wider context is not provided in enough detail to allow the reader to form an opinion on the extent the company has met its societal obligations in line with the size and profitability of the company.
There are also some very significant differences of opinion about what good corporate practice looks like. Most companies like to say that they balance the interests of the company and society, but when investors are demanding higher profits and increased dividends, ‘tax efficiency’ can be a tempting means to contribute towards these goals.
This is now set to change. The Global Reporting Initiative (GRI) has recently issued a new standard on tax with the aim of promoting greater transparency on companies’ approach to taxes. The new standard is very detailed, setting out clear guidance on when exceptions can be made and how to deal with these. It is clear the GRI Tax Standard is trying to be as broad as possible while maintaining the goal of transparent disclosure. This is positive change, as it has often seemed as though the GRI was too generous with ‘reasons for omissions’ allowing companies to choose not to disclose information they don’t wish to publish.
So, what does the new standard include?
Firstly, the company must state their tax strategy and explain how this is linked to the wider business strategy. Secondly it requires the company to disclose governance arrangements around tax. Who is accountable for tax payments and what checks and balances are in place to ensure the tax strategy is followed? Has the company identified, and mitigated risks related to tax? A company should also state any relations with local tax offices and disclose any public advocacy conducted in relation to tax.
Interestingly there is also a requirement to disclose stakeholder engagement in relation to tax. It is difficult to understand how this part of the new standard differs to the more general requirements of GRI to disclose stakeholder engagement information of how a company is collecting, considering and responding to issues of concern to their stakeholders. Nevertheless, companies should disclose what they understand about the expectations and concerns of their stakeholders in relation to tax.
The standard also requires companies to describe “how the approach to tax is linked to the business and sustainable development strategies of the organisation”. This is great to see, as its only when tax information is set alongside the sustainability strategy and the results of stakeholder engagement related to tax, that a coherent narrative can be developed. Done well, this should create engaging communications that show real transparency and impact, something which can be sorely missing in many Sustainability Reports.
The final requirement is where the real change will be driven. The standard states a company should disclose all the countries in which it is resident for tax purposes, the number of employees, profit and loss before tax, assets and income tax paid on a cash and accrual basis. In addition, they must also provide commentary on what these figures show, which is a real step forward towards transparent communications.
The GRI Tax Standard won’t pressurise companies to pay more tax. It does however ask a company to be transparent and put taxes paid in wider context and tell the story that sits behind the numbers. Companies should embrace this challenge and take steps to apply the GRI Tax Standard this year, despite the standard only becoming mandatory in 2021. For those that choose to not disclose, or claim tax is not a material issue for their business could find themselves under the spotlight if they are judged to have acted irresponsibly or seen not to have paid a ‘fair’ level of tax.
Rob Pearson and Adrian Sargent
Adrian Sargent is an Associate Consultant for Challenge Sustainability, and Director of ESG Treasury, a specialist ESG and treasury advisory agency (www.esgtreasury.com)
[1] https://www.theguardian.com/technology/2019/jan/03/google-tax-haven-bermuda-netherlands