Since the 2008 financial crisis, taxation has become a focal point of society’s concerns. Despite profound tax reforms curtailing past practices, interest in corporate taxation remains high amongst the media, political figures and activist groups. If businesses wish to thrive, they must be seen to be doing the right thing. This pressure is likely to be maintained as governments work to sort out their state finances post-pandemic.
Much of the current focus on ESG is on its first element, ‘environment’, but tax also influences society and governance. “The reality is that businesses can only successfully address sustainability challenges in relation to tax by creating good tax governance,” said Grégory Jullien , Senior Manager at Deloitte Luxembourg. In the past, this was often just scrutinised by tax administrations. Now, it is a question of managing the expectations of a broader base of stakeholders, including investors, clients, employees, NGOs, politicians, journalists and citizens.
“There has been a high volume of tax reforms recently in a short space of time, and implementation is creating challenges and risks, as the maturity of tax governance and control frameworks are tested,” said Mr Jullien. Indeed, the risk around tax governance was highlighted as a leading concern in Deloitte Luxembourg’s recent ‘How ESG developments shape business tax practice’ survey, which polled 41 locally based businesses.
There has been a high volume of tax reforms recently in a short space of time, and implementation is creating challenges and risks.
This is even before the full effect of the ongoing waves of new tax regulation is felt. The emerging public country-by-country reporting rules will shine a light on cross-border tax practices, and move businesses towards reporting so-called ‘effective tax rate’ calculations.
“EU rules are enhancing sustainability reporting by connecting it to tax transparency obligations,” Mr Jullien noted. Businesses will have to report on tax in multiple ways; to shareholders for financial reporting, and to the wider stakeholder community for tax transparency reporting. Communication will have to be carefully designed to meet the target audience’s expectations and expertise.
This process can be even more arduous than it sounds, as tax’s highly technical nature often makes it difficult for non-specialists to understand. It involves explaining to stakeholders how tax is governed and managed. “Businesses would even be expected to explain taxes paid and collected as a result of the governance in place,” Mr Jullien noted.
“Sustainability challenges related to tax are best addressed when businesses are able to anticipate, adapt and act proactively. This involves developing and mastering the interdependent spheres of tax policy, tax governance, and tax communication,’ Mr Jullien added. This is key to businesses being perceived by all stakeholders as doing the right thing, building and maintaining trust as a result.
Sustainability challenges related to tax are best addressed when businesses are able to anticipate, adapt and act proactively.
Cooperative tax compliance is an emerging reality. Mr Jullien explained, “The idea behind this concept is to build a trust relationship between the business and the tax administration. Our survey results show that 63% of respondents believe this would be a great way to navigate complexity and reduce tax risks. This involves having the right tax governance in place to reduce friction by working with the tax administration.”
Mr Jullien says there are several strands to good tax governance. It starts with buy-in from the executive board to ensure adequate oversight and governance. From this come the necessary processes that will identify risks and successfully analyse procedures and policies, shaped and enacted by trained and experienced people. Businesses also need the right technology to produce quality analysis, with these systems requiring high-quality data inputs. This enables targeted tax communication that demonstrates the responsible tax behaviour of the business.
While 95% of the survey’s respondents expect to communicate their tax data publicly, 46% expect to go beyond requirements to provide further explanations. Once a ‘nice to have’, such communication is quickly becoming an obligation in 2021 and beyond.
Good tax governance and confident tax communication are the common denominators in the challenges posed by sustainable development. Their setup will take time and resources, and can no longer be considered in isolation from a broader business strategy. But if businesses get it right, the benefits could be felt across the entire organisation – from employee engagement to the satisfaction of customers, administrations, regulators, governments and investors. Answering public expectations gives companies the best chance to manage these risks and opportunities.
The full survey report on how ESG is shaping business tax practice can be downloaded here.