GRI Proposes New Standard on Corporate Tax Reporting

Recent tax-related scandals such as the release of the Panama Papers and Paradise Papers have led to a public debate around the world and a growing demand from investors and other stakeholders for greater transparency around corporate tax payments. Yet few companies today publicly report on tax-related information in any detailed way.

Getting that information out to the public is the aim of a new draft standard on corporate tax reporting from the Global Sustainability Standards Board (GSSB), the independent standard-setting body of the Global Reporting Initiative (GRI).

The draft standard on tax and payments to governments, out for public comment until March 15, sets out common, well-defined disclosures related to tax strategy, governance, control, risk and stakeholder engagement, as well as country-by-country reporting of income, tax and business activities, according to GRI.

“The tax-related information that organizations currently make public is very limited, particularly at the individual country level,” Judy Kuszewski, chair of the GSSB, told TriplePundit. “The majority of companies report only generic information about their tax strategy. Just a small minority of companies publicly report on their tax and payments on a country-by-country basis, and most of these companies operate in a single country.”

Few companies come clean on tax practices

The current state of public tax reporting leaves much to be desired. A recent study by RobecoSAM indicated that only 17 percent out of 830 companies surveyed were reporting publicly on tax payments at a country level, and most of these were only operating in a single country.

A small number of organizations report comprehensively based on voluntary guidelines. In addition, there is regulation relevant to specific sectors or types of organizations in place in a few jurisdictions, with one example being Norway’s requirements for companies involved in extractive and logging activities.

“But overall, the tax behavior of most multinationals remains largely opaque for stakeholders,” Kuszewski says.

The extent to which bad behavior flourishes was evident in both the Paradise Papers and Panama Papers, as global media investigations led to the release of millions of documents revealing how some of the world’s most powerful people and companies exploit secretive offshore tax regimes.

“Most companies – especially small and medium-sized companies – do not engage in tax avoidance or aggressive tax planning, Kuszewski told TriplePundit, “and they may be at a competitive disadvantage relative to the few companies that do.”

With the draft standard, GRI is aiming to open the conversation, she adds, “to have a more informed public debate, creating an environment for better policy and investment decisions.”

Promoting trust and transparency

There are myriad benefits to being more open about tax practices, she says. “Increased reporting will enable stakeholders to make informed judgments about the suitability of an organization’s position on tax and payments to governments, and any risks that this may entail. It will promote trust and credibility in the taxation system and may discourage organizations from engaging in certain aggressive tax avoidance practices.”

Companies who are more transparent on their tax and payments to governments are more likely to be seen by stakeholders as trustworthy and accountable, and it can also strengthen the organization’s position on sustainability, she adds.

“Those companies that step forward and demonstrate their contribution to the community through tax [payments] will potentially benefit from greater social license to operate and better stakeholder relationships,” Kuszewski says.

Investors want more accountability

The increasing flow of investment capital driven by ESG factors, as TriplePundit has previously reported, is also driving new measurement standards.

According to Kuszewski, “investors are increasingly looking at a broader set of ESG issues to enable them, whenever possible, to avoid financing corporate activity that does not match their values or presents unacceptable risks, or at least make the most informed decision they can.”

An analysis published in late November by the Financial Accountability and Corporate Transparency (FACT) Coalition, a non-partisan alliance of more than 100 state, national, and international organizations working toward a fair tax system, found that investors are at an increasing risk from the lack of information disclosed by companies about their tax practices.

Several prominent investors, accountants, financial analysts, and academics — including investors with more than $70 trillion under management, the Certified Financial Analysts Association, and the Investor Advisory Committees at both the Securities and Exchange Commission (SEC) and Financial Accounting Standards Board (FASB) — have spoken out in favor of increased transparency on corporate tax practices, according to FACT.

Staying ahead of regulatory demands

Country-by-country tax reporting is critical in order to help identify where the economic substance of an organization’s activity is located, and if the taxes paid in that location reflect this reality. Such reporting may well become the norm, Kuszewski predicts, following regulatory developments to put an end to aggressive tax minimization practices.

Tax authorities in many countries have already implemented country-by-country reporting after the G-20 group of leading economies endorsed the practice as the international norm. The European Union already requires this type of information be publicly disclosed by larger banks and extractive industry companies, and the EU is in the process of expanding those requirements to all large companies.

For several years, the SEC has been considering increases to disclosure requirements around international taxation.  FASB is undertaking its own process weighing whether to expand corporate disclosure requirements in the accounting standards.

Most companies are already aware of this issue, and anticipate public country-by-country reporting to be adopted in the next few years, according to Deloitte’s 2018 Base Erosion and Profit Shifting (BEPS) survey.

“Companies can stay ahead of this curve by reporting using GRI’s proposed Standard,” Kuszewski says. “During this public comment period, the GSSB is particularly keen to hear from potential reporters, and we have posed some specific questions in the consultation materials, which we very much welcome companies’ views on.”

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