ESG Tax Transparency: You might want to check out BRT's statement signed by 181 CEOs.

• Author: Dalby, Soren
• Position: Environmental, social, and governance; Tax Executives Institute business roundtable, chief executive officers

In years gone by, business looked primarily to increasing shareholder returns, paying less attention to how their business practices affected the environment and society. For many, the primary concern in supply chain design was cost, with little inquiry into how supply chain partners conducted business. But more and more, such money-oriented approaches to business are no longer viewed as sustainable over the mid-to long term. Rather, for business to succeed over time, companies must balance the interests of all stakeholders. This means an emphasis on environmental, social, and governance (ESG) issues.

In 2019, Business Roundtable (BRT) released a new Statement on the Purpose of a Corporation, signed by 181 CEOs of American firms who committed to lead their companies for the benefit of all stakeholders--customers, employees, suppliers, communities, and shareholders. (1) ESG advocates believe that companies that adapt to changing socioeconomic and environmental conditions are better positioned to see strategic opportunities and create competitive advantages over less ESG-focused enterprises.

Tax has emerged as an important element of ESG. The B Team, a coalition of business leaders advocating sustainable business practices, has stated, "Responsible tax can no longer be viewed as solely a technical [matter] for finance or tax departments." (2) According to BRT, taxes are critical to the orderly function of civil society and directly tied to BRT's commitment to "supporting the communities in which we work." (3)

Stakeholders focused on ESG expect companies to conduct their tax affairs in a sustainable manner, measured in terms of good tax governance and paying a "fair share." ESG stakeholders view the public disclosure of a company's approach to tax, the amount of taxes paid, and where those taxes are paid as important elements of sustainable tax practice. Such tax transparency is about trust.

Then and Now

Public expectations about corporate tax behavior became a mainstream topic during and after the 2008 financial crisis, with a growing belief that corporations were not paying their "fair share" of tax. The Lux Leaks scandal and the release of the Panama Papers and the Paradise Papers sharpened that perception.

NGOs, policymakers, and other stakeholders have called on multinational enterprises (MNEs) to be more responsible around their tax obligations. (4) At the same time, governments launched globally coordinated efforts to better ensure that businesses paid their "fair share" of tax. (5) This effort resulted in several global tax reforms, including the requirement that large companies report on the taxes they pay, by jurisdiction, to the tax authorities where they do business--the country-by-country reporting (CbCR) process. (6) These efforts have not appeased some ESG stakeholders who want corporations to share the same CbCR information publicly.

ESG standard setters have called for greater public disclosure around tax governance and payments. For example, in 2019, the Global Reporting Initiative issued GRI 207, setting standards for reporting of tax governance, control, and risk management--as well as for public CbCR that includes disclosures of profits, number of employees, and taxes on a per country basis. Further, there are proposals in both Europe and the United States that would mandate public CbCR. (7)

With a rapidly increasing amount of investment capital seeking "impact investment" opportunities, (8) most rating agencies have developed ESG rating indexes. Further, institutional investors and funds are increasingly evaluating ESG behavior in their investment process. Rating agencies and investors view sustainable tax practices as important measures of sustainability. (9)

Exploring Tax Transparency

The call for public tax transparency arises from some stakeholders' mistrust toward MNEs due to the perception that MNEs abuse the international tax system to avoid paying their fair share of tax. Some companies, mostly headquartered outside the United States, have responded with greater tax transparency to demonstrate their approach to tax is sustainable and to regain the trust of skeptical stakeholders. Indeed, tax transparency can demonstrate both a responsible approach to tax and how much MNEs contribute to government revenues, and more widely to society at large. The simple fact of being transparent signals the public that a company is acting responsibly.

Tax transparency may take different forms, with disclosures of information that is qualitative, quantitative, or both. Additionally, tax transparency can be seen on a spectrum, with limited qualitative disclosures at one end and detailed qualitative and quantitative disclosures at the other.

Qualitative Disclosures

Qualitative disclosures describe a company's approach to tax. Many companies today have made...