For tax purposes, having access to the right information is a must for both taxpayers and tax administrations. This information does not only serve to nurture the annual tax returns. More and more stakeholders of all sorts, such as investors and civil society, are interested in the tax policy of multinational enterprises. This is where ESG comes in as a catalyst for transparency and sustainable taxation.
Increased tax transparency: GRI, CbCR and cooperative compliance frameworks
One reporting metric under ESG that has an impact on taxation is the global reporting initiative (GRI), which addresses tax standards under GRI 207.
Under this GRI 207 standard, enterprises are expected to increase tax transparency. The aim is to enhance trust and credibility in the tax system while at the same time allowing investors and shareholders to take informed decisions on the one hand, and informing the civil society on the other. Enhanced trust and credibility can be achieved through the publication of the tax strategy, by explaining how the enterprise deals with regulatory compliance and by demonstrating how the sustainable development goals of the enterprise are met.
Perhaps the best known disclosure under GRI 207 is the public country-by-country reporting (CbCR) standard, which should not be confused with the OECD CbCR under Action 13 of the BEPS project or the EU directive on public CbCR. There are commonalities between these three disclosure tools, but also important differences. For example, the information under the OECD CbCR is shared among tax administrations and kept confidential, while the information under GRI 207 and the EU public CbCR is intended to be made available to the public. Furthermore, differences exist between the data that must be reported.
Cooperative compliance frameworks between taxpayers and tax authorities is another important evolution in the tax transparency landscape. Under such a framework, it is also necessary that the tax authorities fully understand the sustainable tax approach of the enterprises concerned and bring in supportive evidence through a tax control framework and adequate qualitative information. It may also be useful in joint or simultaneous audits.
Europe pushing it further
Beside the information under CbCR or a cooperative compliance framework, there is a continuous trend to require the disclosure of more and more information.
Under the European Commission’s recent proposal to end the misuse of shell entities also dubbed ATAD 3, for example, companies established in the EU with cross-border activities mainly generating passive income, such as companies with finance or holding activities, potentially need to report annually on their substance in their country of residence if they outsource some of their activities or decision-making functions. Information that will be automatically exchanged with other tax authorities.
A parallel could be drawn with DAC6 where information on cross-border arrangements that meet certain hallmarks has to be disclosed up front. A similar parallel could be drawn with regard to DAC7 where platform operators must disclose information on enterprises or individuals that use the platform for selling purposes.
Furthermore, proposals are expected from the European Commission to increase transparency on cryptocurrencies and on the publication of effective tax rates paid by large multinationals based on the methodology used in the OECD Pillar Two Model Rules regarding the introduction of a worldwide minimum tax.
Next to these reporting obligations in the area of direct taxation, several initiatives exist with respect to consumption taxes. Furthermore, in our previous article we explained that the European wishes to increase transparency on non-financial key performance indicators such as respect for human rights, treatment of employees and environmental and social matters and is working on a new Corporate Sustainability Reporting Directive (CSRD).
These examples can all be situated in the international and European arena. We have not even addressed the information requirements of individual countries…
Turning the additional compliance burden into meaningful transparency
Some might say that the information rollercoaster is getting out of control. Apparently, the existing information streams are considered not to be sufficient. At the same time, it puts a strain on the resources of taxpayers and tax authorities. Enterprises must alter their existing data gathering systems or develop new ones and prepare new data sets. Tax authorities must review the data received through the national and international channels and perform the appropriate risk analysis and case selection on the basis of an ever growing data stream.
Streamlined tax reporting under ESG, however, could become the catalyst for a real time active cooperative approach between tax authorities and taxpayers, do away with the perception that all enterprises engage in aggressive tax planning and avoidance schemes and bridge the gap between the differences in the variety of transparency measures that exist today. In that sense, transparency under ESG could bring trust in the equation. It could increase the certainty that taxpayers and tax administrations need, render access to information for the stakeholders and become a part of the road to sustainable investment and growth.
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