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Bringing tax transparency into focus for life sciences companies

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Loek Helderman and Chris Morgan of KPMG explain that tax transparency is set to become an integral part of ESG disclosures.

Are you aware of the tax transparency issues regarding ESG (environmental, social, and governance) and sustainability within life sciences companies? Is your business prepared for the challenge?

There’s a reason you should be.

Recently, there has been a dramatic cultural shift as governments and communities increase their focus on social and health issues, environmental concerns, sustainability, and corporate governance.

They want businesses to operate responsibly. This has led to more calls for ESG initiatives, where life sciences companies are expected to also measure ‘success’ as more than just profitability. It’s about what they ‘give back’ to society – for example, to patients and communities worldwide – what they do to protect the environment, and how they conduct and govern themselves.

It’s no surprise then that ESG is now at the heart of boardroom discussions.

How well you can demonstrate your commitment, and contribution, to meeting ESG and sustainability goals, and whether you can directly deliver on the United Nation’s 17 Sustainable Development Goals (such as ‘no poverty’, ‘zero hunger’, and ‘sustainable cities and communities’), is becoming a clear measure of such success – and tax transparency is increasingly seen as both an essential element of ESG disclosure and a key metric when demonstrating your responsible attitude towards tax.

While ESG reporting has more to do with taxes, the basic point is that governments want corporate taxes to help fund ESG (and sustainable development goals, or SDG) initiatives and the public wants to be able to see that organisations are doing the ‘right thing’; which can be seen through transparent tax reporting. Boards, however, should develop a separate, non-tax-related, ESG report that answers questions that may be asked about each topic in all three ESG pillars – for example, from what you are doing about climate change and electronic waste, to labour management and access to healthcare, to board diversity and business ethics.

Preparing for the challenge

Becoming a more ESG-friendly business, however, is a complex journey. It involves changing how your company does things while being transparent and accountable – not an easy task as there are no generally agreed-to measures.

While every life sciences business has its own unique requirements, and most are at different stages of their tax reporting and ESG development, there are still several common questions that should be addressed:

  • Has your business committed to meeting and reporting under any ESG standards or metrics?

  • Are you adequately collecting and analysing the right data about your ESG activities?

  • Can your technology support you?

  • Are your employees properly trained?

  • Do you have the right partnerships and alliances in place – ones that can help you create progressive approaches that drive your ESG initiatives?

  • Do you have a true idea about your companies’ environmental impact?

  • Is your board aligned on what you want to achieve, and do they have access to the right information so they can provide effective oversight?

  • As investors increasingly integrate ESG factors into investment decisions, they are taking a closer look at how organisations manage their tax risk. Have you developed a tax risk policy? Do you have a tax risk appetite statement and are you adequately disclosing tax risks?

There are no easy answers to these questions. But getting them right can give you a competitive advantage (more on that later).

For life sciences and chemicals firms, this is especially relevant as the ongoing coronavirus pandemic, climate change, and other environmental and social/health issues keep them firmly in the spotlight. As governments, shareholders, and the public focus on your taxes, getting your tax transparency reporting right is not only essential but potentially beneficial. This is why your ESG strategies should factor in tax transparency and demonstrate how you serve the communities in which you do business. Your tax planning should also align with, and support, the ESG agenda.

Recognising the challenge

The challenges ahead for life sciences companies are, of course, more complex than ‘just’ supporting ESG.

As noted in the report, Opportunities and challenges in an evolving market: 2021 health and life sciences investment outlook, post-COVID-19 “it is likely that the public will demand even more from the healthcare and life sciences industry and subsectors as we move beyond the pandemic and adapt to the new reality that will follow”.

Meeting these demands will likely include taking a closer look at personalised and patient-centric solutions, dealing with (and adopting) disruptive digital technologies, handling disruptions within the supply chain, and reconsidering traditional tax planning when dealing with international developments such as BEPS 2.0. But that’s just the beginning.

Meeting new environmental regulations and laws

Many initiatives, such as the European Green Deal, aim to make Europe climate neutral by 2050 and from it, the European Climate Law was established, which means that EU institutions and member states are legally bound to “take the necessary measures […] to meet the target”. Also, tax transparency can help ensure that shareholders, regulators, and the public can see that you are meeting your environmental obligations.

  • Shareholders can better see your tax behaviours, how aggressive your tax policies are concerning responsibility, and the financial contribution you are making to meet ESG (and societal) initiatives.

  • Regulators, which continue to focus on tax issues with multinationals, can determine that you are making correct ESG disclosures and are following established regulatory frameworks.

  • The public, who are increasingly emphasising ethical and social integrity in their purchasing decisions, can receive a clear snapshot of what a business is actually doing.

You should be seen to not just be ‘talking the talk’ but ‘walking the walk’. If it is felt that you are treating tax as solely a cost centre that should be reduced at all costs, your ESG efforts can be questioned, if not outrightly undermined.

The public perception of multinational firms

For many years, multinationals have appeared on front pages for tax avoidance, so it’s no surprise that the public perception of multinationals has often been negative. This has prompted today’s consumers and stakeholders to increasingly expect organisations to be responsible. Full transparency can help negate adverse public reactions.

A steady increase in regulations and standards

The seriousness of tax avoidance is reflected in the multiple mandatory and voluntary international regulations and regulatory forces that have been put in place. These mandatory and voluntary regulations include:

  • Country-by-country reporting, which requires multinational enterprises to deliver information to tax authorities on their income, profit, taxes paid, and economic activity for every country they operate in.

  • The Extractive Industries Transparency Initiative global standard “to promote the open and accountable management of oil, gas and mineral resources [that] requires the disclosure of information along the extractive industry value chain from the point of extraction, to how revenues make their way through the government, and how they benefit the public.”

  • The Global Reporting Initiative helps private and public businesses to easily report on how their business is dealing with sustainability and the impact they are making.

  • EU public country-by-country reporting has been approved and will apply from periods starting on or after June 22 2024. This requires large multinationals to disclose country-by-country reporting information publicly for their operations in the EU. See Country-by-Country Reporting – KPMG Global for further details. Being prepared for all such future regulatory changes is essential.

There is little doubt that in the coming years, more disclosure about your tax policy or strategy, governance, and risk management (and more) will be required.

Meeting the challenge

Transforming your business into one that does more than the legally required minimum tax reporting can deliver crucial potential benefits:

  • Consumers and investors can see that you are acting fairly and doing the right thing, which can help you establish your long-term value proposition while delivering value to shareholders and society in general.

  • Investors can be assured that your tax affairs are in order and overseen at appropriate levels – wherever you conduct business.

  • You can easily highlight your contribution to local taxes. This puts your corporate narrative directly in your hands, where you can directly show your social contribution and supplement your corporate social responsibility reporting.

  • You can directly contribute to the tax debate and help develop good policy.

A proactive approach

There is no time to lose. Life sciences companies should urgently act on their ESG and tax transparency initiatives. And, as described above, this means doing more than the minimum legal requirement. KPMG professionals believe that tax transparency can be viewed as a spectrum that will likely change over time.

Minimal legal compliance may be okay today but tomorrow it’s likely… very likely… that you’ll need to do a lot more. For example, you may be required to publish your complete tax policy or strategy, and your tax governance and risk management plans (including controls). You may also need to discuss controversies and disclosure plans, and publicly provide details about your total tax footprint on a country-by-country basis beyond what has already been approved by the EU.

Put simply, stakeholders want more information about your business beyond a financial report. They want to know if your tax policies align with sustainability efforts (which are expected to be at the centre of your operations) and that they are socially and environmentally responsible. This will likely require tax leaders to be involved in ESG discussions and be at the forefront of any sustainability conversations.

Transparency within life sciences companies should involve everyone. By fully explaining the taxes you pay, you can provide reports and demonstrate value to stakeholders. This can help improve your business reputation and the morale of those working with you.

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