Understanding the realities of global tax transparency – let’s get practical
Manoj Pardasani and Pallavi Paul of KPMG in India and Eric Voss of KPMG in Canada present part two of a two-part series on the latest insights on tax transparency globally.
The second article in this two-part series aims to answer the question posed at the outset of this series: How to address tax transparency? The first article, “Understanding the realities of global tax transparency – Are you ready?”, aims to immerse the reader in the world of tax transparency; this article aims to share a vision on tax transparency and what is seen in the market.
Many companies are beginning to understand that the tax transparency landscape is complex and important. As discussed in the first article, understanding the history and many standards and regulations that are in play is a critical starting point. However, as with most things, the theory and the practical can feel quite different, so using research and hands-on experience with several corporates in their tax transparency journey has helped to develop a framework that assists in the tax transparency journey. This article aims to address the route that can be adopted and the support that KPMG professionals can provide.
Q1. What is the tax transparency journey?
Before embarking on any journey, it is important to understand the global landscape. If tax transparency was a continuum, with the left-hand side being the minimum standard and the right-hand side being absolute tax transparency, most entities would, as you guessed, be somewhere in between.
Considering the wide range of corporates seen spanning this continuum, some want simply to do what is bare legal compliance; some wish to take the first steps towards publishing their tax plan, governance, etc.; others want to start putting out the data, including country-by-country data; and some are even doing the whole gamut. Understanding where you sit on this continuum, as well as where you want to be, can be imperative in helping to ensure that everyone in the business – be it tax, sustainability, or the C-suite – has a clear idea of where they are starting, and where they want to end. The boundaries of this continuum will likely shift over a period of time as new legislation and tax transparency precedents are set, making the need for a well-defined plan for this journey very important.
Q2. What could be a typical approach to the tax transparency journey?
As entities move along the tax transparency continuum, it is important to remember that this movement is going to be a journey. While there is no one approach that is right for this journey, there is certainly a direction of travel here towards greater transparency. An ever-evolving landscape does not allow for a one-size-fits-all approach and corporates should aim to remain agile throughout the journey.
KPMG professionals have described the tax transparency journey using five broad steps:
Tax policy drafting/review;
Tax risk and governance design/review;
Tax transparency benchmarking (note that this can be done at any time in the process);
Tax risk and communication assessment; and
Tax impact/transparency/contribution reporting (‘Tax Impact Report(ing)’).
These steps provide a framework that can be utilised regardless of the starting point and facilitate corporates to engage in the tax transparency conversation.
By utilising the aforesaid framework, corporates should be able to plan for their tax transparency journey and be able to report their tax information, through a Tax Impact Report, accurately and in a timely manner while knowing where they sit relative to their peers.
Q3. What is KPMG Tax Impact Reporting?
KPMG Tax Impact Reporting is best explained as a simple two-part equation: the qualitative plus the quantitative. One may consider this equation as the following: what is the story, and how do the users understand your approach to tax, tax governance, and how the business structure aligns to the upcoming data, plus, the data being the total tax footprint broken down by country, by type of tax, by business segment, etc.
When you combine the KPMG Tax Impact Reporting Framework with the KPMG Tax Footprint Analyzer, you combine the qualitative with the quantitative. The KPMG Tax Impact Reporting Framework provides a tailorable report structure that covers the main elements of the tax transparency disclosures required by existing standards and criteria, and the KPMG Tax Footprint Analyzer is a technology solution that helps corporates to identify taxes paid data across several types of taxes. The KPMG Tax Footprint Analyzer allows an entity to categorise and show their data in a way that is accessible and user friendly.
Q4. What are the potential benefits of KPMG Tax Impact Reporting?
The elements of KPMG Tax Impact Reporting combine to provide broad tax contribution information contextualised for stakeholders. A KPMG Tax Impact Report can help to:
Utilise the KPMG Tax Transparency Framework to provide structure and content;
Bridge the expectation gap;
Understand and explain the corporate’s broader tax contribution;
Lead on visible action in the responsible tax and social arena; and
Address voluntary and mandatory reporting requirements.
A corporate’s Tax Impact Report could have a flexible look and feel, depending on whether the company prefers text, tables, infographics, or any other way it prefers to showcase itself. All these are important aspects of a transparency report. KPMG Tax Impact Reporting’s flexible framework and ability to integrate the qualitative and quantitate aspects, in line with a chosen tax transparency standard, can facilitate companies as they navigate towards their desired reporting outcome.
Q5. What is the framework for developing the Tax Impact Report?
The KPMG Tax Transparency Framework adopts the PACT (purpose, approach, contribution, and tax analysis) approach. PACT provides a simple guideline for developing the report structure while addressing the tax transparency aspirations of the company.
This is to tell the readers about the company or group’s business and why the company has chosen to be more transparent about its tax activities. It can help to set the tone for the rest of the report and outline what main elements are included or omitted and why.
The group’s approach to tax should be elaborated. This may include elements detailed in the GRI (Global Reporting Initiative) 207 standard; namely, the company’s tax principles, policies, and approach, and how it monitors compliance with these through governance and risk management. It may also include details of how it approaches tax incentives, low-tax jurisdictions, and other key sensitivity issues or attributes. The approach should give context to its tax contribution data, which should follow.
Working together, the company should make decisions on the various kinds of taxes and contributions that should be reported. KPMG professionals can then use a data-driven approach to collect, validate, and present the company’s global tax contribution data. This can include all types of tax, from all jurisdictions, and, if appropriate, reconciled to public accounts or OECD country-by-country reporting data.
With greater visibility over the company’s tax data, meaningful analysis can take place. This can be against any internal targets or external metrics. KPMG professionals may also provide testing of the company’s tax controls and assurance over tax contribution data.
Q6. What data should be shown in the Tax Impact Report?
Tax transparency is as much about data as it is about demonstrating the intent of a corporate towards accountable and responsible tax behaviour. When it comes to data, the GRI 207 standard simply focuses on the country-by-country reporting data. However, a corporate usually has various kinds of contributions in the form of taxes, levies, cess, royalties, etc. that go towards the government exchequer and may be considered as a source for public funding.
In the absence of any guidelines or regulations on this reporting (note that groups operating in certain sectors in certain jurisdictions are subject to specific rules; e.g., some extractives companies must report additional payments to government information under the Extractive Industries Transparency Initiative), corporates have the flexibility of defining the tax contribution amounts they decide to report; however, they would generally be advised to follow a specific and recognised standard for increased credibility.
The exercise is in annual reporting, and the objective is twofold; namely, communicating that the tax is, in fact, paid on all applicable transactions and evaluating the value of the tax payments for the year. Since the actual payment for the year is reported, the reporting is usually on a cash basis.
Some observations with regard to the quantitative aspect of a Tax Impact Report are summarised below:
The basis of preparation should rely on underlying principles of data collection and reporting and be supported by adequate rationale of why those principles are appropriate;
Reporting of refunds and credits under various tax heads needs specific consideration; and
Understanding and capturing industry-specific taxes/cess royalties is an important parameter.
The collation of data and documentation is an extensive exercise that ideally can be processed using technology. Corporates are at varying degrees of maturity with regard to incorporating technology in their Tax Impact Report quantitative data processing.
Q7. Do KPMG professionals have any technological solutions to collate data?
KPMG professionals have a few technological solutions that may be leveraged depending on the aspects that a corporate may be looking for.
The KPMG Tax Footprint Analyzer is a data extraction tool that can extract each tax-paid amount from every group company to show the group’s global tax footprint. It uses automated data extraction tools, accessing data from the underlying ERP tables and other sources. The solution performs data integrity checks and performs data analysis routines to support the validation process. Results are presented in dynamic, interactive visualisation dashboards that allow users to drill down to the deepest level of detail and further visualisation customisation.
The KPMG Tax Control Room is a progressive cloud-based solution that is designed to provide new insights into the management of tax. It allows the identification of specific actions that enhance the management of tax risks, reporting requirements of the head of tax, tax function performance, and tax governance and controls. The Tax Control Room gathers insights through a range of questionnaires that are then automatically analysed by the tool for benchmarking, identifying gaps and suggested actions. The Tax Control Room is used in combination with workshops, desktop reviews and other advisory inputs.
Q8. What are some of the learnings while assisting clients in their ESG tax journey?
The tax transparency journey is an expedition that multinationals should undertake sooner or later. The path is not well defined, but the GRI guidelines and various other initiatives taken up by some governments, non-governmental organisations, and certain conscientious corporates have laid down principles and disclosure requirements for companies to adopt voluntarily.
Working with corporates that are at various stages in this journey, from initial onboarding to speaking with those that are evaluated against the Dow Jones Sustainability Indices (DJSI) criteria and have been updating their tax transparency report based on DJSI feedback, there are some interesting operational nuances that have been observed.
Firstly, it is important to understand that basic tax disclosures in the form of policy and principles are not sufficient. This is surely the first step towards the entire journey: setting the house in order with a uniform global tax policy and principles is an essential element. But thereafter, effective implementation of the policies and principles and demonstrating effective implementation and public disclosure is even more important.
Secondly, corporates that are already undertaking sustainability reporting on the basis of GRI guidelines should be considerate about claiming their alignment with GRI requirements. KPMG professionals often see companies that do not report on tax under the GRI as they have scoped it as immaterial. However, because taxes paid by the group directly equate to revenues received by governments, that tax can have a large social impact and therefore be material to any group reporting in accordance with the GRI. It was also often seen that groups claim to report under GRI 207, but that they only perform partial reporting. Aiming to ensure this is remedied is critical now that GRI 207 is effective for reports or other materials published under the GRI from January 1 2021.
Thirdly, it is important for corporates to be aware of any sustainability standards they or their industry may be already signed up to or regulations that are applicable, and understand if there are required tax disclosures or available guidelines and thereafter analyse their readiness to report on the various tax disclosures. Thereafter, mapping the journey to achieve full alignment on all disclosures relevant to their industry and starting to work towards the same in small, definite steps can be a key to success.
Finally, it is important to remember that tax professionals are not usually communications experts and marketing personnel or investor relations personnel are rarely tax experts. However, releasing tax data and making extensive disclosures about a group’s approach to tax often involves releasing information that can be perceived as sensitive information and requires these stakeholders to engage in dialogue early and collaborate throughout the whole tax transparency process.
Since tax transparency is still voluntary (except in a few jurisdictions), beginning to discuss goals and work through issues means that the corporate can work at its own pace rather than trying to meet mandatory disclosures under regulatory pressure. It means the group can take time and care to explain the tax data and approach to tax in an interconnected way, giving stakeholders a better understanding of how the group approaches tax accountability and transparency.
Read the full article on KPMG’s website