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ESG scrutiny shines spotlight on tax transparency

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CEOs feel heightened pressure to report tax information and deliver on ESG strategy, says David Linke, KPMG’s global head of tax and legal services.

Tax transparency has been on global executives’ minds for years, and the KPMG 2022 CEO Outlook shows it is still front and centre. About three quarters of CEOs (73%) feel a heightened pressure to increase the public reporting of tax information.

One of the earliest catalysts has been the development of country-by-country reporting, followed by other developments, such as broad agreements on pillar two of the OECD’s BEPS action plan, which establishes a global minimum tax regime. More recently, the European Commission has moved ahead with the Foreign Subsidies Regulation to address alleged distortions and anti-competitive activities (for example, preferential tax treatment and exemptions) granted by non-EU countries in M&A and procurement activities.

ESG demands on the rise

Faced with significant new regulations – and with ‘regulatory concerns’ a top-three risk – global CEOs are also weighing increasing stakeholder demand for transparency and ESG. With ESG rising on leadership agendas, tax practices and governance are becoming critical ESG measures, with tax transparency often used as a key metric for demonstrating a responsible attitude towards tax. And this is likely to intensify in the years ahead.

The KPMG 2022 CEO Outlook shows a marked jump in demand from stakeholders, such as customers and regulators, for increased ESG transparency:

  • Sixty-nine per cent of CEOs see stakeholder demand up significantly (from 58% in 2021), and 72% believe ESG scrutiny will continue to accelerate; and

  • Increased or frequently changing regulations are seen as one of the top two challenges CEOs face in delivering on their ESG strategy.

Increasingly, there is a tendency for ESG-oriented investors and regulators to want large organisations to disclose their financials, including how much they pay in taxes, and cut back on aggressive tax planning.

Reporting on tax is not only about being transparent or about how much tax a company pays, but also actively demonstrating the way the company behaves with respect to tax, so that it can support governments that are trying to achieve sustainable and inclusive growth.

As such, tax touches all three elements of the ESG agenda:

  • Environmental – environmental-related taxes (for example, carbon taxes), green incentives (such as renewable energy credits) and tax-changing consumption behaviour, acting as a ‘force for good’ and helping to price externalities.

  • Social – social tax credits and social investment tax relief are becoming more widely available for companies pursuing social objectives. Also, an open, transparent dialogue between businesses, tax authorities, non-governmental organisations and consumers is key to helping to build trust. The approach to tax and the tax policies of businesses are increasingly evaluated as a measure for sustainability and change.

  • Governance – tax is at the heart of governance and accountability within a business. Tax sustainability is increasingly becoming a high-priority topic in boardroom discussions about governance. More and more stakeholders are looking to companies to demonstrate their commitment and contribution to society through tax transparency reporting.

It is also important to note that tax is typically easier to measure than, and often sits alongside, other efforts on the ESG agenda. Explore more insights around how tax and regulations are key considerations in a business’s ESG journey here.

Tax transparency and trust

With social purpose at the forefront of most businesses today, organisations should also respond to the call for tax transparency in a way that aligns with their corporate values. This is imperative to enhancing and retaining public trust. According to the KPMG 2022 CEO Outlook, 75% of CEOs say there is a strong link between the public’s trust in their organisation and their approach to tax matters.

Dealing with public reporting and building trust requires planning and effort to help to make tax numbers meaningful so they are not subject to misunderstanding or misrepresentation. This is an increasing priority for organisations.

A way forward

Tax transparency can help to provide multiple benefits to the tax function:

  • Being transparent is about fostering trust – being open about your activities, plans and progress can help your stakeholders to understand who you are as a business;

  • Regulation is increasing – in recent years, tax regulation has become a point of public discussion more frequently and in more detail, including the above-mentioned Country-by-Country Reporting Directive, BEPS and the Foreign Subsidies Regulation;

  • Voluntary reporting is becoming increasingly complex – businesses should understand the difference between reporting standards, principles-based disclosures, rating agency criteria and stakeholder preferences before deciding how to begin voluntary reporting; and

  • Investors are increasingly evaluating tax sustainability – investors are requesting information to assess the value impact of the tax strategy and governance policies that an organisation has adopted from an ESG perspective.

More investors are making ESG and tax transparency part of their investment strategy and sustainable finance initiatives. As a consequence, there has been a mounting interest in taxation as a ‘steering instrument’ for making an impact through a contribution to society and to the ESG agenda. But one thing has become clear: not all businesses are at the same point in their tax transparency journey, and not all have the same tax transparency destination.

Read the full article on KPMG’s website.

Click here to access more KPMG Future of Tax content.

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