Tax transparency: clarity without explanation is not an answer to the question

How can a company or an individual be deemed to be a “good citizen”? Against a backdrop of public sector deficits and cuts in public spending, being transparent on how much tax you pay, whether that is “fair” and where you pay it is now a key factor for any business and especially for Multi-National Entities (MNEs).

With increasing pressure from stakeholders (not just shareholders but customers and pressure groups) the issue of tax transparency is now as much an ethical and moral issue as much a political and legal one. So, how should businesses deal with tax transparency when it comes to corporate reporting?

Statements in the media that large corporates have lost their way through highly aggressive tax planning have fueled the notion that we have not yet reached a satisfying consensus on this matter. Customers have demonstrated that they will change their buying habits if they believe a business is not paying fair taxes. Many employees want to know that they are working for an organisation with a strong ethical stance towards social responsibility.

Investors want to understand, inter alia, the reputational and tax risks their investments face. So the demand for greater tax transparency, and in particular for MNEs to publicly disclose “country by country” (CbC) tax data is strong, as there is a perception that this will help prevent aggressive tax avoidance. With taxation issues at the heart of the web of relationships between a business and its stakeholders, what role can reporting play in helping companies progress?

It is a matter of judgement as to whether or not enhanced tax transparency, such as the provision of CbC tax data, will enhance truth and fairness. In recent years the international and European taxation landscape has dramatically changed. There are already requirements for financial institutions and extractive industries to enhance their tax transparency.

The European Union has demonstrated a commitment to increasing the level of tax transparency through enhanced reporting, either privately to tax authorities or publicly. Pierre Moscovici, European Commissioner for Economic and Financial Affairs, Taxation and Customs, says: “Abusive tax practices and harmful tax regimes breed in the shadows; transparency and co-operation are their natural foes”.

On 19 July 2013, the OECD launched its BEPS (Base Erosion Profit Shifting) Action Plan, endorsed by the G20, focusing on tackling aggressive tax planning and tax avoidance by MNEs and modernising international tax rules. As a result of the OECD work, the international tax landscape has dramatically changed. Today, businesses face new challenges which are primarily driven by the introduction of BEPS rules and the EU proposals, such as public country-by-country reporting.

As auditors we are acutely aware that publishing of data, whilst conforming with specified regulations, may not in itself enhance the quality of corporate reporting. Indeed there is a risk that extensive data disclosures could have the opposite effect, creating confusion and misunderstanding.

For example, without a deep understanding of a business’s international operations and a strong knowledge of the tax rules for each jurisdiction in which the MNE operates, it is unlikely that a reader will be able to understand the MNE’s approach to taxation from such disclosures, particularly whether it is aggressive or not.

The fear, as we have already seen through some media stories, is that the data will be misinterpreted by those with a particular agenda creating PR challenges for the company in question. The primary duty of auditors is to ensure that financial statements are “true and fair”.

At Mazars, we hold necessary that MNE go beyond truth and provide in their financial statements a clear explanation of their approach to managing taxation risks through tax planning, their transfer pricing approach and their taxation governance, without giving away commercial intellectual property. In addition, they should provide the explanations necessary for understanding the CbC data to ensure that apparent variations between jurisdictions are not misinterpreted.

As auditors and tax advisers, it is our job to help them do so.

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