RSS feedsWhile once it may have been acceptable to report a company’s tax affairs in a single line in the accounts, those days are rapidly disappearing. Many companies now see benefits from giving a full explanation of tax costs, potential future liabilities, the approach to tax planning and even the total tax contribution resulting from the company’s operations.
Companies are paying more attention to their tax reporting. For the first time in 2006 PricewaterhouseCoopers introduced a tax reporting category into its Building Public Trust Awards, which celebrate high quality communication in relation to sustainable performance. “We were bowled over by the number of entries we got from companies that clearly thought it was a good idea,” says PwC partner John Whiting. “We had about 40 initial entries. There were some companies reporting very well on policies, on risks, ongoing problem areas, how much tax is paid in various areas, etc.We got three companies on the shortlist that were very good.”
Winning quality
The eventual winner was FTSE-100 pharmaceutical giant AstraZeneca. Ian Brimicombe, director of group taxation at AstraZeneca, notes that tougher US and international accounting standards on tax, including how it is reported, combined with Sarbanes- Oxley legislation, have required companies to spend more time on tax – both in terms of calculations and reports. “It’s much less of a dark art now,” he says. “It’s much more transparent. There’s a greater degree of precision and evidencing what you have done. The standards to get up to ‘true and fair’ have increased. The standards require greater transparency and clarity around tax reporting.” That reporting could potentially include information on the maximum potential exposure, the corporate tax strategy and the company’s attitude to tax planning. “All these things are considered best practice to put into your annual report,” Brimicombe says.
“Not every company has got a tax strategy that’s been developed and signed off by the board. There’s a push for more to get that done. If you have, it’s free whether you comment on it but best practice is that you will see more companies explaining their approach to tax. Those who want to set themselves apart from highly aggressive tax planning will probably say something, as we do. You are helping the reader, and the tax authorities too. It’s a statement that sets the tone of engagement with the tax authorities.” Brimicombe believes it is important to spend time on getting the tax reporting right. “It’s critical to the value and reputation of the company to make a good job of this,” he says.
“And to give the reader a fair chance of understanding the company’s tax position. In some ways you can see it as a defensive thing, but on the positive side, if you are able to promote a reasonable picture of your position and make some declaration of your approach to tax, it can only help with improving relations with tax authorities.” He refers to Revenue & Customs’ plans to risk assess companies to identify those which may be non-compliant. “People making a statement in the annual report and presenting a fully disclosed picture are more likely to be put in the compliant box rather than the non-compliant,” he says.
Total tax footprint
Asked to identify the characteristics of good tax reporting, Brimicombe highlights clarity and transparency.
“These are characteristics you look for to get a full understanding of the tax position of the company,” he says. “If you have contingent liabilities, are they explained in terms of quantum, likelihood and timing?” Another company that has won praise for its tax reporting is drinks giant Diageo, which was commended in investment manager Henderson Global Investors’ Responsible Tax report of October 2005. A year on, Diageo’s 2006 corporate citizenship report clearly explains the contribution it makes to government revenues through tax, as well as the approach taken to tax management. Jill Kyne, Diageo’s head of tax, explains why the company includes a section on tax in its corporate citizenship report.
“The economic basis of our business is to add value to the materials and services we buy and distribute this to our stakeholders,” she says. “The greatest share of this value – around 44% last year – flows to governments as tax. Due to this significance, information on taxation is clearly needed to form an understanding of our economic footprint, and we aim to disclose on some key aspects of tax, bearing in mind that the area has commercial sensitivities.
“While treatment of the subject in CSR [corporate social responsibility] reports generally is at best patchy and at worst non-existent, our coverage has been commended by some stakeholders – eg SRI [socially responsible investment] investors.” The phrase “total tax footprint” was used for the first time in the 2006 report although Kyne says: “The sense of aggregating direct tax contributions with tax paid by others in our supply chain to determine the total contribution to public funds due to our activities has been in all our reports, which we started publishing four years ago.” Kyne sees some clear benefits from explaining the total tax footprint and how tax considerations impact on transactions. “The benefits include enabling our employees to understand the contribution we make in the societies in which we operate,” she says. “This should result in an increase in the engagement of our employees.” Another benefit is that governments can understand better the total economic contribution Diageo makes.
“This should lead to better engagement with governments on their fiscal policies and how they impact us,” Kyne says. “It has enabled us to have specific conversations with the Kenyan government on the benefits for both parties of a lower duty rate on a new product. The total tax rate for the government increased and we increased the number of consumers of that product – attracting them from illegal and dangerous products.” One methodology that companies can use to help explain their contribution to governments and societies is that of the Total Tax Contribution developed by PwC. The TTC has several components. The most obvious relates to the taxes a company bears that hit the P&L.
Secondly, there are taxes collected on the government’s behalf and handed on. Thirdly, the TTC takes account of the administrative costs involved.
“We started this as an attempt to bring a greater degree of transparency to what companies do pay,” says Richard Collier-Keywood, UK head of tax at PwC. “It was informed by the fact that in some countries in Europe the tax authorities have a much more holistic approach to companies’ tax affairs. In thinking how important the company is to the economy, how aggressive it is, they look at all the tax the company is paying. Attention in the UK has been on corporation tax, even if the company employs huge numbers of people and pays large amounts of PAYE. In the financial services sector there could be a huge amount of irrecoverable VAT. But the focus is on corporation tax.”
Wider reporting
“The drivers were many and varied, but it keeps coming back to the fact that tax tends to be reported virtually as one line in most situations – corporation tax,” saysWhiting, one of the creators of the TTC. “Companies are involved in a heck of a lot more taxes than that and surely these days there’s a need to report more widely.
And there are a lot of stakeholders with an interest in a company’s tax position – the Revenue, the Treasury, employees, management– but at present it’s pretty difficult to see what’s going on – not just in terms of the figures, but the risks and how companies are managing them. So there is a need for more transparency on tax reporting.” Although Whiting acknowledges that the TTC framework has been criticised by some economists, who argue that companies factor tax costs into the prices they charge for products, he believes the model still has value. “It still feels to me that companies are paying a lot of tax,” he says. “If we show what’s going on, people can make their own deductions about it.We are trying to encourage more of a gathering together of information, rather than put judgements on it.” There is no doubt that applying the TTC framework, as The Hundred Group of Finance Directors has done, reveals the huge tax contribution such companies make. Whiting believes companies should not shy away from reporting their total contribution to government coffers. “It fits well with the CSR argument to show what they are contributing,” he says. “It gives a better picture for people looking in at the company about what it is doing.”
TTC and the Hundred Group
In March 2006,The Hundred Group of Finance Directors published the findings of
the first annual Total Tax Contribution survey of its members, revealing that
the total amount of tax borne was double that of corporation tax. Based on the
results, the total contribution of all business taxes paid by the UK’s largest
companies was estimated to be £18bn.
The findings of the survey, which was conducted by PricewaterhouseCoopers using its TTC framework, focused on 18 other business taxes in addition to corporation tax which contribute to government revenues. Of these the most significant were national insurance contributions, local business rate and irrecoverable VAT. Overall, the survey showed that the TTC of the Hundred Group participants seemed to be increasing.
Diageo’s corporate citizenship report
Diageo’s corporate citizenship report 2006 highlights the contribution the group makes to the economies in which it operates. It includes a diagram explaining how the cash value added in 2006 has been distributed – the largest portion (43.9%) going to governments, followed by 34.4% to investors and 14% to employees.
• Under a heading “Engaging with government”, the report states: “The largest slice of the added value we generate goes to governments though taxation. This year, tax accounted for 44% of the total, amounting to £2.9bn. In some countries, the tax Diageo pays represents a significant proportion of the government’s income.”
• The report goes on to outline some of the other taxes the company pays, including VAT, local and property taxes, as well as the tax revenues it helps to generate indirectly by creating business for suppliers and customers. It says: “In aggregate, these direct and indirect contributions, which we have not quantified, represent the total tax footprint of our business.”
• Diageo goes on to outline its tax strategy: “With responsibilities to many groups of stakeholders including investors and governments, we strive to organise our tax affairs efficiently within the law. As part of this effort, we consider options available to us for the location of Diageo’s profits and hence tax liabilities. Such decisions are always based on a combination of commercial strategy, cost and levels of taxation.
However, our approach includes a strong preference for locating tax liabilities in territories where Diageo also has significant commercial operations.”
