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Tax reporting: Reveal all

While 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

“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

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

• 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

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