4 principles of responsible tax
Fair tax systems are vital to enhancing public trust and to achieve a modern, sustainable and inclusive economy. Currently, the world is focused on the environmental and social consequences of what businesses do and are calling organisations to respond in a way that demonstrates positive impact. Tax reporting is an area that brings elements of environmental, social and governance (ESG) performance to life, with leaders preparing for a more transparent tax world. Tax transparency is a topic that has seen rapid change in recent years and recent scandals have highlighted the need to retain public and stakeholder trust. Simply Sustainable have a strong focus on addressing the most complex issues and opportunities our clients face. By combining our expertise and commercial mindset, we work to achieve your business goals.
Simply put, to stay competitive in the market, businesses must respond to the increased focused on tax strategies, policies, reporting and risk management in connection with responsible investment. Our approach is underpinned by these four principles:
It is important to know that tax lies within both ‘S’ and ‘G’ of ESG. So, what is the most effective way the tax function of a company be managed and governed that upholds social and moral values?
Corporate tax is becoming a reputational risk that companies must consider and is a means for stakeholders to evaluate if companies are paying their ‘fair share.’ This impact is seen on a local and international scale, with “unfair tax” depriving the low and medium Human Development Index countries of an estimated $100 billion per year.3 To follow through with good governance, a company must follow the general business and human rights logic and hold social and economic rights as a key obligation to operations. This means putting in place the right policies and processes to assess the impact of a company’s behaviours and minimise the potential harm done by irresponsible tax behaviour. These should all be measured for effective due diligence and robust impact assessments.
Taking a responsible approach to tax means that a company is open, progressive and considers all stakeholder interests – including taxpayers, communities, governments, lenders and the financial community.1 So, understanding tax from a social perspective means questioning how much tax is being paid and where, and what are the global tax strategies being undertaken by companies?
While pressure in different geographical regions varies, the consensus from the global stakeholder community is for companies to reflect on their contribution to society. Voluntary approaches included engaging with disclosures in Global Reporting Initiative (GRI)4, Fair Tax Mark accreditation, B Corp certification and the work done by Principles for Responsible Investment (PRI) such as the Engagement Guidance on Corporate Tax Responsibility and Investors’ Recommendations on Corporate Income Tax Disclosure.5
Companies will already be aware of mandatory requirements in certain regions and sectors. These include country by country reporting (CBCR) in the EU Accounting Directive, public country-by-country reporting (pCBCR) Directive, UK Tax Strategy Disclosures and Base Erosion and Profit Shifting Project (BEPS) for certain OECD countries.
Engagement with Tax Authorities
Even if a certain regions tax regulations are unchanging, a company may still be subject to stringent regulation by tax authorities. Tax authorities are taking a more proactive enforcement to reduce the exploitation of international tax frameworks. Need for transparency and better disclosure has been the focus for global bodies such as the World Federation of Exchanges – include tax transparency as ‘material ESG metric for reporting’; International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) Foundation – work on independent standard-setting on tax disclosures; and the International Federation of Accountants (IFAC).5
Tax risk management
Tax-related risks extend beyond short-term earnings, so companies should be proactive to changes in their business environments to tax rules. This may include being aware of incentives the company may take advantage of, reputational and brand risk, societal risk from aggressive tax strategies and challenging complex strategies. In addition, a company should understand the potential impact on key stakeholders to understand any long-term risks.
How Simply Sustainable can assist
Many recommendations from all actor groups share the same difficulty: how to distinguish between acceptable and unacceptable tax practices. To address this, Simply Sustainable follow the above four principles to develop an approach for our clients that embraces responsible tax. Our goal is to arrive at the correct tax metrics to support the overall ESG goals to achieve commercial success and wider stakeholder buy-in.
2 Fair Tax. About us.
3 Oxfam. Endless corporate tax scandals.
4 GRI 207. Tax 2019.
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