Tax’s role in ESG performance – part 2. How tax underpins the social contract between business and public
ESG objectives are now firmly embedded in the corporate agenda, and how companies handle tax plays an increasingly important role in hitting those objectives. But without much existing guidance, and so many pitfalls to avoid, where do tax teams fit in? In this three-part series we discuss the role of tax in companies’ wider ESG picture, and how the right technology investments can unlock its true potential.
In this second part, we discuss the ‘S’. One might wonder where the “social” obligation in ESG lies for tax teams. Let me tell you.
Not only have the last few years seen a strong increase in international transparency initiatives, with Public CBCR and ETR reporting requirements still looming on the horizon, but they have also seen the rise of the Total Tax Contribution reports. This type of reporting aims to address the lack of trust in business amid concerns that globalization is disproportionately benefitting large corporations over the public.
Undoubtedly, there is now an appetite for creating a world where companies drive financial success and create "net positive" impacts. This is where the “S” in ESG proudly stands. Aspiring to be “net positive” should not only be understood in environmental terms, but should be seen as the commitments by companies to contribute more into the global system than they take out.
Right now, the tax world is suffering a communications crisis; there is no common language, and tax is a complex, technical domain. Without a common language and a basis to depart from to tell a compelling story to the public, which requires most of all context, there will only be confusion, resulting in suboptimal levels of trust.
This is an opportunity to examine the underlying “social contract” that multinationals have with local communities.
So how do we close the communication gap? From a reporting perspective, the Public CBCR poses tremendous challenges for multinationals. CBCR is in itself full of highly tax technical and context-poor KPIs, leaving significant room for error in the hands of non-tax people and the broader public.
Public CBCR, in a stand-alone fashion, will therefore potentially do more bad than good from a communications perspective. Being an early adopter of Total Tax Contribution reporting, however, is a strategic move; it allows corporations to tell a transparent, context-rich and convincing story. And by the time the first Public CBCRs are published around 2025/2026, those with a head start will have created a strong track record of storytelling.
Drafting is however another story. For tax teams, putting together this type of report is yet another tax job that adds to their ever-growing to do list. If the strategic value is not properly understood, there will be little to no buy-in from the local contributors to help the team.
Data quality and accuracy is also key - reporting the wrong numbers can be worse than not reporting at all. Alternatively, it can be insightful to keep a Total Tax Contribution report internally in the first year(s), as it will naturally disclose tons of valuable insights to the tax leadership.
So, what else is needed for tax teams to gain the highest strategic value from Total Tax Contribution reports and get the most out of their “social contracts”? In the first instance, technology. This will enable in-house tax functions to:
- Set out structured and automated processes to source the required data with involvement of all the relevant stakeholders.
- Achieve sufficient data quality levels by having strong data governance in place.
- Enable data consolidation, analysis and reporting.
- Achieve overall process repeatability and scaleability to have a smooth process year-on-year.
Ultimately, technology allows for the integration of a simplified workflow system which takes all of the above into account. Total Tax Contribution data often relies on very local, operational data points (as it includes “above-the-line-taxes”), meaning a centralized source is vital. Using a single-view automated workflow platform will also make it easier to gather, analyse and report on taxes paid, number of returns submitted, as well as stakeholders involved and various statutes.
It’s no secret that the Total Tax Contribution report is an extensive project. It needs to be trialled in the teams with the most material countries, companies, and taxes first. However, with the right technology, patience and resolve, tax teams can be well-equipped to communicate and report transparently. It will be these teams who can confidently sign the social contract.
In the third and final part of our series we’ll focus on the ‘G’ for governance, and what this landscape really looks like for tax teams worldwide. If you can’t wait till then, why not follow us on LinkedIn to keep up to date with Loctax?