The tax transparency express is at the station, but are you ready to board?

Amazon shareholders, for a second year running, voted at the company's annual general meeting last month on whether the company should commit to public country-by-country reporting on tax. The proposal was supported by over one-fifth of shareholders and follows a rising trend of large companies facing pressure to disclose their tax affairs in line with the Global Reporting Initiative Tax Standard, GRI 207, the first international standard for comprehensive tax transparency.

With the AGM cycle underway, Amazon is far from alone in fielding tax resolutions. Despite board opposition, on June 14, 27% of shareholders at the Canadian multinational Brookfield Corporation backed a first-time resolution to report with GRI 207. This is impressive when you consider a BlackRock analysis that concludes companies respond to three-quarters of shareholder proposals if they attract over 30% support, a threshold close to being met. It follows similar resolutions fielded by Microsoft and Cisco last December.

Oxfam America recently called on shareholders to vote in favor of public country-by-country reporting, or CbCR, in motions filed at the AGMs during May of ConocoPhillips (received 17% support), ExxonMobil and Chevron (both saw 14% support). 

While for now these multinationals continue to resist voluntarily committing to tax transparency, time is running out for big business to withhold its practices from public scrutiny. Indeed, Oxfam's analysis finds investors with over $10 trillion in assets under management back public CbCR.

What this increased activism signals is that many investors consider tax as an important sustainability metric — alongside the companies' other socio-economic and environmental contributions and impacts. It's clear that what was nascent stakeholder interest in tax transparency has gained real momentum.

The mounting cost of tax avoidance

Pressure on companies to disclose their tax approach, including how much and where they pay their taxes, isn't going away. And with good reason. Taxes are vital to the smooth running of the global economy, and they underpin the operations of critical infrastructure and services, from health care to education to security. Taxes are also one of the key ways in which organizations demonstrate how they contribute to the communities where they operate.

In the era of polycrises — cascading and connected crises across economic, social and environmental dimensions — taxes have never been more important. Corporations need to be seen to play an active role in addressing the sustainability challenges facing the world.

Yet it is clear that some companies do not pay their fair share. According to the Tax Justice Network, governments lost $312 billion in tax in a single year to multinational corporations shifting profit into tax havens. Meanwhile, the EU Tax Observatory has estimated that global losses could be as high as $650 billion per year, with lower- and middle-income countries impacted the most, relative to their GDP. 

For the tax risks and contributions of businesses to be fairly assessed, organizations need clear and comprehensive tax reporting. Interest from policymakers is on the rise, fueled by demands from civil society and investors, and the eventual global transition toward mandatory tax disclosure, by country, looks likely. 

Momentum toward mandatory rules

Australia is a good example. Following a consultation by the Australian Treasury on disclosure requirements that are based on GRI 207, as well as additional requirements on entity reporting, it published draft legislation in April that seeks to introduce mandatory CbCR tax reporting. As the scope of the legislation is still being heavily debated, the latest news is the proposal is delayed till July 1, 2024.

At the European level, majority support was reached among EU ministers in a session of the Competitiveness Council to finalize the Country by Country Reporting directive — a proposed EU-wide law that would ensure CbCR by multinationals with a turnover above €750 million. Romania has already adopted it as of Jan. 1, 2023.  

It is important to note that, in the context of the Corporate Sustainability Reporting Directive (CSRD), tax will be prominent. Transparent reporting will be required when tax is considered a material topic. While the European Sustainability Reporting Standards (ESRS) do not provide a standard on tax, the EU explicitly mentions that organizations can use GRI for reporting on material topics not covered in the ESRS.

In addition, the EU taxonomy minimum standards require reporting organizations to adhere to the OECD MNE Guidelines, which state that companies should "treat tax governance and tax compliance as important elements of their oversight and broader risk management systems."  In its report on these standards, the EU Platform on Sustainable Finance "recommends endorsement of GRI 207 as an indicator of an undertaking's more ambitious understanding of tax fairness."

Meanwhile, France's Forum for Responsible Investing sets out within ESG guidelines expectations that a "public fiscal responsibility report" should detail public CbCR. The forum specifically asks for GRI 207 reporting to benchmark results for French listed companies, and right now, many of the firms fall short on this requirement.

In the U.S., too, the Financial Accounting Standards Board has just proposed a package of tax disclosure rules that will require companies to provide more tax transparency, including a break-down at the federal, state and foreign jurisdiction levels.  Meanwhile, the Disclosure of Tax Havens and Offshoring Act would require public CbCR. This move is supported by investors representing $2.9 trillion in assets.

A social license to operate

Against this global backdrop, a growing number of major companies are choosing to publicly disclose their tax practices using GRI 207, such as Rio Tinto, Phillips, BHP, Enel, Newmont, Deutsche Bank, NN Group and Orsted, to name a few. Yet according to research by UN-PRI, only one-third of large and midsized companies have tax transparency policies, compared to two-thirds for climate and 98% for health and safety — and less than 10% disclose CbCR on tax. This needs to change.

The groundswell of policy developments underlines the emerging consensus that tax compliance should no longer be limited to tax evasion but also address tax avoidance. This is about how companies can meet expectations — from regulators, investors and other stakeholders — that they respond to the economic realities in the countries where they operate, and act in a fair way through their tax practices.

The shifting expectations around a company's tax practices, as well as the significant ongoing regulatory changes worldwide, show that tax is a critical pillar within a company's social license to operate — and a lack of transparency represents a substantial business risk.  

The pressure on companies, policymakers and investors to act on aggressive tax planning is here to stay. Forward-looking businesses would do well to get on board with tax transparency and commit to public reporting now.