Corporate transparency requirements: Taking the clear path
Corporate transparency and accountability have been hot topics in the public debate on corporate tax responsibility. Citing public interest on these issues, the global media has, for some time, questioned whether large corporate taxpayers are paying their fair share of tax. Many governments have responded, introducing public disclosure requirements around tax. These public disclosures are in addition to initiatives for greater (non-public) disclosures to tax authorities.
While these disclosures are aimed at encouraging openness and transparency, there’s a risk that publishing unexplained tax figures may result in misconceptions about a company’s tax profile – particularly around the reasons for low effective tax rates. It’s therefore necessary for corporate taxpayers to consider how to respond, both proactively and reactively. The right strategies can clear the way for a variety of benefits – but companies must heed the risks along the way.
As different countries introduce transparency requirements, companies must evaluate the requirements in each country where they do business. There are a number of questions to be addressed internally to understand how to approach the requirements. Some questions to ask include:
Do the right people in your organization know and understand the details of the proposals and your tax numbers?
Are all your internal stakeholders on board?
How likely is this to attract attention from media, activists, employees, government and/or public?
Do you plan to take a proactive or reactive approach to any potential attention?
How does this fit into your broader investor relations, corporate communications and/or media strategy?
Canada, for one, tabled new legislation in the fall of 2014, the Extractive Sector Transparency Measures Act. The Act lays out the framework of new expectations for resource companies to publish annual reports outlining their tax and other payments made to both Canadian and foreign governments. Under these requirements, corporations must provide an annual report to the Canadian government detailing payments made to a Canadian or foreign body to develop oil, gas and minerals if the total payments made in that year are at least $100,000. While payments to a public body include local, provincial and federal levels of government, the Act contains transitional provisions for disclosure of payments to First Nations, exempting these payments for the first two years before falling into line with the rest of the Act.
In Canada, and elsewhere, corporations should evaluate their current tax profile, effective tax rate, and the potential impact that reputational damage arising from negative publicity on this issue may affect their business. Corporations that may have been the subject of recent public scrutiny or have a low effective tax rate or low tax rate on income may wish to mitigate any reputational damage that may arise from this issue. For these corporations, it may be appropriate to take steps to anticipate and correct any misinterpretation that may arise from the publication of their tax information or the resulting public debate.
For example, in recent years some corporate taxpayers have been publishing a series of reports explaining the taxes paid by their company. This proactive approach to explaining their tax profile has garnered praise from the public and, in some instances, won awards from various bodies concerned with corporate transparency.
Unlike their competitors, these proactive companies have been spared from much of the negative publicity from the corporate transparency and tax debate. Other corporations could do well to follow the example set by these companies in formulating and publishing their own explanation of taxes paid, together with an explanation of how they contribute to the economic wellbeing of the country as a whole.
A more transparent approach to corporate taxes can have multiple benefits, improving both internal and external relations. As new transparency requirements become the norm in many countries, mining and metals companies ought to be proactive about implementing processes and strategies that will allow them to go beyond the requirements with ease – staying on the clear road to success.