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The evidence suggests public demand for large business tax transparency is at an all-time high. Tax is, of course, the most important revenue source to support government spending, but tax policy and compliance have been brought much more into the public consciousness in recent times, whilst for most businesses, tax is the biggest social contribution that they make. 

From compliance to governance

This increased public interest is changing the way that businesses think about their tax. Historically, tax was mainly a matter of compliance, and the key influencer of tax policy in business was the tax authorities, with taxpayers confident of limited risk if the tax authorities agreed their position. The views of a third stakeholder – the general public – have now entered the picture, and sometimes the outcomes of this development are surprising. There is a clear potential conflict between businesses’ desire to be transparent, but not to attract tax authority attention, since tax authority enquiries can be costly in time and money, even if no additional tax is due. 

At the recent TP Minds international tax conference, one speaker asserted that tax is the ‘hottest topic’ in the environmental, social and governance (ESG) space – debatable no doubt, but it’s certainly a key boardroom topic. Increasingly, businesses want to not only do the right thing, but be seen to do the right thing; that is, be transparent about their taxes. 

Transparency in tax is therefore driven both by calls for more effective regulation and a desire from many businesses to go beyond legislative requirements to engage public opinion. 

An enhanced regulatory framework

In 2016, legislation was passed requiring large businesses to publish a UK tax strategy. In 2022, further legislation was enacted requiring UK businesses to disclose uncertain tax positions giving rise to potential tax savings exceeding £5m that they have taken in their tax filings directly to HMRC. 

Beyond the UK, the European Union (EU) has introduced public country-by-country reporting (CbCR) requirements for the very largest businesses with operations in more than one EU member state, for financial years beginning on or after 22 June 2024. The required disclosures include details of: activities; staff numbers; turnover; profit before tax; tax due; and tax actually paid. 

These requirements place an increasingly significant compliance burden on businesses, and an increasing revenue source for tax authorities in terms of penalties for incorrect disclosures.

Good corporate citizenship

However, some businesses are choosing to disclose more than is required in the name of transparency, because they feel it engages their key public stakeholders and makes a point about the way they do business. Increasingly there are independent consultants providing services that promise to evaluate and certify whether a business’s behaviour generates ‘fair’ or ‘sustainable’ levels of tax.

In the UK, HMRC sees the public pressure for such openness and applies it to large businesses in such a way that they become the ‘policemen’ of the supply chain. For example, the UK plastic packaging tax introduced in 2022 applies only to businesses manufacturing or importing significant amounts of plastic packaging materials – but it also requires those businesses to obtain information about their whole supply chain.

Impact on tax and finance teams

This move towards greater transparency and the increased information and due diligence requirements it presents can quickly isolate a tax function used to dealing with tax as a simple compliance list. Those responsible for tax now need to get to know the public relations (PR) and media objectives of their business and understand how a relatively small tax or compliance risk might become a relatively large PR or ESG issue.

Tax transparency regimes are becoming increasingly prevalent, but the tax world is struggling to adapt to the changes. It may therefore make sense to take advice to understand how tax transparency developments are likely to affect your business, now and into the future.

For more information, please get in touch with Flora Barnes or your usual 91探花contact.