Barely a decade ago, the tax transparency model was called “compliance”—a purely technical concept centered on how a company reported and divided its profits among jurisdictions and calculated its income tax provision and effective tax rate (ETR). The burden of demonstrating value creation and adherence to arm’s length practices was on the taxpayer. The medium was Excel spreadsheets, and the audience was tax authorities, auditors, and (further downstream) analysts.
Today, the full gamut of tax compliance—transfer pricing, tax provision, R&D tax credits, and of course the tax return—is no longer verified by dusty old spreadsheets, but by far more sophisticated technology, with authorities empowered to examine (and share) far deeper layers of documentation. And, in the light of highly publicized tax-minimization techniques long used by global monoliths to park their profits in low-tax jurisdictions, the aperture of scrutiny has widened significantly.
The writing is on the wall: reputation matters. Tax transparency is increasingly the expectation (if not yet the norm) across all areas of tax reporting, with many new sets of eyes—investors, regulators, the press, and the general public—focused on taxpayer practices. There’s no going back to the days of secret tax deals, or by-the-numbers compliance.
What does this mean for tax departments? The burdens you face are greater than ever. But there are also varying degrees of tax certainty that stem from openness and clarity as we discuss in this paper.
BEPS Was Just the Beginning
Who can forget the UK Starbucks boycotts of 2012, when customers, angry that their favorite coffee brand paid little or no UK tax, picketed the shops with signs such as “They’re not Starbucks, they’re OUR BUCKS!”? In retrospect, that spontaneous message was like a shot over the bow for multinationals, presaging the modern era of tax transparency—and the need to get ahead of the issue.
The OECD, too, was taking note. In 2013, the organization introduced its Base Erosion and Profit-Shifting (BEPS) Action Plan, focused on addressing tax avoidance strategies employed by multinational enterprises (MNEs), with a series of guidelines and recommendations for governments to follow. Action 13, ratified in late 2015, took direct aim at the transparency gaps and tax-rule mismatches which MNEs had been exploiting to artificially shift profits to low-tax jurisdictions.
BEPS Action 13 introduced the concept of three tiers of transfer pricing documentation for MNEs: a master file, local file, and country-by-country reporting (or CBCR), which is often required for MNEs with over €750 million in total revenue shared among tax authorities in all relevant jurisdictions. According to the OECD, over 100 countries have to date adopted the CBCR filing requirement—and over 3,000 relationships have been codified for the exchange of these reports between countries.
Suddenly, sweetheart deals and blatant inequities in how companies booked intercompany transactions started to come to cross-jurisdictional light—raising the risk of enforcement action or disputes with countries who’d gotten the short end of the stick.
Those three tiers of documentation, taken together, were designed to bring transparency to a new level. But not necessarily to its highest level: many argue that for the Action Plan to have real teeth, the MNEs’ country-by-country reports should be visible to all—not just a few government tax experts. Transparency advocates want investors, regulators, and the general public to have information on a company’s financials, risk position, where they profit, and where they pay taxes.
As it often does, the European Union has led the way in pushing for more transparency. In 2023, the EU passed a directive requiring all MNEs headquartered (and/or operating) in the EU that maintain a €750 million revenue threshold to make their once-confidential CBCRs public—on their website, no less. All member states must comply by June 2024 (at the time of this writing, several had already done so).
It’s not going to end with the EU. Australia—a longtime leader in the drive to combat corporate tax avoidance—is going even further: in addition to making CBCRs public, it is proposing that any MNE doing business in Australia disclose additional information, such as its ETR in every jurisdiction, and even the parent company’s “approach to tax.” In the US Senate, the Disclosure of Tax Havens and Offshoring Act bill, reintroduced in 2023, calls for the SEC to mandate that all CBCRs be made public, with the explicit aim of providing more transparency on corporations’ use of tax havens and incentives to outsource American jobs.
While the outcome of this particular bill is uncertain, it’s pretty clear where this is going: With so many MNEs already active in these jurisdictions, it seems inevitable that more countries will follow, giving external stakeholders a valuable lens into how much a company really pays in taxes—and where.
How Much Should Investors Know?
It’s not just governments and the general public that are clamoring for more tax transparency. Increasingly the conversation is also being driven by investors, creditors, private equity, and venture capitalists—basically, any party that relies on financial statements to make capital allocation decisions.
That stands to reason when you consider all the ways in which a shifting global tax environment (tax structuring trends, regulatory developments, geopolitical risk) could touch a company’s effective tax rate (ETR) and prospective cash flows. Presently, investors are mostly limited to rate reconciliation tables and
cash flow statements to evaluate risk: they may be in the dark about the company’s tax strategies, including risky tax behavior that could cause problems downstream.
That’s why, in early 2023, the Financial Accounting Standards Board (FASB) proposed to beef up its ASC 740 accounting standard to give capital allocators more transparency on how an entity’s worldwide operations might affect their investments, when it comes to tax-related risks and opportunities. The proposed amendments would require more granularity and disclosures about how the ETR is calculated. They would also, importantly, help investors assess exposure to potential changes in jurisdictional tax legislation.
Does Tax Responsibility Exceed Paying Taxes?
Because few businesses can afford to risk their reputation, tax transparency has, for many, been beamed up into the ESG Mothership. Matters of “corporate responsibility” are increasingly material, especially for publicly traded corporations—the more so for consumer-facing brands.
Many (though not all) companies are focused on getting ahead of the curve: taking pains to trumpet their commitment to transparency by voluntarily reporting on their tax positions, principles, and financials—in plain English—on their website, with clear statements like “We are a responsible taxpayer.” Proctor & Gamble, Unilever, Heineken, Shell are but four well-known examples.
Others (ahem, looking at you, tech behemoths) have vigorously resisted pushes by governments, shareholders, institutional investors, and the public to come out of the tax shadows that have so richly protected their profits. A 2021 study by the International Consortium of Investigative Journalists, which famously published the Paradise Papers in 2017, revealed that in 2021 alone, MNEs, including those tech giants, shifted $1 trillion offshore, depriving governments of hundreds of billions in revenue. And the OECD reports that base erosion and profit shifting continues to go strong, despite its best efforts.
In fact, if you’re reading this, it’s likely that in 2020 you paid more in federal income taxes than Whirlpool, Nike, Fed-Ex, HP, and Salesforce—combined (despite that each made millions in profits).
Clearly, corporations have a lot of work to do to repair their reputations. But because outside observers tend to paint all MNEs— no matter how virtuous and forthright they may have been—with the same brush, much of that burden falls on… guess who? The tax department.
To Disclose or Not to Disclose? The Real Question Is How
Transparency is indisputably important. But it must be handled with care—because when it comes to highly technical tax issues, there may actually be such a thing as TMI.
Many companies worry that disclosing too much sensitive information would compromise their competitive edge. The ETR in particular is a vital metric by which companies are judged and compared, and some may consider certain tax planning strategies or structures as proprietary information.
There’s also the very real risk that, absent proper context (for instance, explanation of the many non-income taxes companies are paying), the technical information disclosed on the CBCR could be misinterpreted by non-experts, causing unwarranted reputational harm.
Still, that genie is not going back in the bottle. So the key is in how you shape the conversation—because if you don’t, someone else will.
Transparency is not about throwing data into the world—it’s about controlling the narrative so that the data tells a story that aligns with the company’s facts, circumstances, and goals. That of course requires understanding, and speaking to, the individual perspectives, interests, and touchpoints of your stakeholders—external, internal, and the general public.
Putting the data in the proper context, knowing which points to emphasize for which stakeholder, is the key to making transparency work for everyone. Without altering a single number or calculation, it can make all the difference in the world.
There’s a phrase for that, unfamiliar though it may be to tax experts: PR.
Yesterday’s Data Crunchers are Today’s Communicators
Pushed and pulled in all kinds of directions at once, tax departments are under more pressure than ever before. And that’s not just because of the new roles they’re being asked to take on.
Consider the sheer volume of administrative and technological burdens (and risks) flowing from the new laws, expectations, and requirements piling up at the door. Or the sharply increased cross-functional coordination required to comply with those new requirements, ensure all your documentation is consistent, and sing from the same hymnal.
If you’re a tax executive, this is your moment. There are all kinds of opportunities when you sit at the fulcrum of change. With companies moving from a stance of responsive compliance to one of proactive transparency, tax now has a more vital role to play: as guardian of the company’s reputation, and strategic vehicle for the business.
So make a virtue of a necessity and take the lead. Put the numbers in context, including in the context of your overall ESG strategy. In particular, explain that corporate tax is only one of the many taxes you pay—that it does not tell the entire story of your company’s tax contribution, or its commitment to societal good.
Get a seat at the business table and weigh in on the tax implications of new business decisions before they take place. Get to the heart of what those actions will mean not only for the bottom line, but for your tax narrative. What will they look like to investors? To consumers? To the competition? To shareholders? To employees? Then, write your narrative, and make it clear and understandable to each stakeholder.
Transparency is a journey, not a destination. For tax directors—and businesses overall—it’s a trip well worth taking.