Scope: The research assessed levels of corporate income tax disclosure at 50 large multinational companies in the healthcare and information technology sectors headquartered in the US (20), Europe (20) and rest of the world (10). For further explanation of why these sectors were selected, see section on selection of companies. Documents considered included annual reports and/or 10K statements, sustainability reports, as well as standalone tax reports or statements on tax policy available as of 1 December 2017.

This section of the report highlights the key findings from the desk research commissioned by the PRI. The research evaluated corporate tax disclosures against the items in the recommendations. The table below shows these, grouped by the current level of company disclosure observed in the research (also see section on the list of recommendations).

Overview of current tax disclosure practices
 <10% of companies10-25% of companies Over 25% of companies 
  • Address broader economic impacts in their tax policy and outline alignment with business and sustainability strategy
  • Discuss advocacy and lobbying
  • Indicate membership in trade associations active on tax policy
  • Have a policy signed by a board-level representative
  • Reference impact on overall profitability in their tax policy
  • Discuss stakeholders’ trust, values or explain if engagement has impacted policy
  • Commit to transparent tax-related reporting
  • Describe relationship with other stakeholders including assessing perceptions regarding the spirit of tax laws
  • Describe relationships with tax authorities
  • State risk appetite
  • State link between where profit is booked and commercial activity
  • Provide overview of general tax structures and strategies
  • Publish a tax policy
Governance and risk management
  • Provide evidence that the board discusses ramifications on reputation
  • Provide information on whistleblowing channels
  • Reference third-party standards and guidelines
  • Provide examples of acceptable and unacceptable practices, and how tax havens are used, if applicable
  • Indicate that tax policy and strategy are reviewed at least annually
  • Provide a statement on tax governance and risk oversight
  • Disclose mechanisms to maintain compliance with the firm’s tax policy
  • Describe the process to interpret the law and deal with ambiguity
  • Provide information on training and guidance
  • Provide a narrative on major tax risks
  • Disclose new tax strategies being employed leading to increases in UTBs
  • Disclose intra-company debt balances, name countries where intercompany debt is held and disclose average interest rate paid on intercompany debt
  • Publish country-level tax reporting
  • Explain key tax strategies employed in relation to ETR and use global weighted average in ETR reconciliation
  • Provide commentary on the likelihood of non-renewal of incentives
  • Highlight investment requirements of each incentive
  • Potential regulatory changes related to tax strategies
  • Information on the expiration date of tax incentives
  • ETR reconciliation
  • Statement on UTBs
  • List of subsidiaries
  • Current disputes with tax authorities
  • Information on financially material tax incentives

Commonly reported items were driven by regulatory requirements and accounting standards 

Corporate income tax-related information published by companies appeared to be largely focused on meeting regulatory requirements rather than stakeholder demand. This driver was reflected in the type of information and the level of detail published by companies.

To illustrate, corporate reporting on the below factors were more frequently observed (also see previous table). The increased disclosure on these items can be attributed to the following regulatory/reporting frameworks:

To illustrate, corporate reporting on the below factors were more frequently observed (also see previous table). The increased disclosure on these items can be attributed to the following regulatory/reporting frameworks:

  • Tax policy: UK Finance Act and the Australian Government’s voluntary tax transparency code (see box below).
  • Narrative on major tax risks: Item 1A - “Risk Factors” – in Form 10K4 requires information about the most significant risks that apply to the company or to its securities. In practice, this section focuses on the risks themselves, not how the company addresses those risks.
  • List of subsidiaries: Companies that file 10K reports in the US are also required to disclose a list of the company’s subsidiaries in line with Item 15 – “Exhibits and financial statement schedules”. The s409 of the Companies Act 2006 requires UK companies to list all subsidiaries in their annual report.
  • Disputes with tax authorities: Companies that file 10K reports are required to report information about significant pending lawsuits or other legal proceedings, other than ordinary litigation.
  • Statement on uncertain tax benefits (UTBs): US Companies must recognise and estimate the UTB in their financial statements in line with the US Generally Acceptable Accounting Principles (GAAP).
  • Tax reconciliation and tax incentives: A tax reconciliation explains the relationship between the tax expense and the accounting profit in corporate statutory accounts. The GAAP and International Accounting Standard (IAS) require reconciliation using an applicable tax rate(s) as a benchmark.

It is worth noting, however, that the quality of information that was provided in response to some of the regulatory requirements varied. In some cases, disclosures were less informative:

  • some tax policies applied to a single jurisdiction as opposed to the entire organisation;
  • some companies provided only a numerical effective tax rate (ETR) reconciliation which was not self-explanatory and needed additional narrative to clarify and explain the underlying details;
  • generic statements around major tax risks reported by some companies were not particularly revealing;
  • in certain cases, disclosure around disputes did not specify which tax years were open or under audit and in which countries, or the anticipated impact of the disputes; and
  • some companies disclosed only their principal subsidiaries as opposed to more comprehensive disclosure of all subsidiaries and their business nature.

Discrepancies exist between current corporate disclosure and investor expectations

Overall, the research points to limited disclosure compared to the recommendations. There was little or no corporate reporting in areas which are not covered by regulation despite growing investor and stakeholder interest in these areas. Observations include:

  • Lack of evidence in corporate disclosure that tax policies are intrinsically linked to the overall strategic objectives of the organisation, including sustainability considerations. Corporate tax policies did not include a narrative around how companies consider the broader economic impacts of taxes paid in the countries where they are operating, or explain the link between their tax policy and business strategy or sustainability commitments.
  • Few concrete examples provided of how companies may appraise tax transactions in line with their risk appetite. While companies referred to their risk appetite in their tax disclosure, they rarely provided examples to support their views of acceptable and unacceptable tax practices.
  • Insufficient explanation and granular data to test corporate commitments around avoiding profit shifting. Although some companies made statements about aligning their taxes paid with the substance of their commercial activity, few companies provided an overview of general tax structures and strategies to substantiate this. For example, companies generally provided no explanation regarding why they operate in low tax jurisdictions where business operations may not be apparent. None of the companies reviewed published country-level data on key indicators of economic activity such as revenue, profits, employee numbers and taxes paid. None of the companies provided any information on intra-company debt balances, let alone information on average interest paid or where the debt was held. A very low number of companies used the weighted average statutory rate for their tax reconciliation.
  • Weak evidence that companies are actively addressing reputational risks emerging from tax issues. While a reasonable number of companies referred to their relationships with tax authorities in their tax policies, none referred to their relationships with stakeholders or dialogue that had influenced their tax policies. There was no indication that company boards were actively discussing the ramifications of their tax approaches on reputation and brand.
  • Poor disclosure on tax advocacy and lobbying and whistleblowing. None of the companies described tax advocacy and lobbying activities, or reported on membership in trade associations that are active on tax policy. Moreover, the companies reviewed did not refer to channels for confidential or anonymous internal reporting on breaches of tax policy.

In addition to the international and national accounting standards that companies are subject to, three sets of regulations appeared to be particularly important in driving patterns of enhanced tax transparency in the companies reviewed:

The UK Finance Act (2016) requires all UK companies with a UK turnover of more than £200 million and/or a balance sheet total of over £2 billion, and UK companies that are part of multinational groups with annual global consolidated turnover of more than €750 million, to publish a tax strategy setting out the company’s approach to risk management and governance arrangements. These companies are also required to set out their attitude towards tax planning, level of risk the company is prepared to accept, and approach towards dealings with HMRC. This disclosure requirement means that any large multinational doing some degree of business in the UK is required to publish a tax strategy covering its UK operations. This information is required with respect to UK taxes, although companies may choose to report on global operations.

The Australian Government’s Voluntary Tax Transparency Code (TTC) is a voluntary code which encourages large businesses to publish statements on their approaches to tax strategy and governance. The TTC was developed by the Board of Taxation and endorsed by the Government in the federal budget 2016–17. The Australian Government facilitates the centralised hosting of published reports.

US regulations for public companies set out the specific form and content for annual reports and financial statements. Regulation S-X requires the use of US GAAP for financial reporting. It also sets out the form of the statutory annual 10K report. Both areas cover aspects of the treatment of tax and reporting of tax risks.


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    Evaluating and engaging on corporate tax transparency: An investor guide

    May 2018


Evaluating and engaging on corporate tax transparency: An investor guide