Disclosure and transparency about tax payments continues to be an issue for global companies, as witnessed by this week’s release of the Paradise Papers.
The Paradise Papers investigation has sparked a renewed discussion of tax payments and tax minimisation strategies, with new disclosures beyond the Panama Papers document leak.
In February 2017, Vigeo Eiris released a study analysing 1,139 multinational companies, which revealed that:
- “– Only 2.5% of companies reported comprehensively on their tax payments in line with OECD recommendations . This minority provide a geographical breakdown of their tax payments and data on their operations including sales, operating profit or the number of employees in each area of operation. They also disclose the actual tax rate they pay and explain differences between this rate and the statutory rate.
- – Nearly 1 in 10 companies (9.1%) fails to disclose any information on their tax payments.
- – 44.4% of companies only disclose partial information, generally limited to the gross amount of tax they pay, with no geographical breakdown by operating country or region.
- – Less than half of companies provide a breakdown of the taxes they pay by country or region; and for one third of these companies the reporting covers less than half their activities.
- – Nearly a quarter of European companies (24.9%) and a fifth of American companies (18.3%) provide comprehensive information on their tax payments, sales, operational results and the number of employees.”
Australian companies – and Australian divisions of multinational companies – have not escaped scrutiny, although leading Australian companies in the mining and financial sectors tend to perform better because they have had heightened attention from regulators and other stakeholders on their activities, said Julia Leske, CAER CEO. CAER is part of the Vigeo Eiris network.
“Australia is very exposed to the issue,” she said. “Similarly to what we see globally, with the finance sector and the mining sector, there’s been a big focus in those sectors. They’ve been better in disclosure, because they’re have the discussions, with the [Extractives Industry Transparency Initiative] and the [US Securities and Exchange Commission], and European Union regulation, they are the big sectors that have had to disclose. But Australia has big exposures to those sectors, and there are still some that need to work up to it and get onto the front foot, and companies that have been in the public debate have seen the headaches it causes if you get caught up in legal proceedings.”
Companies are dragging their feet on disclosure, but requirements around the world for tax transparency are increasing, Leske said.
“Now that we’ve had the second big leak there’s going to be a much stronger conversation about company disclosures, and with the European legislation on the table, there will be more pressure, and if the EU starts imposing reporting requirements, because companies are operating globally, more will be caught up.”
For investors, the balance of the conversation is shifting to consider the risks of tax minimisation as an issue impacting negatively on social license to operate.
“Public perception is what’s starting to bite,” Leske said. “The expectation is that companies will be positive actors in their communities. It’s not that long ago that in typical conversations, investors would say ‘it’s in our interest that companies cut tax expenses. Why shouldn’t we encourage them if it’s legal? Now it’s a reputational risk, and there are regulatory risks, because countries are seeking to tighten the rules around taxing companies where they make the profit.”