Businesses Must Consider Investors’ Views on Tax Transparency

The social purpose of a business can’t just be talked about—it must be demonstrated in a clear and transparent way. This extends to tax, and despite the undeniable link between trust and tax transparency, it is becoming increasingly apparent why satisfying many different kinds of stakeholders is challenging.

For many businesses, investors are a critical stakeholder, so a comprehensive understanding of their specific requirements and the challenges they face can provide a clear starting point. During the recent KPMG Responsible Tax round tables, we spoke to investors and asked these questions: the answers were more varied than we expected.

Investors’ Interest

Some investors seek long-term sustainability in their investments, where after-tax profits aren’t “artificially high” due to the use of regimes or schemes that could be challenged and withdrawn at any moment, impacting the viability of returns. Recently, investors have begun to assess investees’ exposure to impacts of the OECD’s Pillar Two requirements and whether they face top-up taxes.

Certain collective investment schemes advertise “sustainable” investments to their own investors, and tax must be considered.

Investors have now joined other stakeholders in the desire for a high-quality supporting narrative to help understand what data exists in the public domain. There have been calls for a clear, concise explanation that details the relationship between tax and environmental, social and governance—with the reason suggested to be a lack of understanding of tax as a fundamental ESG issue.

Nevertheless, while it is important to remember issues concerning tax and ESG are gaining momentum, particularly in Europe, the landscape varies across continents; any transatlantic framework must be realistic about differing attitudes and markets. In Europe, there is growing pressure for companies to demonstrate they take a sustainable approach to tax, whereas in other parts of the world some shareholders still focus on lower tax increasing returns and believe this should be sought wherever possible, which can mean less pressure for transparency.

Evaluating Tax Disclosures

Many companies want to know what approach investors take with investee companies and, most importantly, what investors do with the data investee companies release into the public domain.

One of the biggest issues investors faced was the time and expertise required to evaluate investee tax disclosures. Many investors must choose whether to be more “hands-on” or to simply invest or divest based on data analysis alone.

Being hands-on takes much more time, as investors engage with each investee company to discuss improvements in their approach to tax and tax reporting, but it can result in more movement in the investee’s behavior. Using data analysis alone is in theory a faster approach; however, it risks excluding those companies that apply a responsible tax management approach, and not reporting or including those that take a tick-box approach to tax transparency, without substance.

Either approach is made more complicated by the plethora of ways tax disclosures are being made and the limited consensus on what “good” looks like.

After the European Parliament approved public country-by-country reporting, some investors expressed the hope that once such reporting was commonplace and represented the “basic” standard of tax disclosure, more sophisticated methods of evaluating an investee could be developed, and more time could be spent collaborating with businesses to improve their tax practices and disclosures.

Some investors, and indeed tax leaders, may now be feeling less confident that there will be one version of the truth when it comes to public CbC reporting. The content, basis of calculation, and data dependencies of EU public CbC reporting; each member state’s implementing act; and Australian public CbC reporting are beginning to be understood, and it seems unlikely that one set of CbC disclosures will be able to satisfy regulations.

While investors may be about to get access to more data, it may still not be directly comparable, and as discussed, more data isn’t necessarily the correct answer anyway.

Environmental Tax Incentives

Finally, a specific issue that investors and investees are having to tackle is the global increase of environmental tax incentives. Tax transparency is just one place where the ESG agenda intersects with tax. As governments are striving to meet net-zero targets, many are launching large packages of environmental tax incentives to encourage decarbonization activities by businesses.

As businesses use these environmental tax incentives, the taxes paid and effective tax rate are reduced. Sometimes when businesses can’t use these tax credits (due to no profits being made) they can sell them to their investors. Although effective tax rate was perhaps never the best measure of how “ESG-friendly” a business is, using it as a parameter is becoming even more problematic.

The tax transparency landscape continues to become more regulated and increasingly complex to navigate, and the concept of “sustainable” tax is also becoming more nuanced. More data will become available to investors, which could be a curse or a boon.

A New Solution?

But perhaps a new solution has also presented itself in the form of open artificial intelligence. Will it be possible for investors to start performing large-scale data analysis using fewer human resources and achieve the same, or better understanding of the individual investee tax profile in the near future? It would seem unrealistic to think that some investors and other stakeholders won’t be exploring this possibility.

This raises an interesting question. Will the use of AI free up investors’ time to enable more in-depth discussions about tax strategy and profile, or will it do the opposite and result in reliance being placed only on analysis performed virtually on publicly available data?

Maybe the answer will depend upon the choice individual investors make. Whatever the answer, it seems clear that the clarity of the narrative around the tax data will become more and more important.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Chris Morgan is global leader for the KPMG Responsible Tax Program, at KPMG International. Becky Knight is manager, global ESG tax and legal, at KPMG.