Mapping Risks Helps Multinationals Control Their Tax Narrative

In an era of increasing global scrutiny, multinationals face a fundamental question from stakeholders: What’s your tax story?

Government regulators, driven by initiatives such as country-by-country reporting and the 15% global minimum tax known as Pillar Two, are demanding companies pay their fair share of taxes. Activist shareholders are proposing measures to ensure aggressive tax positions don’t undermine their investments. Buyers are seeking extensive data to assess tax risks during merger and acquisition evaluations.

Despite differing motivations, the message from all stakeholders is clear: Tax transparency matters.

Multinational corporations have a window of opportunity to both control and differentiate their tax narrative. Companies that proactively adopt the following sequential steps to communicate a clear tax story will build trust, attract capital, and unlock strategic opportunities.

Establish a cross-functional team. Although the tax team is ultimately responsible for stewarding a company’s tax strategy, creating a broader team that includes representatives from finance, investor relations, legal, and corporate development is crucial.

This team can collaborate to integrate the tax strategy with the company’s broader environmental, social, and governance agenda. It should understand the company’s risk tolerance and implement governance controls. Establishing an ongoing dialogue with the board will help ensure that tax values align with the company’s stated purpose and tax objectives.

Engage in a qualitative risk-mapping assessment. The tax function should engage in a risk-mapping exercise regularly to identify existing or new tax risks acquired in M&A transactions, then assess the level of risk and determine appropriate risk mitigation steps.

Key tax risks include using so-called tax havens, double non-taxation tax structures, misalignment of profits or assets with economic substance, aggressive transfer pricing or intragroup strategies, and a general assessment as to whether the corporation complies with technical tax requirements as well as the spirit and purpose of tax laws.

Companies should carefully consider reported tax positions, or those required to be reported, under a jurisdiction’s mandatory reporting rules, or rules requiring the disclosure of uncertain tax positions. Advisers should be consulted to clarify tax risks, tax authority audit positions, and broader implications for identified risks.

Gather and verify supporting data. Implementing data collection measures will help quantify (preferably on a jurisdictional basis) numerous tax points:

• Total revenue, assets, employees, and pre-tax profits
• Total taxes paid, including direct taxes, payroll, indirect taxes, custom duties, and municipal and local taxes such as property taxes
• Effective tax rates

This will require investment in gathering and sourcing granular data across the organization. Opaque or fragmented data can undermine confidence in the corporation and increase any risk premium attached to the company by regulators, proposed acquirers, or activist shareholders.

Create a risk assessment report. After risk mapping and data gathering, a report should be prepared and presented to the cross-functional team and ultimately the board. This feedback loop is important to identify specific action steps in the company’s tax transparency journey.

The company should identify which tax positions it believes are defensible and undertaken for bona fide commercial purposes versus those that pose a reputational risk and need to be addressed promptly.

Develop a communication strategy. Multinationals must make a strategic decision about what information to share publicly and the level and scope of transparency it’s prepared to adopt, provided such disclosure doesn’t compromise its confidential data or any competitive advantage.

This decision will be driven by a company’s broader ESG mandate and profile, the number of institutional investors, and reliability of data.

Companies can choose to follow the Global Reporting Initiative benchmarks, country-by-country reporting standards, or the new substantive income tax-related risk factor disclosures as required by the Financial Accounting Standards Board.

Companies that articulate a clear and comprehensive tax story will be clear winners in the journey of tax transparency. Multinationals that take active steps to successfully control their own tax narrative and emphasize tax transparency in their ESG playbook will garner both investor confidence and public support.

After all, if a company doesn’t share its tax story, someone else will—and that narrative may not be as generous as hoped.

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

Author Information

Shaira Nanji is a tax law partner at KPMG Law in Canada.

Fang Wei contributed to this article.

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