Tax is what connects the society to the government. The predominant purpose of the very existence of Governments is to support the society, and society bears the cost of, and enables actions of the government (and all society benefitting programs of the government) through taxes. Thus, responsible tax behaviour by corporates is an essential element of responsible social behaviour. Responsible tax behaviour is also a very big proportion of the overall governance of a corporate.
For this purpose, tax needs to be understood in a wide sense. tax is not only the corporate tax paid on profits, but also – withholding taxes collected from employees, vendors and customers, goods and services tax, other sales related and value added taxes, import related customs duties, stamp duty and similar transaction taxes, state and local levies, royalties or license fees of various kinds for permissions to harness natural resources or to undertake certain activities, etc. At times, even social security related contributions (example – provident fund, employee state insurance, etc) are also considered to be a form of tax or extension of tax given the direct social impact of these.
Over the years, different organisations (including some governments/ tax regulators) around the world have issued varying guidance on the nature, extent and form of tax transparency, and this field shall continue to evolve. More recently, the EU Public Country by Country Reporting Directive released in 2021 (to be applied based on domestic tax laws in each EU state, by 2024) mandate multinational groups with a total consolidated revenues over €750 million if they are EU parented or otherwise have EU subsidiaries or branches of a certain size. Even though this is a relatively narrow concept – covering only information on description of activities, number of employees, revenues, profits and income taxes thereon, there is hectic activity ongoing amongst relevant companies to prepare for such public disclosures. Where Indian corporates have subsidiaries or branches in EU meeting certain size thresholds, these are important requirements to comply with.
Another important guidance with much wider coverage and impact was issued by the Global Sustainability Standards Board (GSSB) in the form of Global Reporting Initiative (GRI) 207 – Tax in 2019 (applicable effective 2021). GRI 207 requires disclosure of – approach to tax; tax governance, control and risk management; stakeholder engagement and management of concerns related to tax; and country by country reporting of taxes. The coverage is very wide here covering – description of activities; number of employees; revenues from third-parties; cross-border revenues from intra-group entities; profits; tangible assets; employee remuneration; withholding taxes from employees, vendors and customers; industry related payments to government; significant uncertain tax positions; intra-group debts; etc.
In the Indian context, a large number of public companies already adopt GSSB’s GRIs for their sustainability reports or integrated annual reports. Several corporates in India now have started including elements of GRI 207-Tax in their integrated annual reports and a few corporates have published separate tax transparency reports (also referred to as tax impact reports or tax contribution reports) – and some of these have also been able to quantify their aggregate contribution (in form of a range of taxes) to the Government and effectively their contribution to the Society.
This is just the beginning of a new era. Adoption of ESG principles by corporates would remain incomplete without effective implementation of responsible tax behaviour principles and their demonstration through tax transparency reporting.The writer is Partner, BSR.
