The concept of tax transparency is far from new, having been a subject of international discussions for several years. The importance of a state's ability to respond promptly and to allocate tax revenue in addressing various challenges, including financial and health crises has further propelled the topic and heightened the interest of regulators, tax authorities, consumers, investors, and society leading to a higher demand in (tax) transparency.

In the wake of this increased interest, the importance of tax disclosures and their link to sustainability and ESG reporting has come to the forefront.

Numerous organizations and governmental entities, including the United Nations (UN) and the European Union, recognize the crucial role of taxation in the transition to a greener and more sustainable economy. The UN Development Program (UNDP) acknowledges tax as a “powerful tool for revenue collection and a policy instrument to encourage sustainable growth strategies and influence behaviour towards desired outcomes related to climate, nature, well-being, and governance”.

In 2015, the UN member states adopted the 2030 agenda for sustainable development. At its heart are the 17 Sustainable Development Goals (SDGs), which are an urgent call for action by all countries to address various global challenges, such as environmental, social, and governmental issues, effectively encompassing all three facets of ESG.

Achieving the SDGs will require a significant financial effort. The World Bank estimated the financing gap at USD 2.5 -3 trillion per year. Financing remains highly pertinent, especially since we are halfway to the 2030 Agenda deadline. Revenue collection through taxes paid by multinationals represents a significant mean to close this gap, thus, the pressure on enhanced public tax transparency is expected to remain high.

Tracking the T in ESG

Taxes play a critical role across all three facets of ESG, specifically:

• Environmental: environmental taxes target areas such as energy usage and emissions, waste, resource exploitation, and transport. For instance, carbon taxes, including internal carbon prices, are becoming an increasingly important tool for governments and companies alike in their endeavours to reduce carbon emissions and shift behaviours. Grants and incentives are also another powerful instrument in steering behaviours.
• Social: when it comes to the social dimension, tax can play a role ensuring fair remuneration packages, addressing inequalities, and providing transparency and accountability. Taxes, in fact, are an important indicator of a company’s social contribution and an indication on whether companies pay their “fair share” of taxes. By disclosing their tax contribution, companies can further strengthen their social license to operate and build trust with the communities in which they operate.
• Governance: governs the “E” and the “S” pillars and includes matters of corporate behaviour such as practices, controls, policies, and procedures. For tax this translates in aligning the ESG policy with a fiscally responsible and sustainable tax behaviour.

What is tax transparency?

Tax transparency entails offering stakeholders a glimpse behind the scenes by showing that a company’s tax affairs are conducted in a responsible and sustainable way. Put differently, tax transparency means translating words into action. In this context, "words" represent a company's tax policy and strategy, while "action" involves actively demonstrating how the company upholds its governance, including the disclosure of specific tax-related data, such as taxes paid.

A shift from voluntary to mandatory disclosures

Public tax disclosures have been largely voluntary, with a few exceptions for the extractive industry (US Dodd-Frank Act, EU Accounting Directive) and for financial institutions in scope of the EU Capital Requirement Directive IV.

Our recent Deloitte Global BEPS survey found that 54% of the respondents expect their company to align its communication on tax performance with a transparency standard. Further, an increasing number of companies across various industries have already published a tax transparency report.

Companies rely on various reporting frameworks for their voluntary tax disclosures. Among the most recognized ones are the B team tax principles, the World Economic Forum stakeholder capitalism metrics, and GRI 207. These frameworks vary in terms of the level of details required. GRI 207 stands out as the most comprehensive and builds on Action 13 of the OECD BEPS initiative, encompassing both qualitative and quantitative disclosures.

While the majority of disclosures are currently voluntary, a shift is on the horizon and companies in the EU will be required to comply with public Country-by-Country Reporting (CbCR) (EU Directive 2021/2101). Public CbCR builds on Action 13 of the OECD BEPS initiative with slight differences as shown in the table below.

Further, the Directive also captures non-EU large multinational enterprises (MNEs) present through at least one medium/large-sized entity in the EU, or an equivalent branch that exceed two out the three criteria below:

• Balance sheet total above EUR 4 million
• Net revenue above EUR 8 million
• Fifty employees on average

Therefore, given the above, Swiss companies with an EU presence should carefully consider whether they will be affected by the Directive and be prepared to report accordingly.

Public CbCR is however not the sole regulatory challenge that MNEs face. The OECD Pillar 2 rules also stand out as a notable regulatory framework companies must navigate. To assist with compliance, the OECD has introduced a temporary relief, the Transitional CbCR Safe Harbour rule, for MNEs that can prove they are not subject to these rules using their qualified CbCR.

Companies in scope of the EU public CbCR Directive need to adapt swiftly and prepare to provide specific tax information (nature of company’s activities, number of full-time employees, profit or loss before income tax, accumulated income tax, income tax paid, accumulated earnings) starting 2025. Additionally, companies can leverage the data prepared for the EU public CbCR and qualified CbCR to create a tax transparency report that not only meets the regulatory requirements but also offers contextual information to the published tax figures, ultimately reducing the risk for misinterpretations. Moreover, groups that take an active role in tax transparency are better able to control the tax narrative (beyond just Corporate Income Tax) and enhance business reputation by showing how companies contribute to public finances and, thus, support society to achieve the SDG targets.

In addition to the EU requirements, MNEs should also consider disclosure expectations in all the countries where they operate. For example, in the UK, companies across all sectors are required to publish their tax strategy.

As companies rise to the challenge and publish their tax data, they need to ask themselves a number of questions, as there is not a one-size fit all approach to tax transparency:

• Is tax a material topic for sustainability reporting considering its relevance to the organisation, its stakeholders and society as a whole?
• What is the appropriate communication strategy, taking into account a diverse group of stakeholders, such as customers, clients, and employees?
• What are regulatory requirements and stakeholders’ expectations in the jurisdictions they operate?
• When is the ideal time to publish a tax transparency report? Further, decide if the report will be a standalone document or incorporated in the sustainability report.
• Understand the various reporting standards and the extent of information disclosure needed.
• If seeking an agency rating understand what the expectations around tax disclosures are.
• Determine whether obtaining assurance on the tax transparency disclosures.

Additionally, medium-sized companies, even if not in scope of the EU public CbCR, have a unique opportunity to enhance their sustainability narratives by leveraging the tax disclosures.

To this end it is important to note that the tax transparency report goes beyond mere compliance. It is an avenue to showcase a company’s environmental and social engagement, such as fair wages, social securities’ contributions, and the array of taxes administered. Subsidies and grants could also be used to demonstrate a company’s environmental footprint as they can underline a company’s sustainability efforts.

Companies should also ensure the quality of their data and consider whether they have the right technology that can assist in the capture, verification and aggregation of tax data and leverage existing software where possible.

Finally, tax teams should work closely with the sustainability team to ensure a holistic and consistent message in their annual report and sustainability report.

If you would like to discuss more on this topic, please do reach out to our key contacts below.

Consult Deloitte's in Switzerland tax transparency report here.

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