Corporate Reporting blog

Increasing disclosure over tax

With the financial crisis, the need to repair public finances and concern about whether companies are paying ‘the right amount of tax’, there has probably never been greater public interest in how much tax is paid by companies.

You might have read in the news about companies not paying their ‘fair share of tax’.  Some companies have been targeted by Civil Society Organisations (CSOs) to explain the tax they pay and with this increased attention, a new reputational risk is emerging.  Traditionally tax was viewed as a private financial matter, a cost to be managed or a question of compliance.  But this is no longer the case.  Tax is now becoming a corporate responsibility issue, of interest to a variety of stakeholders including investors, governments, media, CSOs as well as the Board, finance department, and employees.  Are you informed on the issues and do you have an awareness of current developments in tax reporting?

In recent years, a number of proposals for increased financial reporting by companies have emerged.  These are under discussion by regulators and legislators and have the potential to have a significant impact on the disclosure requirements of companies in the near future.  In the US, the Dodd-Frank Act includes provisions requiring SEC registered extractive companies to report on all payments made to US Federal and foreign governments.  In 2011, the EU introduced a proposal for an amendment to the existing Transparency Directive to introduce new reporting requirements for listed and non-listed large companies active in the extractive industry and the logging of primary forests.  The Extractive Industries Transparency Initiative, although voluntary, has been adopted by 14 countries to ensure that extractive companies publish what they pay and governments disclose what they receive.

The main proponents of these proposals are the CSOs who see this as an important element of their campaign to ease the plight of the poor in developing countries. There are two distinct aspects. The first is the need to hold governments of developing nations to account for the revenue they collect. The second element is the issue of helping developing nations collect the “right” amount of tax from international businesses.  Although currently focused on extractive industries, certain CSOs are campaigning for a wider application of country by country reporting requirements for all MNCs.  Their primary focus is on tax planning and transfer pricing policies and a call for them to publish very detailed financial information for each country in which they operate.

It is clear therefore that there is pressure on businesses to improve transparency around the taxes they pay to government in the individual countries in which they operate.  So how are companies responding?  Some, mainly from the extractive industry, have been leading the way in tax reporting.  The focus from CSOs is on corporate income tax but companies pay and collect a wide range of taxes which are not always fully recorded in financial accounts or recognised.  A number of companies such as Rio Tinto are reporting their tax payments using this Total Tax Contribution approach.

A few companies are going further to assess their wider economic impact, taking into consideration macroeconomic impacts, tax contributions, socio-economic and environmental impacts, for example British Land.  The aim is towards greater transparency and for better engagement with key stakeholders. 

Whether for corporate responsibility purposes or to address a reputational issue, greater disclosure in tax reporting is high on the agenda in the current climate.  Corporates should keep up to date with the latest trends and developments in tax reporting and consider whether there is a business case for increasing disclosure over tax.

Do please keep in touch - I really value your responses to this blog.

Is the opportunity to use sustainability to drive competitive advantage over?

Companies have shown that the return on investment from focusing on sustainability can be impressive.  So why aren’t all companies following suit and reaping the same benefits?

Household names like M&S with its Plan A, Unilever with its Sustainable Living Plan and GE with Ecomagination have used sustainability to drive competitive advantage.  Schemes such as these go further than clever marketing and deliver real value to the business.  M&S’s Plan A delivered a net benefit to the bottom line of £70m in its last financial year and GE’s Ecomagination products generated $85billion from an investment of $1.8bn in R&D.

The question has led some quarters to consider increasing the pressure on businesses to act on sustainability.  This June world leaders, governments, the private sector, NGOs and other groups, will come together at Rio+20, the UN Conference on Sustainable Development , to shape how we create a sustainable future on an ever more crowded planet.  Paragraph 24 of the Rio+20 zero draft is getting a lot of attention at the moment.

It states:

“We call for a global policy framework requiring all listed and large private companies to consider sustainability issues and to integrate sustainability information within the reporting cycle.”

For some, this does not go far enough.  A group of institutional investors lead by Aviva with $2 trillion under management is calling for an international commitment from Rio+20 to develop national regulations which mandate the integration of material sustainability issues in the Annual Report & Accounts on a ‘comply or explain’ basis.  Also, the WBCSD (a CEO-led organisation of forward thinking companies) and the IUCN (the world’s oldest and largest global environmental organisation) have sent an open letter to the Heads of Delegations attending Rio+20 urging governments to strengthen paragraph 24 by including the explicit requirement for companies to adopt standardised, rules-based sustainability reporting.

If the UK Government’s consultation on mandating carbon reporting is anything to go by, it seems that business is not averse to a more prescriptive approach to reporting.  WWF-UK claims unreleased submissions to the government’s consultation, obtained through freedom of information requests, show that some 61 per cent of organisations are in favour of full mandatory carbon reporting for all large companies.

The delay announced recently by the UK Government to the decision on mandating carbon reporting may be more about its commitment to a ‘one in one out’ approach to business regulation and wanting to look at what to do with the Carbon Reduction Commitment and businesses desire for this policy to be simplified.  But if the benefits from sustainability reporting are so great, as evidenced by the GE and M&S stories, why has a more prescriptive approach to reporting not already happened?

One argument is that a prescriptive approach stifles innovation and moves everyone towards the lowest common denominator.  If we are to respond to the threats posed by sustainability then we need more innovation not less.

What is the best way forward? More companies doing a little, driven by ‘comply or explain’ type regulation?  Or is it a case of some businesses breaking new ground because they see the commercial benefits and, in the words of Richard Branson, “screw business as usual”?   The answer is not as straightforward as it might at first appear, but one thing seems clear – sustainability reporting is going to continue to rise up the political and business agenda.

Do please keep in touch - I really value your responses to this blog.

BFN

Charles

BIS consultation: a more strategic and flexible framework

Changes to the narrative reporting framework are needed and there’s growing momentum for action – that’s the consensus view revealed in the summary of responses to the UK government consultation on a new reporting framework. 

As the summary says, “Preparers and users want it to be easier to draw out strategic company information from the increasing volume of published company data.”

On the face of it, the proposed changes by the Department of Business Innovation and Skills seem little more than a ‘shuffling of the deck’. But scratch below the surface and leading reporters are recognising its potential to:

• Move the focus of attention from compliance to communication
• Reduce clutter and create a more dynamic narrative that focuses on what matters strategically and what’s changed during the year
• Leverage the on-line space better – eg, for standing data and other statutory information
• Speed up the reporting process – eg, release the Strategy Report with the preliminary results
• Challenge the quality and availability of information for internal decision-making

The direction of travel for reporting is clearly towards a more flexible reporting framework that allows companies to tell an integrated story that’s grounded in their business model and strategy.  Boilerplate disclosures can then be reported separately and not allowed to cloud the key messages. 

There’s no doubt that presenting a clear, concise and strategically-focused picture of a business is a challenge. You only have to look at the evidence in our review of companies’ narrative reporting practices – From compliance to competitive edge. But, as you may have gathered already, I am a firm believer this is the way reporting needs to go if it is to remain relevant.

The detail of the proposals for a strategic report will be developed with stakeholders, including PwC, over the coming months. New legislation is likely to be published in October this year and is expected to come into effect in April 2013.

So what’s the first step?  BIS is hosting some workshops, which we are pleased to be contributing to, along with preparers, users of reporting and other key stakeholders. The aim is to help clarify the detail of the strategic report and establish the breadth of information that should go into the Annual Directors’ Statement.

We’re now in a period of challenge and change that has the potential to transform corporate reporting over the next decade. The BIS consultation is just one of many important initiatives and I look forward to keeping you posted on developments as they arise.

BFN

Charles