Tax Transparency and ESG: why nearly one in two FTSE100 companies are disclosing their Total Tax Contribution (TTC)?

Key points in this guest blog from PwC UK:

● Stakeholder capitalism has gained increased popularity in recent years

● Use of tax contribution and transparency as an ESG metric is an area of significant growth and focus

● International trends are heading towards greater transparency

● What publicly available data shows about the Total Tax Contribution (TTC) of large UK businesses and legal and accounting sectors

● TTC can offer the opportunity to tell the whole story and give visibility over all the taxes paid by the business

Stakeholder capitalism and ESG reporting

The debate around the role that business plays in society has increasingly gained momentum as the world adapts to the changes caused by the pandemic. The strain on public finances is making governments look for additional sources of revenue and shifts in global economic power and conflicting interests are making it harder to reach an agreement on the scale and urgency of the climate emergency crisis. These strains will be exacerbated by the war in Ukraine and the pressure it exerts on the energy and agricultural markets.

Within a complex context, stakeholders are taking on an increasing role in ensuring companies do not only optimise short-term profits for shareholders, but consider their long-term value creation, by taking into account the needs of all their stakeholders, as well as wider society. This includes reviewing if companies are putting in the right steps to ensure sustainable, ESG-compliant growth, even where the investment needed now may not offer an immediate return.

How a company’s tax behaviour is marked against sustainability criteria is an area under development. To address the immediate needs of stakeholders, companies have been developing their own framework to define what tax information – and for what purpose – should be provided.

The development of Environmental, Social and Governance (ESG) standards are one of the main products of stakeholder-driven expectations placed on businesses. New metrics are appearing and they can range from standards on energy consumption, waste disposal, and water; to standards on tackling corruption, protecting human rights and, more recently, tax.

Tax as a sustainability metric

Through this ESG lens, tax, and transparency around tax, is increasingly being incorporated into sustainability metrics, with businesses expected to address stakeholder concerns on the topic and publicly disclose how their tax strategy helps address issues around climate change and economic inequalities, bridging the gap in trust between businesses and society.

In parallel, international organisations such as the Global Reporting Initiative (GRI) and the World Economic Forum’s International Business Council (IBC) have taken on the challenge to provide clarity around what companies could be focusing on in sustainability reporting – including tax.

The GRI is an international organisation which produces voluntary sustainability standards. These standards are widely accepted as good practice for reporting on a range of ESG topics. In December 2019, the GRI issued the 207 tax standard which was introduced to meet stakeholder demands for greater transparency around tax. The standard covers four areas: approach to tax, governance over tax, stakeholder engagement and country-by-country reporting. One area of focus of the 207 standard is the public CbCR requirement which has data points very similar to the OECD BEPS template. The standard is applicable for reports published from 1 January 2021.^[1]

The IBC of the World Economic Forum issued its paper on sustainability reporting in September 2020. It was designed to address the need to harmonise the different ESG reporting frameworks that exist, and converge the various standards. The paper contains a common, core set of metrics for ESG reporting, with tax included in the form of the taxes borne element of the Total Tax Contribution (TTC) methodology.^[2] There is an expanded metric including the options of disclosing the taxes collected element of the TTC and/or geographic analysis of that data. The IBC comprises 140 largest multinational companies globally, many of which have endorsed the metrics and stated their intention to follow them.

A focus on what publicly available data shows in the UK

But how many companies have decided to lead the tax transparency debate? In the UK, almost half - 47% - of FTSE100 companies published data concerning their TTC in 2020, an increase of 18% since 2019 when 40% published tax data on their TTC.^[3] By looking at the results of the 17th annual TTC survey from the 100 Group, the TTC of the largest UK businesses totalled £77.1bn during 2020/2021, representing 11.4% of total government receipts.^[4]

With country-by-country reporting (CbCR) becoming public in the EU,^[5] the expectation is that the number of companies providing more context around their total tax numbers will increase. CbCR information is focused solely on corporation tax, but businesses pay many other business taxes.

For The 100 Group, for example, corporation tax represents 27.0% of total taxes borne in the 2021 survey (figure 1). For every £1 of the corporation tax, the 100 Group companies paid another £2.68 in other taxes borne, and £7.81 in taxes collected.

TTC data can also highlight the contribution of a sector as a whole: the TTC of UK-based legal and accounting firms is estimated at £20.5bn, comprising £8.4bn in taxes borne and £12.1bn in taxes collected.^[6]  Combined with other economic footprint metrics such as employment and turnover, it is clear that the activity conducted by these firms makes an important contribution to the UK economy. For example:

1. The TTC of legal and accounting firms represented 2.8% of total government receipts in 2020.
2. Compared to the last TheCityUK survey for this sector, which covered 2018, TTC has increased, on a like-for-like basis, by 5.4% over the two years.
3. The average annual growth rate for legal and accounting GVA was 3.1% over 2011-20, while UK GVA rose by an annual average of 0.6% during that period.
4. The legal and accounting sector provides skilled, well-paid jobs. The average wage for employees of the TheCityUK membership, which broadly comprise the largest firms, was £77,002. For every employee in the study (98,803), an average of £30,004 was paid in employment taxes.
5. One-third of turnover and more than half of profits (33.6% and 54.6%, respectively) are paid and collected in the form of taxes.

The road ahead

TTC provides a holistic overview of a company’s international tax profile once data is collected from around the business and categorised against the TTC framework. The figure below shows how the TTC profile varies according to sector amongst the largest companies headquartered in Europe^[7] in seven countries:

         ^{Figure 2 - TTC by the five tax bases by sector of the largest companies headquartered in Europe} 

^{Source: European Business Tax Forum (EBTF). Data considers global TTC data provided by the study participants for Germany, the Netherlands, Spain, France, Italy, the UK and the USA covering the periods ending to 31 December 2020.}

In the study conducted by the EBTF, 42.5% of the TTC of consumer goods companies are product taxes – a clear reflection of the relevance of indirect taxes (e.g., VAT, excise duties and other turnover taxes) for the sector. 31.5% of the profile of the TTC of insurance companies corresponds to product taxes. This is due to the collection of insurance premium taxes.

While collecting international tax data on all business operations can be a significant task, in practice companies are able to do so fairly easily and doing so helps to understand the global profile of the organisation. A focus on data collection for material taxes of the most significant locations with operations is recommended in complex organisations.

For those companies further ahead in their journey, there are still things which could be done to gain more value from TTC. Leveraging technology and automation to assist with the data collection process can save significant time. TTC data which has been collected over a number of years can also be used to draw out longer-term trends and used to inform future tax policy. Additionally, this data can help to support conversations on macroeconomic issues such as industry or geographically specific taxation as shown in the figures above.

In challenging times, tax functions are being asked to be flexible whilst meeting the expectations of an increasing number of stakeholders. It is understandable, therefore, to meet resistance in embracing new tasks for preparing tax transparency disclosures and to collect TTC data. In that regard, technology can be a powerful tool to alleviate the pressure on already stretched teams.

Wherever you are on your transparency journey, TTC can offer the opportunity to tell the whole story and give visibility over all the taxes paid by the business, highlighting the broader economic contribution it makes to society. TTC data can also be used in communications with the Board and with internal management to brief them on taxes and how the business is performing overall. Finally, this is a value creation opportunity for the business, as shown from the examples above, an analysis of total tax contributed and being transparent with that data can function as both a foundation to a wider ESG strategy, and also as a metric, evidencing alignment to some of the key themes within ESG. bringing value for the business.

Guest blog by Andrew Packman, Total Tax Contribution and Tax Transparency leader, PwC UK

Notes for editors

^[1] For more information: A Global Standard for Sustainability Reporting, available at https://www.pwc.co.uk/tax/assets/pdf/global-standard-for-sustainability-reporting.pdf.

^[2] TTC is the total cash taxes and levies paid by a company to any level of government. TTC is split into two main categories: taxes borne, which are a cost to the company when paid and impact the company’s financial statements; and taxes collected, which are those taxes the company collects on behalf of governments as a result of the economic activity generated by the company. The TTC framework is non-technical, meaning it is easy for non-tax experts to understand and can be applied to any regime around the world.

^[3] PwC, Tax transparency: A new reporting landscape, available at https://www.pwc.co.uk/tax/assets/pdf/tax-transparency-2021.pdf.

^[4] PwC, 2021 Total Tax Contribution survey of the 100 Group, available at https://www.pwc.co.uk/services/tax/total-tax-contribution-100-group.html.

^[5] PwC, European Parliament votes to pass public country-by-country reporting, available at https://www.pwc.com/gx/en/tax/newsletters/tax-policy-bulletin/assets/pwc-european-parliament-votes-to-pass-public-cbcr.pdf.

^[6] TheCityUK, Total Tax Contribution of UK legal and accounting activities, available at https://www.thecityuk.com/research/total-tax-contribution-study-for-uk-legal-and-accounting-activities-2021.

^[7] EBTF, Total Tax Contribution: A study of the largest companies headquartered in Europe: third edition, available at https://ebtforum.org/wp-content/uploads/2021/12/Total-Tax-Contribution-A-study-of-the-largest-companies-in-Europe-2021-Report.pdf.