New ESG reporting requirements are encouraging greater tax transparency across large UK listed companies, reveals a new report.
According to the Tax Transparency in an ESG Era report by PwC, half of the FTSE 100 companies made a voluntary total tax contribution (TTC) disclosure in 2021, compared to 47 companies the year prior, as focus on ESG pushes tax transparency to the fore.
“These findings represent small but significant steps towards tax transparency by major UK companies in 2021, and we can expect this issue to be widely debated in coming years,” said Andy Wiggins, UK ESG reporting lead at PwC.
“More companies are recognising the need for disclosures as an important tool for building trust with investors and stakeholders, as well as supporting their own social purpose goals.”
TTC disclosures offer a holistic view of a company’s international tax profile including all the taxes a company pays.
The slight uptick in companies making TTC disclosures is likely due to firms using it as a “preparatory exercise” in anticipation of the EU’s public country-by-country reporting directive (CbCR) requirements that are due to come into effect in 2023, noted the report.
Moreover, it found that 26 companies issued standalone tax reports in 2021, a small increase from the 24 in 2020. By publishing a separate tax report, companies have “more flexibility to control the narrative around their tax profile, and address topics stakeholders consider material,” the report said.
Tax transparency boosting ESG profile
In the first year of mandatory Task Force on Climate-Related Financial Disclosures (TCFD) reporting for premium listed firms, 38 companies included tax within their first filing and 33 mentioned carbon taxes and/or carbon pricing. Their TCFD reporting included expansive narrative and modelling on the anticipated risks of environmental taxes increasing under different climate scenarios and their impacts on existing business models.
“A growing minority of organisations are considering how tax reporting can play a role in highlighting their climate impact, although there is a broad range of how they are doing so,” said Wiggins.
This level of disclosure is becoming increasingly important as UK investors consider ESG criteria in investment decisions. In fact, 72% of investors said a clear and demonstrable ESG proposition increases their likelihood to extend financing, according to a survey by PwC.
“Companies should be considering how they can best report the risks and opportunities associated with their tax responsibilities in this area, and how this can be used to build trust with stakeholders,” adds Wiggins.
The EU’s Corporate Sustainability Reporting Directive will further affect tax transparency among companies. Due to be implemented in 2023, the new directive will expand the scope of non-financial reporting obligations, requiring companies to report on ESG areas that are material for their organisation with tax included.