South Africa’s top 100 companies are making great strides when it comes to making voluntary tax disclosure.
Globally, there is an increasing awareness of responsible tax behavior as well as rigorous scrutiny from regulators and other stakeholders. Added to this, the Covid-19 pandemic and economic uncertainty have fueled the public debate on tax and tax transparency.
These are some of the key findings from a review of the voluntary tax reporting for the financial year ending 31 December 2019 of the top 100 companies listed on the JSE issued by PwC today.
The review summarises trends that are shaping the tax transparency landscape and provides examples of how companies are responding by using voluntary tax disclosures, thereby demonstrating corporate citizenship as responsible taxpayers. Although this report analyses the level of tax transparency presented by companies for the 2019 financial year, it cannot be denied that the outbreak of the Covid-19 pandemic in 2020 has had an enormous impact on almost every aspect of doing business, including taxes and tax transparency.
Troopti Desai, tax reporting and strategy lead for PwC Southern Africa, says: “There is no telling what will define the tax landscape in the coming year and after the Covid-19 pandemic. What we do know is there will most certainly be accelerating demands for greater transparency in an environment where the media and civil society are sceptical about the taxes paid by multinationals.
“Whether a company’s goal is to support its employees, communities, suppliers, customers or others, it is realising that its relationships with stakeholders should be based on its values and making a positive difference — which also impacts tax.
“Values drive behaviours that are required to realise purpose. How a company demonstrates its commitment to being a responsible taxpayer, through its taxes enabling governments to pay for public services, should be recognised and celebrated, especially in cases where companies remain focused on sustainability programmes that help address fallout from Covid-19, now and in the future.
“With this in mind, we are encouraged by the findings of our Building Public Trust Through Tax Reporting initiative for 2019 year-ends, as we found there to be a definite increase in voluntary tax disclosures among the companies that formed part of the study.”
The report summarises trends that are shaping the tax transparency landscape and provide examples of how companies are responding by using voluntary tax disclosures to tell their story, thereby demonstrating good corporate citizenship as responsible taxpayers.
Findings of PwC’s report
The report uses the PwC Tax Transparency Framework to carry out an annual review of the voluntary tax reporting and transparency of the top 100 companies listed on the JSE. The companies evaluated were selected based on their market capitalisation on 31 December 2019.
On average, companies scored 23% (compared to 15% in 2018) for effectively providing transparency of taxes and for integrating it with other company-related disclosures to provide a sense of value reporting on tax disclosure. It is notable that multinational companies made a marked increase in voluntary disclosure (2019:29%; 2018:19%) compared to national companies (2019:20%; 2018:13%).
It is notable that at least 14 companies participating in the 2019 study demonstrated a clear understanding of how to effectively provide transparency of taxes (easy to find and well communicated) compared to just seven companies in 2018. Furthermore, in 2019 at least ten companies demonstrated integrated tax related disclosure with other company related disclosure (i.e., a sense of value reporting on tax disclosure and how it integrates with and relates to the business) compared to seven in 2018.
Despite the fact that the King IV ReportTM requires a company’s governing body to be responsible for a tax policy that is not only compliant with the applicable laws, but that is also congruent with responsible corporate citizenship and that takes account of reputational repercussions, there was little improvement in the appetite of companies to disclose their tax strategy publicly (2019:34%; 2018:32%). There is, however, an increase in the number of companies that indicate that the governing body assumes responsibility for the tax strategy (2019:44%; 2018:27%).
Approach to tax planning, views on aggressive tax strategies and use of tax havens have been areas of intense scrutiny over the years and continue to attract strong interest from tax authorities, civil society organisations, ESG analysts and the wider public. More companies have discussed their approach to tax planning and minimising tax liabilities, although the transparency of this criteria remains low.
It is concerning to note that fewer companies have expressed their views on aggressive tax strategies and there has also not been a considerable move towards more disclosure on policies for use in tax havens (2019:14%; 2018:12%). The number of organisations that disclosed the circumstances surrounding uncertain tax positions or tax controversy exposure remained the same at 31 companies.
Tax and ESGs
Worldwide, there is a heightened sense of urgency around environmental, social and humanitarian issues, with pressure on companies to take action and prioritise these matters. Stakeholders increasingly want to understand an organisation’s long-term, value creation plans through credible information.
Many organisations are starting to show interconnectedness across ESG issues and how these relate to their business strategies. In the process, sustainability and ESG are being placed high on the board agenda. ESG integration requires leadership and an ESG transformation mindset.
Covid-19 has fuelled the tax debate
The Covid-19 pandemic has fuelled the public debate on tax and accelerated calls for greater scrutiny and broader information of businesses’ sustainability programmes and the way they interact with society. Many stakeholders are making the connection between tax transparency and the ‘social and governance agendas under ESG.
As companies set and evaluate their ESG goals, they cannot afford to overlook the importance of responsible tax practice. Investors and other stakeholders’ expectations are changing, but so too are those of policymakers, revenue authorities and civil society organisations, with the global pandemic also having put all of this in further focus.
Desai concludes: “Voluntary public tax transparency is more than just publicly disclosing how much and where taxes are paid. It’s about presenting easily understandable and credible information on the broader economic contributions a taxpayer makes by paying taxes in the environment in which they operate and putting this information in the right context. This kind of public tax transparency can be very beneficial.”