Tax as a governance matter in 2022

What exactly ‘governance’ means – and how to measure it – can be less intuitive than environmental and social issues, which feel more tangible and familiar. But the last letter of the ESG initialism covers concepts that will be equally as emotive and familiar to stakeholders – including tax. This can still feel nebulous though and, as the EBTF paper acknowledges, to date there is no single agreed approach to what good tax governance looks like.

As tax has become more of a mainstream topic for consumers and investors alike – while remaining a priority for tax authorities, regulators and government – there is a broader range of stakeholders to keep happy than ever before. Moreover, their preferences and expectations when it comes to tax governance may well not align. These can leave businesses in something of a quandary. What are the rules of the game here? How can businesses (and their stakeholders) meaningfully evaluate their tax governance arrangements? As the paper points out, there is no common standard or established best practice.

The upshot is that there is no ‘one size fits all’ approach. The EBTF paper acknowledges that what is appropriate will depend on the combination of stakeholder profiles on the one hand, and the particular characteristics of the organisation on the other. But this relativism has limits and the paper sets out example best practices which can provide inspiration and guidance for businesses looking to add ballast to their tax governance arrangements. Obvious examples include open and cooperative engagement with tax authorities (thereby minimising time spent on audits and enquiries down the line) and appropriate tax control frameworks. In practice the latter will involve being clear on who is accountable for managing group tax policies and risks, how they do this in practice and any checks and balances in the process.

Transparency itself is evolving, and disclosure of purely numerical information is unlikely to continue to cut it. Publishing snapshots of historical data is unlikely to satisfy those looking for a meaningful understanding of a company’s tax position, and numbers need context so that users other than tax specialists can meaningfully use them to work out the tax risk profile of the company. But narrative around numbers isn’t the only new requirement. There has been a realisation that data is only as trustworthy as the processes and procedures that deliver it. Similarly, stakeholders are increasingly keen to understand not just the tax risks a business faces, but how they are managed. This emphasises an operational focus on the sustainability of a group’s tax systems and practices, rather than the traditionally myopic look at tax as an isolated line in the P&L.

The key draw of the paper for those still scrabbling to add real substance to what this all means is likely to be the case studies. Companies, including Fortum, Anglo American, RELX and Prosus have contributed real examples of their approach to managing tax risk, including a process for tax review of material business decisions, tax control framework and policy on engaging with tax authorities. This is a useful place to start for businesses who are relatively new to articulating their tax governance arrangements and want practical insight into what doing this might look like. 

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