Podcast transcript: How tax transparency can contribute to a group's ESG priorities

Alwyn Hopkins:

I think that we’ve all seen that there’s some growing pressure on companies at the moment with respect to sustainability, and in particular their position on climate change. But if you think about sustainability really as being an umbrella term for ESG priorities, so environmental, social and governance priorities, then there’s an element of reporting that’s actually already forming a key tenet in many businesses’ social and governance disclosures, and that’s tax transparency.

So, what we’re going to talk about today is total tax contribution, or TTC as it’s often called. And that’s really important because I think public interest, at the moment, is remaining pretty high in tax transparency matters, and a lot of businesses are seeing TTC as the first practical step that they can take in wider discussions in the area.

If we think about the environment of GRI 207, which some people might have heard about, EU rules on public country-by-country reporting, or CbCR, that’s really, really important. So, Fay Parfitt and Binka Layton are going to share their experience on the topic, and they’re also going to talk a bit about what they see as really salient from some of the recent client discussions they’ve been having. 

So, to kick us off, Fay, I’m sure some listeners are going to have heard consultants and tax advisers talk about the acronym TTC, but I’m not sure everyone’s going to know what it actually is and how it’s being used by businesses, so can you try and explain that to us, please?

Fay Parfitt:

Hi, Alwyn. I’d be delighted to. Total tax contribution, in simple terms, is the measure of all of the types of taxes that a business pays, the jurisdictions where those payments are made, and, typically, how they contribute to wider society, the economy and the environment. TTC is actually part of wider good tax governance behaviour, because it evidences corporate purpose and how businesses contribute to the differing interests of its stakeholders, so, for example, customers, suppliers, investors and employees.

Hopkins:

So if we understand that as the concept, I think it’d be really helpful for our listeners to understand what the basis for it is, so by that I mean is it voluntary or are there any mandatory regulations that businesses need to follow on the matter? Binka, can you give us your thoughts on that, please?

Binka Layton: 

Yes, thank you, Alwyn. TTC is a quantitive element of a voluntary reporting standard at the moment. You referenced GRI 207, and TTC is a core component of that. We see a lot of businesses in certain sectors trying to get their arms around TTC and then presenting that in external reporting. They are primarily in the extractive and mining sectors. 

But when we look ahead and we see the legislative changes coming through, and, Alwyn, you referenced that at the top of the call, you referenced the EU public CbCR reporting standards coming through, and income taxes paid and income taxes accrued is a key component of that. So we only see the space and the focus on TTC growing in the coming years and months.

Hopkins:

So, Binka, thinking back to what you’ve said then, about use of total tax contribution figures to evidence that the business is contributing to wider society, paying its fair share of taxes and so on and so forth, and also thinking about the anticipated mandatory reporting we’ve got coming up, are you seeing now that total tax contribution is being talked about as a really major sustainability priority for tax teams, when you’re talking to them?

Layton:

Sustainability is something that all businesses are looking to underpin most of their decisions in. And I’ll give you an example of how a business is using TTC in the context of ESG, because it goes beyond ESG. So, for example, if a business has its operations where there are greenhouse emissions involved, they’re looking at the taxes that appeared as a result of that activity, and then they are messaging to their internal, external stakeholders how the taxes raised are contributing to a greater good or a greater societal need. So, you can see how, therefore, TTC, in terms of the data collection of the taxes paid and how, then, it’s being used for the greater good. And in the wider context, underpins that sustainability agenda.

Hopkins:

So, other than sustainability priorities, Binka, are there any other aspects you’re seeing that are driving TTC client discussions?

Layton:

Clients are faced with many legislative updates. You already referenced, Alwyn, EU public CbCR reporting, which is coming in 2024, and we also are aware of BEPS 2.0, which is really a step-change in compliance and data readiness for most businesses. If you look at TTC, and if you think of that as a trigger to deploy a globally consistent methodology for data gathering and presenting, you can almost combine all these legislative requirements in this one big framework.

So, absolutely, we are having conversations where we are looking at common ways of gathering data and thinking through the best ways in which we can deploy globally consistent methodology and processes to underpin it.

Hopkins:

Great. Then, to think about this as some actionable information that can be used now, in your mind, what should a tax function be thinking about doing at this point, in the context of TTC?

Layton:

At EY, we’re holding a number of client conversations. Tax functions are, at the moment, getting their heads around TTC, the requirements that are coming through for EU public CbCR reporting standards in 2024. At EY, we are suggesting to clients that they undertake a total tax contribution readiness assessment, which is usually in three phases.

Phase one, looking at the tax governance and transparency framework that underpins any of these requirements, and then thinking through how mature that is against their peer groups. Stage two is then actually doing the data collection for TTC, and that is across all tax types in as many locations as the business operates in, and then thinking through the story that it tells and the greater good that it creates economically. And then the final stage that we’re looking at is once all the data has been gathered, it’s around how to take that to market, and also to the internal stakeholders.

Hopkins:

You talked about this as a practical way forward, how are we actually seeing the TTC report being used?

Layton:

I’ve seen it being used in a number of ways, Alwyn. I’ve already referenced that, internally, the tax function collects the data, they then put them in dashboards and visualisations to bring out the key messages on taxes collected and taxes borne, and that then becomes a board-level matter. And that’s important because it really shows a corporate purpose and it shows the tax-compliant footprint of a business.

The other way that I’ve seen this being used is in external reporting, and that then follows through a format which is voluntary, which we referenced at the top of the call, which is in GRI 207, and that is then used in a variety of ways, including raising finance out in capital markets, for example.

So as you see, there is a real practical need for gathering your data around TTC, and at EY we’re currently driving those conversations with tax heads and CFOs of businesses.

Hopkins:

Binka mentioned that EY teams are working with businesses to help them on this topic. Fay, can you tell me a little bit more about what that work looks like, and some of the ways that you’re seeing clients respond to it?

Parfitt:

Yes, of course. We’re helping our clients in lots of different ways. We are assisting them with data collection which, as we’ve already alluded to, is absolutely key to TTC. We’re helping them with validation and presentation in customised dashboards, which uses our technology solutions to present information to them in many ways.

Just recently, we had a situation where a head of tax of a multinational group came to us with an issue with their existing TTC reporting process. It was incredibly manual, leveraging Excel spreadsheets and multiple emails, and the tax manager had to spend an awful lot of time chasing people across different jurisdictions, and it was just very cumbersome. 

So we were quickly able to deploy our solution that streamlined the data-gather process and generate dashboards for them, with high-level analysis on the cash taxes paid and borne. And we had our solution in under a couple of weeks’ time. And that enabled the business to report to internal and external stakeholders, and we actually got really positive feedback from them. They were really impressed with our efficient process.

And, as Binka touched on earlier, TTC is the first step that leads to wider discussions around ESG reporting, and we’ve also assisted in lots of other areas too. We have helped present the quantitative data, but also articulate the story behind that data and the economic impact that’s being made.

We have helped businesses address the robustness of their governance and risk management structures and mitigations. And, in addition to that, we’ve helped them conduct peer analysis and benchmarking and what steps the business can or should make in this area if they are behind their peer group. So the key message here is a tax function should really get started on understanding and also contributing to the business’s ESG agenda, and TTC can absolutely be an initial step in that process.

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