New guidance for tax as a governance matter in 2022

27 May 2022

The European Business Tax Forum (EBTF) last week released its first working draft of a set of “best practices for good tax governance”. The paper isn’t – and doesn’t purport to be – a comprehensive rulebook for businesses looking to getting their tax governance right. But it is an important collaboration and a signal that it is increasingly inappropriate for organisations to consign tax (and tax functions) to a silo. The paper should also provide a useful resource for businesses looking to reflect on the “G” pillar of their ESG credentials.

Governance, tax, and ESG

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.

Tax governance – who are you trying to impress?

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.

Governance relativism?

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 spend 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.

Statistics need a story

Transparency itself is evolving, and it is that 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 what 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.

Leading by example

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.

What next?

The EBTF paper isn’t a final draft but rather “a living document that evolves in future based on contributions from a broad range of interested parties”. Readers can send their suggestions or recommendations to the contacts listed in the paper.

There is now wide recognition that a range of internal and external stakeholders expect to be provided with better information on how MNEs manage risks, including taxation.