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Tax transparency – a looming new certainty in life

What are the latest developments in tax reporting and what have they got to do with sustainability? Fiona Donnelly, TPB’s Business Development Lead, explains.

With the latest Hong Kong budget being just days away, and the current fiscal year drawing to a close, it’s that time of year when tax issues are front of mind for many.

And this is more the case this year given the sensational comments made by Dutch historian Rutger Bregman at the World Economic Forum in Davos when he took billionaires to task for not paying taxes.

Tax is often cited as being one of the two certainties in life, but is that really the case?

While profits tax and salaries tax are the biggest operating revenue streams for the Hong Kong Government, when you look at recent statistics, less than 10% of the corporations registered in Hong Kong paid profits tax and less than half of the employed population paid salaries tax.

It seems tax is a certainty but only for a few.

Obviously, a lot of these non-payers are due to very legitimate reasons, including through the use of allowances and deductions, some of which like R&D credits are policy incentives established by the Government itself.

But there is a big grey space, a space created by the fallibility of humans and what often boils down to our personal judgement and interpretation, as well as ethics, conscience and idea of fairness. This being the nub of Bergman’s comments.

Law, tax or otherwise, often boils down to the views and behaviour of  ‘a reasonable person’. I wonder what range of tax calculations we would get when asking different reasonable people to run the numbers? Accepting ‘tax evasion’ is at the extreme and illegal end of the spectrum, so when is ‘tax avoidance’ taken too far? Ultimately, what constitutes a fair amount of tax and who gets to decide that?

 

Tax transparency

Many believe that tax transparency is good step in the right direction, as it  allows readers of fiscal facts to be better equipped to make their own analysis and form their own view.

Accounting standards are a key source that prescribes what and how tax details and figures should be disclosed, but that’s more from a technical financial reporting perspective. In effect standards highlight the degree to which local standards have been complied with and set out in tax balance sheet figures/charges/cash flow and other accounting entries.  So, it concerns transparency, but from an application of the financial reporting code, not about the approach to tax.

It’s conceivable that tax could warrant mention, as indicated by the law (in Hong Kong) through its inclusion in the Management Discussion and Analysis in annual reports.  But it would be more in exceptional situations than routine run of business that readers could expect to learn any more about tax details in this part of the report.

 

ESG reporting and tax

Another source affecting tax disclosures is sustainability reporting standards and guides.

While tax will be one of many topics included under ‘Governance’, compliance and risk processes and controls, reference to tax specifically is mixed and evolving:

HKEx’s ESG Reporting Guide Appendix 27 does not include any requirements to report tax policy or related details.  The Corporate Governance Code – Appendix 14 – may cover tax issues, for example if risk and control concerns are triggered.

The Global Reporting Initiative (GRI), the body that issues the de-facto international standards for sustainability reports, will affect tax disclosures if ‘tax’ is considered to be a material topic so that standards like GRI 201: Economic Performance will apply.

Interestingly, as an indication of a direction of travel GRI has a consultation regarding a new topic-specific GRI Standard, Tax and Payments to Governments. Interested parties are requested to submit comments by 15 March 2019.  Their proposals are comprehensive and will include very typical GRI steps and disclosures specific for tax and payments to Governments such as management approach and stakeholder engagement.  It will be very interesting to see what the final standard looks like.

 

A reasonable and responsible future?

One could argue that the UK has taken a particularly progressive stance on this, possibly (probably?) an outcome of the ongoing Google Tax phenomena (to prevent tax planning that diverts taxable profits to lower tax rate jurisdictions).

UK-listed companies of a certain size and with effect from financial years starting after 15 September 2016 have had to publish a tax strategy, which includes some interesting requirements such as Your business’s attitude to tax planning.  Once again, time will tell if the actual disclosures made reflect the substance or form of such new asks.

In this era of crumbling trust, better tax transparency is sure to be well received in general.  Clear and concise yet comprehensive disclosures around material fiscal matters would be in keeping with other reporting trends.

The even bigger element to get right however is the actual amount of tax paid which will require some people becoming more reasonable and accepting of the fact that a fair fiscal bill is part of an enterprise’s licence to operate and being a responsible business.  Maybe the ‘reasonable person’ needs to become the ‘reasonable and responsible person’?

 

 

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