Where are global ESG standards heading in the short term as well as increasing disclosure trends?

What are the current developments in tax transparency reporting?

On 15 August 2023, the law implementing the EU directive regarding the Disclosure of Income Tax Information by Certain Undertakings and Branches (2021/2101) (the Public CbCR Directive) was signed and published on 22 August 2023 in Memorial A532 in Luxembourg. 

Based on the new published law, the Public CbCR will take effect in Luxembourg for accounting periods beginning on, or after, 22 June 2024. In scope of the Public CbCR are multinational enterprises (MNEs) based in the EU, and non-EU- based MNEs doing business in the EU through a branch or subsidiary with a consolidated annual revenue of at least EUR 750 million for two consecutive years. MNEs falling in scope will be required to perform their public CbCR.

The Public CbCR will be an additional requirement for MNEs besides the existing CbCR reporting, in place since 23 December 2016.

• Who is concerned?  

EU-based MNEs and non-EU-based MNEs doing business in the EU through a branch or subsidiary with total consolidated revenue of more than EUR 750 million in each of the last two consecutive financial years.

• What is disclosed?

Among other things, information on the amount of income, profit before tax, corporate tax payable and withholding tax on a per-country basis.

• How should you disclose? 

The report must be publicly disclosed in an official EU official language and deposited each year:  

• On the website of the Ultimate Parent Entity (UPE) or the standalone undertaking; or

• In the Register of Commerce and Companies (register de commerce et des sociétés) if available, free of charge for a five-year period.  

• Exemptions

In line with the possibility offered by the Public CbCR Directive, Luxembourg has opted to allow companies to temporarily (up to five years) omit specific data from the declaration in cases where this would be particularly detrimental to the company's commercial position.

EU banks already disclose information within the scope of the European Capital Requirements Directive IV (CRD IV).

• What are the requirements of the public CbCR bill? 

The Public CbCR is a filing requirement separate from the existing CbCR. We hereby summarise the main different requirements.

• Public CbCR and ESG

As part of a broader consideration on tax strategy, tax transparency, and tax governance, Public CbCR is one of the first global legislative initiatives requiring MNEs to publicly disclose elements of their tax affairs to various stakeholders. MNEs should take the opportunity of the Public CbCR to reflect on their tax strategy, review their tax governance and establish a public tax transparency policy as an element of their wider ESG strategy.

The non-financial reporting directive has required companies in EU Member States to publish non-financial statements since 2015. The EU Corporate Sustainability reporting directive, which extends this obligation, was adopted in November 2021 and had to be implemented by national legislators within 18 months. The CSRD applies to large capital market-oriented companies in 2024, followed by a staggered implementation for small and medium sized companies until 2026. An audit requirement with limited assurance is included to ensure the reliability of  published information.

The CSRD is based on the principle of double materiality, and an expanded catalogue of minimum content and scope. In the public consultation of the CSRD, the topic of “taxes” ranked 5th out of 15 topic areas among respondents when asked what non-financial information companies should be required to disclose. For many companies, tax will be considered a material topic as part of the double materiality assessment, thereby triggering a reporting requirement under CSRD. Although a specific European Sustainability Reporting Standard has not been developed for tax, European Financial Reporting Advisory Group notes that the Global Reporting Initiative (GRI) 207 can be used for the purposes of tax disclosures in European Sustainability Reporting Standards statements.

The GRI is an international organisation responsible for setting sustainability standards globally. The standards are widely accepted as the global best practice for reporting on a range of ESG topics. In December 2019, the GRI issued the 207tax standard which was introduced in order to meet stakeholder demands for greater transparency around tax, especially country-by-country datasets. The standard covers four areas: Approach to tax, governance over tax, stakeholder engagement and Country-by-Country Reporting. The main area of focus with the 207 standard is the public CbCR requirement which has data points very similar to the OECD BEPS template.  

How are companies responding to these developments?

The PwC study "Tax transparency and sustainability reporting in 2023¹", which analyses the tax and sustainability reporting of leading listed companies of the Banking and Capital Market (BCM) from eight different countries², shows that the variety of standards and methods being used, leads to greater complexity. Close cooperation in the areas of tax and sustainability as well as clear and consistent communication between companies, stakeholders and regulators are essential. The importance of clear and uniform tax strategies for companies becomes apparent when comparing countries. While in the UK (100%) and Spain (97%) almost all companies assessed publish or mention their tax strategy. In Austria, Switzerland and Ireland this ratio falls to about half of the companies assessed.  

Four key frameworks were considered for the study – the GRI 207: Tax 2019 standard (GRI 207: Tax), the S&P Global Corporate Sustainability Assessments Tax Strategy Criterion (S&P Global CSA), the OECD Guidelines for Multinational Enterprises and the World Economic Forum’s Measuring Stakeholder Capitalism report.

^{Notes:
[1] https://www.pwc.ch/en/insights/tax/tax-transparency-sustainability-reporting-2023.html
[2] Austria, Brazil, Germany, Ireland, South Africa, Spain, Switzerland and United Kingdom.[3] https://www.pwc.ch/en/insights/tax/public-tax-transparency-benchmark-study.html}

A public tax transparency benchmark study³ has been carried out by PwC Switzerland on Swiss-based companies focusing on three different areas of disclosure: Tax Strategy and Risk Control Framework (TSRCF), Country-by-Country Reporting (CbCR) and/or Total Tax Contribution (TTC).

Each area is assigned to the classes ‘Minimal’, ‘Medium’ and ‘Advanced’ according to pre-defined criteria. Based on that, the companies’ overall public tax transparency level has been evaluated.

Overall Public Tax Transparency of the Swiss benchmark study companies

In 2022 the percentage of companies rated advanced overall doubled from 4% to a much more substantial 8%. The proportion meeting the standard of medium disclosure remains unchanged at 38%. A 4-percentage point decline in the number rated minimal overall (down to 54%) tallies with the 4-percentage point increase in advanced disclosers.

The financial services sector still puts more emphasis on disclosing its qualitative data like tax strategy including how the company complies with tax laws and regulations, and how its tax strategy aligns with its ESG strategy, tax governance, control, and risk management and less on disclosing its quantitative data.

While the financial services sector shows a strong trend in publishing in line with S&P Global CSA Framework, this outcome aligns with the expectations and corresponds to the requirements set forth in the European Union's Capital Requirements Directive IV, national and international accounting standards.

Notes:
^{[1] https://www.pwc.ch/en/insights/tax/tax-transparency-sustainability-reporting-2023.html
[2] Austria, Brazil, Germany, Ireland, South Africa, Spain, Switzerland and United Kingdom.[3] https://www.pwc.ch/en/insights/tax/public-tax-transparency-benchmark-study.html}