World: Safeguarding reputation: effective tax communications with stakeholders
11 December 2014
Posted by: Author: Joe Dalton
Author: Joe Dalton (EY Tax Insights)
Multinationals’ tax affairs have been in the spotlight over the last few years, but many companies’ communications teams are struggling to keep up with increasing transparency demands and heightened scrutiny.
Failure to effectively communicate the reasons for adopting a given tax strategy is a significant reputational risk for today’s multinationals. This pressure will only intensify as the OECD, working on behalf of the G20, continues to deliver its Base Erosion and Profit Shifting (BEPS) recommendations for reforming international tax practices. These encourage measures to promote further transparency such as automatic information exchange between tax authorities, and country-by-country reporting of revenues and business activity.
A 2014 EY study of tax risk and controversy showed that 89% of the largest companies surveyed are concerned about media coverage of the taxes some companies are paying, yet more than half of them have not changed the way they communicate tax-related information to internal and external stakeholders.
Multinationals need to ensure their tax communication strategies can face up to these pressures. "A high- level understanding of organizational tax policy must first be in place, then companies should work to implement the communications strategy effectively at the operational level — by making sure that tax and communications are aligned internally, planning ahead and by engaging the media effectively,” explains Susan Sugg-Nuccio, a communications adviser at River Communications.
Mind your reputation
While corporate social responsibility (CSR) has been an important part of many multinationals’ business models for some time, in the last three or four years tax certainly has moved to the forefront of this agenda.
Companies have been surprised to find details of their tax planning arrangements at the center of media attention, and many have struggled to address calls from politicians, NGOs, activists and others for them to pay a "fair share” of tax, given the difficulty of such a loosely defined concept.
Indeed, tax has long been an area in which companies — especially multinationals — can gain competitive advantage. Multinationals often argue that reducing their tax burden fulfills a duty to maximize returns for shareholders. Moreover, "there can be legitimate reasons why companies would for a period not pay significant amounts of tax in certain countries, such as research and development incentives,” says Dr. Stuart Palmer, Head of Ethics at Australian Ethical Investment.
Nonetheless, a negative public perception of companies’ tax affairs may damage their bottom line. It is crucial that multinationals mitigate this risk by avoiding disjointed messages about tax policy. Companies need to foster closer cooperation between their tax and communications leaders to ensure
there is consistency in the message,” says Sugg-Nuccio.
Communications teams also must now pay attention to NGOs and tax justice campaign groups. U.S. PIRG and Citizens for Tax Justice jointly released a report on tax haven use by Fortune 500 companies in June 2014. In 2012, the Greenlining Institute made technology companies in Silicon Valley the focus of a critical report on tax avoidance. Christian Aid, a UK-based organization, is running a global campaign criticizing corporate tax avoidance, and the Tax Justice Network is an umbrella group for similar organizations worldwide. While the companies that are the focus of such scrutiny are often quick to respond, it may be too late to undo the reputational damage inflicted.
Simon Whale, Managing Director at PR agency Luther Pendragon, argues that communications teams need to be proactive and constructive in their approach in order to manage reputational risk. "You should formulate your ideas and your plan, and stress-test them to find out where your weak points are — preparing yourself before questions are raised in the public sphere,” he explains. "And when responding to questions, you’ve got to stay constructive. Ideally, your aim is not just to defend yourself but to move onto the front foot by setting out solutions to problems. If you can say something along the lines of ‘what we’d like to see is the following …’ this puts you in an entirely different light.”
The disclosure question
While being proactive around tax communication can help manage reputational risk, it can be difficult to
strike the right balance in deciding the correct level of information to disclose and the most appropriate way to do so. A well-defined and documented tax policy that is well implemented and communicated within the organization is an important element of managing these risks. Such a document also should capture an organization’s risk appetite, as well as capturing an agreed level of, and approach to, public disclosure.
Australian mining multinational Rio Tinto, for example, publishes voluntary annual reports detailing its revenue and tax payments for the countries in which it operates. Unilever, the Anglo-Dutch consumer products multinational, publishes its "Approach to Tax” online. This outlines its global tax principles and approach to taxation in a number of areas such as transfer pricing, transparency and compliance, as well as giving an indication as to the corporate tax paid both by region and major countries of operation. While more detailed reporting demands may be on the horizon, companies like these are positioning themselves as tax transparency leaders and seeking to attract the associated reputational benefits.
In the UK, NGOs, business representatives and industry practitioners have begun the development of a Fair Tax Mark — an accreditation that companies can apply for in order to promote an image of openness, honesty and trustworthiness to consumers and investors. The Fair Tax Mark will be awarded based on two main categories of criteria: transparency and tax rate, disclosure and avoidance.
Yet even voluntary disclosure can attract negative attention, highlighting the need for a carefully planned approach and knowledge of the pitfalls associated with such public transparency. There have been examples where voluntary disclosures by multinationals were met with challenges from tax activists, a reaction that highlights the exposures faced when publicly disclosing information.
It is unsurprising then that multinationals are increasingly wary about their approach to disclosure. In the recent EY tax risk and controversy survey, 65% of the largest companies — those with revenues of US$5 billion or more — said engaging with the press on tax is a no-win proposition, while just 13% disagreed with that view. The complexity of tax regulations and individual business requirements means that while mandatory disclosure of information to tax authorities is clearly necessary, companies will need to form their individual views on any additional voluntary disclosures and find the best strategy for them.
This article first appeared on taxinsights.ey.com.