A responsible tax policy has become a key component of a company’s Environmental, Social, and Governance (ESG) strategy. This article addresses three key questions about responsible tax policy for General Counsel.
What are the main benefits and disadvantages of a responsible tax policy?
The main benefits of a responsible tax policy for companies include reputational advantages and enhancement of control and strategic guidance. Through a responsible tax policy, companies can demonstrate to investors, customers, employees and governments how they contribute to society through compliance with tax legislation and payment of taxes. The effectiveness of reputational advantages may be increased if specific guidelines are applied such as the GRI 207: Tax 2019 or the guidelines published by VNO-NCOW. Another benefit of a responsible tax policy is that it can help to enhance control and reduce tax risks through identification of responsibilities (which parties are responsible for tax compliance) and guidelines to refrain from aggressive tax behavior (which often results in increased risks for tax controversy).
A responsible tax policy is currently not mandatory but can be a useful part of an overall ESG strategy. Disadvantages of the publication of a responsible tax policy may be reputational risks (e.g. if the responsible tax policy would not be applied in practice or if the responsible tax policy would not demonstrate a sufficient contribution to society) and financial risks since it may limit options legally available and trigger additional questions from tax authorities and civil society (e.g. press and NGO’s).
What topics are typically included in a responsible tax policy?
A responsible tax policy usually consists of the following topics:
- The companies’ approach to tax. This includes the composition of a set of tax principles approved by the management board or other corporate body on taxation (so-called tax principles, see below), the frequency of the review of the tax principles, reports on adherence to the tax principles, which entities are in scope of the tax principles and how the approach to tax is linked to its business activities and the sustainable development goals.
- Tax control framework. This is a description of how a company manages its tax compliance and tax risks, including adherence with the companies’ approach to tax.
- Tax principles. Examples of tax principles include commitment to compliance with the intent and spirit of tax legislation, completely and timely filing of tax returns, tax planning aligned with business activities and generally available tax incentives, not using aggressive tax arrangements; not using low tax jurisdictions, full disclosure of facts to tax authorities, payment of tax where value is created, compliance with the at arm’s length principle.
- Relationship with tax authorities and other stakeholders. Description of the approach to engagement with tax authorities such as engagement in a horizontal monitoring regime, applications of advance tax rulings and/or advance pricing arrangements, description of lobby activities, intention to achieve early dispute resolution with tax authorities.
- Transparency and reporting. Voluntary disclosure of the companies’ approach to tax and annual publication of information such as a list of all jurisdictions where group entities are tax resident and the names of all group entities residing in that jurisdiction, the numbers of employees, revenues from third parties’ sales and intra-group transactions, the total amount of tax paid including corporate income tax, VAT and wage tax and applied material tax incentives and/or special tax regimes.
Which sources are typically used to share a responsible tax policy with stakeholders?
The sources used to share a responsible tax policy depend on the tax strategy chosen by a company. If a more cautious strategy is pursued, a responsible tax policy is typically only shared with stakeholders upon request. In a more ambitious strategy, a responsible tax policy and annual information is shared via the companies’ website and through social media accounts.
