Climate risk - key resources for boards
Boards have a critical role in responding to climate-related issues to ensure the long-term sustainability of their organisations.
Building and retaining trust is front of mind for many boards, with trust underpinning brand and reputation. Tax is an important issue that can impact on reputation.
In the Tax Justice Network’s 2020 Financial Secrecy Index New Zealand is ranked 57th. Corporate tax disclosure is an area where New Zealand scored poorly.
In a changing tax and governance landscape including increasing demands for transparency and the rise of ESG disclosure, boards should expect and plan for greater tax scrutiny from Inland Revenue and other stakeholders.
Directors are not expected to be tax experts, but it is critical that they are sufficiently informed about their organisation and its financial position, including any material tax matters.
Tax isn’t mentioned in New Zealand’s core corporate governance codes, but tax transparency is referenced in the NZX Guidance Note on ESG Guidance.
Tax transparency can be positive for organisations and more than just a tax compliance exercise. There are opportunities for organisations to lead in this space as part of their approach to corporate responsibility and this can help foster trust. This includes outlining the contribution that an organisation has made to society and the economy through the tax it pays, for example highlighting this upfront in the annual report.
Inland Revenue’s Multinational Enterprise Compliance Focus 2019 highlights the OECD Guidelines for Multinational Enterprises which set out expectations for boards around tax. The following checklist is also included in Inland Revenue’s publication and can be used by directors as a basis to refine their organisation’s approach to tax governance.
Many countries and jurisdictions are reforming corporate tax reporting obligations. For example, recent reforms in the United Kingdom include a requirement for large organisations to publish (and update annually) a UK tax strategy setting out:
Australia has also developed a voluntary tax transparency code with principles and minimum standards to assist medium and large organisations with tax disclosure. It has also published a tax risk management and governance review guide with a directors’ summary covering corporate governance and risk management, board-level controls and director responsibilities.
In January, the World Economic Forum began consulting on the report Toward Common Metrics and Consistent Reporting of Sustainable Value Creation which would be used by International Business Council members to help align reporting and reduce fragmentation. This states: “An increasing interest in societal impact is pushing firms to go beyond simply ‘playing by the rules’ and demonstrate how their behaviour is consistent with the firm’s broader purpose. For example, efforts to improve transparency around tax strategy demonstrate a shift from reporting compliance towards articulating why an approach is appropriate.”
A ‘country-by-country’ reporting metric is included in the report. This metric, the report says, “can provide insight into the organisation’s tax practices in different jurisdictions (i.e. the scale of activity) and its contribution to prosperity. It can also signal to stakeholders any potential reputational and financial risks in the organisation’s tax practices. Public reporting on tax increases transparency and promotes trust in the tax practices of organisations and in the tax systems of jurisdictions. It enables stakeholders to make more informed judgements about an organisation’s tax positions.”
This global trend of initiatives aimed at improving corporate tax transparency is likely to continue and there are opportunities for New Zealand boards to take the lead to build and retain trust.