Methodology & Results

The Tax Transparency Benchmark aims to enhance good tax governance. Alongside encouraging organisations to increasingly improve transparency on their tax approach and tax function, it also aims to offer inspiration on how to communicate comprehensively on tax in publicly available documentation.

Each organisation has had the opportunity to provide feedback on the findings of VBDO. We are content to report that 68% of the companies provided input on their own results, but also on the 2018 updated methodology of the benchmark. Organisations that provided feedback are mostly organisations that also ranked higher on the benchmark. This could imply that those companies are more active in improving transparency on their tax approach, which we find very encouraging.

Even though the methodology of the benchmark changed compared to previous years, we still see a general trend of companies making advancements in the degree of transparency they provide on tax. The average transparency rating of the companiesin scope increased from 36% in 2017 to 39% in 2018. This is a positive trend but also shows that there is still a lot of ground to cover as the average score is still below 50% of the total points.

The number of companies scoring a minimal amount of points (0 – 10) slightly increased to 41%, however, this is also due to the changes in the methodology of the benchmark compared to previous years. Out of these lower-scoring companies in 2018, 16% is AEX listed, 32% is AMX listed and 52% is listed on the AScX index. Of the 59% of the companies that scored 11 points or more, 44% is AEX listed, 31% is AMX listed, 20% is listed on the AScX index and 4% is non-listed.

A. Define and communicate a clear strategy

An appropriate tax strategy is assessable and clearly communicated (transparent). It contains the company’s vision and objectives in respect to taxation. It is aligned with the organisational values, the business strategy and the sustainability strategy. It takes stakeholders’ interests into consideration, explains the company’s view on its relationship with the tax authorities and describes (its vision and) the role of technology.

For principle A, we see that most companies clearly communicate their views on tax, their relationship with the tax authorities and the fact that they see tax as part of their corporate social responsibility.

Although new in this benchmark, we are pleased to see that half of the companies that communicate their views on tax also communicate that the tax strategy is aligned with the organisational values, the business strategy and the sustainability strategy. We recommend companies communicating on this alignment to show that tax is not seen as an isolated business component, but as an integral part of the organisation and as part of the broader business.

On another new item in this benchmark, we find it promising to notice that a quarter of the companies communicate that the tax strategy is signed off by the (executive) board. We recommend more companies to communicate on the sign off of the tax strategy by the (executive) board, to serve as evidence to stakeholders that the approach to tax is discussed and approved at board level. This is an important communication as it also indicates the ‘tone at the top’.

Although technology is a new topic in this year’s benchmark, it is encouraging to see that already 7% of the companies describe the role of technology in its tax strategy/policy. 

B. Tax must be aligned with the business and is not a profit centre by itself

Tax should not be seen as an isolated business component, but as an integral part of the organisation and as part of the broader business. As such, it should not be the exclusive domain of the tax department. In principle, a company should declare profits and pay taxes where it conducts business activities and should be transparent on how this is done.

We find it encouraging to notice that 74% of the companies communicate to declare profits and pay taxes where the economic activity occurs. This implies that most of the companies do not see tax as an isolated business component and that tax follows business. In addition, more than half of the companies explicitly communicate not using ‘tax havens’ or ‘non-cooperative jurisdictions’ for their tax planning. However, there is room for improvement for providing country-by-country information to provide an insight to stakeholders on the company’s scale of activity and its approach to taxes and payments to governments across the tax jurisdictions in which they operate. 

Finally, although almost all companies, being 92%, disclose a reconciliation between the effective tax rate and the weighted average statutory tax rate, only a quarter of the companies provided sufficiently detailed information explaining the various elements causing the difference between the two rates. We recommend adding a narrative description to this reconciliation to provide (non-tax specialist) stakeholders with more background on this difference.

C. Respect the spirit of the law. Tax compliant behaviour is the norm

A company should aim to comply with the letter as well as the spirit of the law, which entails that the intention of the legislator is also guiding to ensure tax-compliant behaviour. By definition, the spirit of the law cannot be described unambiguously. It requires discussion with internal stakeholders, including tax, legal, compliance and CSR officers, as well as external stakeholders such as government officials, tax authorities, civil society organisations and investors. Being compliant with tax laws and regulations, statutory financial obligations and international accounting standards is the core responsibility of the tax function.

As part of corporate social responsibility, it is becoming increasingly important for companies to report that they also take the intention of applicable laws into account. We are pleased to see that almost half of the companies communicate taking into account the letter as well as the spirit of the law.

Taking into account the intention of the law, requires a wider look at taxation from all employees involved. A training programme is essential to ensure the company’s tax strategy is effectively embedded in the organisation and employees are supported to deal with tax in an ever-changing tax landscape. By reporting on this in publicly available documentation, stakeholders receive more comfort that company employees are trained in an appropriate manner and know how to deal with these risks if they ever occur. Currently, 20% of the companies report on this, however, we recommend the other 80% of the companies to report on this as well.

To ensure that the core responsibility of the tax function of being compliant with tax laws and regulations is being met by a company, there needs to be a mechanism in place for employees and stakeholders to report concerns about unethical or unlawful behaviour and/or activities that compromise the company’s integrity. A whistleblower policy, encourages an employee or stakeholder to report concerns about unethical or unlawful behaviour and/or activities that compromise the company’s integrity, as it informs employees and stakeholders how to escalate and respond to unethical or unlawful behaviour. Although we have not reviewed whether the whistleblower policies contain a specific reference to tax at this stage, we find it encouraging to see that 92% of the companies have a whistleblower policy in place. In future versions of the benchmark, we will however look for this specific reference to tax.

D. Know and manage tax risks

Tax risk management is a proactive process that is demonstrably embedded within the risk management and internal control function of the company.

Organisations that report on tax risks, including their tax risk appetite and risk response, provide stakeholders with a better understanding of the potential and actual risks involved and a clear understanding of how these risks are managed within the organisation. In this respect, it is promising to see that 70% of the companies report on tax risks. However, there is still some ground to cover on the description of the response to these tax risks, as only 42% of the companies provide this information.

In addition to the above, from a tax risk management perspective, it is crucial that tax relevant data is correct and complete. The organisation needs to have technology in place to manage all this data, from gathering, storage, modelling, blending, visualising, reporting and more.

This is especially important as the amount of tax relevant data that has to be managed is increasing fast, partly accelerated through various tax transparency reporting requirements (e.g. CBCR, Mandatory Disclosure Regime, and more). Therefore, we recommend companies explaining transparently on how they deal with managing tax relevant data.

E. Monitor and test tax controls

It is important that a company has a standardised approach for monitoring and testing. This allows for monitoring the proper execution of its tax strategy on the one hand, and substantiating that the organisation is in control on tax on the other.

Due to the increasing interest for and debate on tax, board interest for tax risk management is intensified. Reporting on tax risks, the management thereof and possible issues identified by means of monitoring and testing activities should be part of properly embedding tax risk management in the organisation.

Although there is room for improvement, we are pleased to see that 39% of the companies provide information on how tax risks and controls are tested and monitored and that tax risk management is included in the reporting to the audit committee.

With respect to the tax strategy, we note that once the tax strategy is finalised, implementation and execution of the tax strategy can be a process of months or even years depending on the size of the organisation and amount of transformation the tax strategy brings with it. Having in place a process to monitor the implementation and execution of the tax strategy helps the organisation with the actual and timely implementation of the tax strategy.

Such process also helps to track progress, identify required adjustments to the implementation process or even the strategy itself. By communicating on the monitoring processes, the stakeholders are informed about the importance of implementation and complying with the tax strategy for the organisation and how it ensures that the organisational behaviour is aligned with its strategic approach to tax. At this stage, only 14% of the companies communicate regarding the monitoring processes in place, we strongly recommend the other companies to be transparent about this as well.

F. Provide tax assurance

A company should be prepared to provide additional tax information to regulators, tax authorities and other stakeholders in order to provide a certain level of assurance regarding tax data and processes. This tax assurance should be based on the implementation and outcome of the five aforementioned principles. One way to create more certainty is through a tax in-control statement. The company provides their own tax in-control statement in which it declares to what extent de processes and operations worked and were in control. In addition, assurance could also be provided by a third party. Third party tax assurance gives stakeholders certainty about the performance of the tax processes assessed by an external party and is therefore dissimilar to the regular (tax) in-control statement.

From a tax perspective, communicating about the (external) review of your tax function provides additional comfort to stakeholders. Whether this means increased board involvement (tax in-control statement), implementing checks and balances with the tax authorities (co-operative compliance program) or supervision by a third party (third party tax assurance), all these forms will provide additional assurance to stakeholders about the tax function.

Regarding reporting on tax in control statements, third party assurance and participation in co-operative programs, there still is a lot of room for growth. This is illustrated by the section’s average of only 15% on all questions. It is unfortunate to see that this important principle of good tax governance remains underdeveloped.

Methodology

The Tax Transparency Benchmark is based on the principles for good tax governance. Each principle is further specified into various elements and converted into measurable criteria. These measurable criteria were tested against publicly available information.

As mentioned in last year’s Tax Transparency Benchmark, the developments surrounding transparent reporting are moving fast. Due to changes in reporting and given the methodology of the Tax Transparency Benchmark should reflect the latest view on transparency from the perspective of (tax) laws, regulations and societal expectations, we mentioned that VBDO would conduct a thorough overhaul of the Tax Transparency Benchmark methodology for the 2018 benchmark. In this regard, we also took into account the feedback received from many of the participating companies.

This resulted in some of the criteria being adjusted and new criteria being added to the 2018 benchmark. For example, in the areas of aligning tax with business and sustainability strategies and organisational values, and in the area of (tax) technology. As a result of the changes to the Tax Transparency Benchmark methodology for the 2018 benchmark, a comparison to previous years is not possible. 

Similar to last year’s benchmark, to make the results as measurable and comparable as possible, a strict interpretation of the criteria was used. Furthermore, in comparison to last year’s benchmark, our focus increased this year on the implementation and execution of the various criteria. This implies that we were not only looking for a statement regarding the various criteria, but also for a description of how the various criteria were implemented.

As the developments surrounding transparent reporting on tax are moving fast, we expect companies to adapt challenges and improve the quality of reporting on a continuous basis. In similar fashion, answers that were sufficient in earlier versions of the benchmark may no longer suffice for current tax transparency standards. To encourage companies to contribute to the ongoing debate about good tax governance and tax transparency, companies were evaluated on their current practices and were able to provide feedback on their assessed score.

The adjusted and newly criteria added to the Tax Transparency Benchmark methodology for the 2018 benchmark are explained in further detail below.

Q2. Is the tax strategy aligned with organisational values?

Organisational values define who you are, what the organisation stands for and how you behave. If the tax strategy is aligned with the organisational values, this implies that the company’s culture is embedded in the tax strategy. It also indicates that the company does not see tax as an isolated business component, but as an integral part of the organisation and the business.

In this respect, we were looking for explicit statements that the tax strategy is aligned with the organisational values (i.e., that the organisational values have been taken into account). If it was explicitly stated that the tax strategy is aligned with only one organisational value, for now this was also awarded with a point. However, we highly recommend aligning the tax strategy with all organisational values.

Q3. Does the organisation describe how the tax strategy has been aligned with the business strategy?

Alignment of the tax strategy with the business strategy shows that tax follows business and that the company does not see tax as an isolated business component (but rather as part of the broader business).

As mentioned above, the increased focus of this year’s benchmark was on the implementation and execution of the various criteria. Therefore, we were not only looking for a statement that the tax strategy is aligned with the business strategy, but also for a description of how these strategies are aligned.

Q7. Does the company describe how its sustainability strategy is taken into account in the company’s tax approach?

Sustainability has become a more and more relevant topic over the past years. Society and stakeholders expect a sustainable approach from companies on how they do business in the broadest sense. Tax is not an exception in this regard. This means that sustainability also influences the organisational approach to tax. The Good Tax Governance in Transition report by VBDO & Oikos (2014) also explains that tax should be an integrated part of a company’s corporate social responsibility policy.

In this respect, we were looking for an explicit statement that the company’s tax approach takes into account the sustainability strategy.

Q8. Is the tax strategy signed off by the (executive) board?

Given the increased attention to tax by society, the topic of tax should accordingly receive increased interest on the agenda of the board. A tax strategy that is signed off by a (executive) board is important evidence that the approach to tax is discussed and approved at board level. At the same time, it reflects the tone at the top.

In this respect, we were looking for an explicit statement that the tax strategy and/or tax policy was signed off or approved by the (executive) board. For now, sign off or approval by the audit committee was also awarded with a point. However, we recommend approval and sign off by the board.

Q9. Does the company describe (its vision and) the role of technology in its tax strategy/policy?

The role of technology is a new topic in this year’s benchmark. In a world that is digitising fast, including the company’s vision and the role of technology in its tax strategy has become more relevant. Reason for this is that organisations need to manage tax relevant data. For this data management, technology is needed to store, gather, analyse, blend, visualise and report tax data. Data management is important for insights and strategic decision-making, control and tax reporting and compliance. Given the importance of tax data management and technology in a digitising world, it is important to have a vision and transparently communicate this to stakeholders.

In this respect, we were looking for a description of (the company’s vision and) the role of technology in the company’s tax strategy and/or policy.

Q14. Does the company provide information like current corporate income tax payments, accrued corporate income tax, profit before income tax, accumulated earnings and FTE’s on a country­-by-country basis? (In case the company is domiciled in only one jurisdiction, this question refers to this jurisdiction)

Country-by-Country Reporting (“CbCR”) is an important compliance requirement as a result of the OECD’s BEPS action plan (action 13) for financial years starting as from 2016. Companies that are part of a Group and with a consolidated annual turnover of EUR 750 million have to prepare and file a report that (amongst others) shows how much tax they have paid and what the base is for these taxes on a country-by-country basis. Some companies have voluntarily published these reports or similar information, e.g. as part of their corporate sustainability reporting.

Being transparent about the aforementioned information provides an insight in whether taxes are paid where value is created. If the company reported on at least two elements of the five mentioned above, this was awarded with one point. If the company reports on all five elements, this was awarded with two points. For completeness’ sake, we note that the number of items relating to CbCR have been reduced in comparison to last year’s benchmark.

 

Q15. Does the company provide on a per country basis information on its taxes paid (direct taxes and other taxes like VAT, wage taxes, etc.), government payments, and government subsidies? (In case the company is domiciled in only one jurisdiction, this question refers to this jurisdiction)

Taxes and payments to governments are important sources of government revenue, of which corporate income tax payments are only one type. Wage taxes, for instance, are a significant part of a company’s contribution to the societies in which it operates. The taxes and payments to governments combined, finance vital social and economic infrastructure and public services. The relative size and allocation of taxes and payments to governments are key to the fiscal policy of most governments and to the macroeconomic stability of a country.

Country-by-country reporting can provide an insight into a company’s scale of activity and its approach to taxes and payments to governments across the tax jurisdictions in which it operates. Especially, when the information of items 14 and 15 are read in conjunction, they can inform assessments about the level of taxes being paid in a jurisdiction.

If the company reported on at least one of the elements mentioned above on a country-by-country basis, the company was awarded with one point. If the company reported on all elements mentioned above, the company was awarded with two points. For completeness’ sake, we note that the number of items relating to CbCR have been reduced in comparison to last year’s benchmark.

Q18. Does the company have a whistleblower policy in place with regard to tax?

A whistleblower policy provides a mechanism for employees and stakeholders to report concerns about unethical or unlawful behaviour and/or activities that compromise the company’s integrity, which is of high importance to ensure a culture of integrity and compliance. A whistleblower policy, encourages an employee or stakeholder to report concerns about unethical or unlawful behaviour and/or activities that compromise the company’s integrity, as it informs employees and stakeholders how to escalate and respond to unethical or unlawful behaviour. At the same time, the whistleblower policy protects the whistleblower from retaliation.

A whistleblower policy can also contain a special paragraph relating to taxes, to ensure that employees and stakeholders can report concerns about unethical or unlawful tax-related behaviour and/or activities that compromise the company’s integrity in relation to taxes.

For this year’s benchmark, having a whistleblower policy in place is sufficient to receive a point (i.e., no specific reference to tax is required).

Q23. Does the company provide its vision on concluding tax agreements (ruling) with tax authorities?

By communicating its vision on concluding tax agreements (ruling) with tax authorities, the organisation actively informs stakeholders on this topic. This is relevant as in today’s society, rulings often have a negative connotation due to its lack of transparency.

A point is received when the company’s vision is communicated.

Q24. Does the company describe the role of technology for tax relevant data management?

The role of technology is a new topic in this year’s benchmark. For reasons described above at question #9, organisations need to manage more and more data, including tax data. This data is transparently communicated through tax reporting (e.g. Corporate Income Tax return), and for example the annual accounts, website, etc. From a tax risk management perspective, it is crucial that this data is correct and complete on a timely basis. The organisation needs to have technology in place to manage all this data, from gathering, storage, modelling, blending, visualising, reporting and more. This is especially important as the amount of tax relevant data that has to be managed is increasing fast, partly accelerated through various tax transparency reporting requirements (e.g. CBCR, Mandatory Disclosure Regime, and more).

By explaining transparently on how the company deals with managing tax relevant data, through making use of technology, it provides stakeholders with further insight in how (advanced) this is done.

If the company explained how they make use of technology to manage their tax relevant data, it received a point. 

Q25. Does the company describe how the implementation and execution of the tax strategy is monitored?

Designing a tax strategy is in first instance an exercise performed through discussions with various stakeholders, and writing on ‘paper’. Once finalised, implementation and execution of the tax strategy can be a process of months or even years depending on the size of the organisation and amount of transformation the tax strategy brings with it. Having in place a process to monitor the implementation and execution of the tax strategy helps the organisation with the actual and timely implementation of the tax strategy. Such process also helps to track progress, identify required adjustments to the implementation process or even the strategy itself. Furthermore, such process helps to monitor execution and transparently communicate to stakeholders on performance, dilemmas and more. By having monitoring processes in place and communicating about them, stakeholders are informed about the importance of implementation and complying to the tax strategy for the organisation and how it ensures that the organisational behaviour is aligned with its strategic approach to tax.

By communicating on how the organisation monitors implementation and execution of the tax strategy two points can be earned.

Q26. Does the company describe how tax risks and controls are tested and monitored?

As mentioned afore, in this year’s benchmark there was an increased focus on the implementation and execution of the various criteria. This implies that we were not only looking for a statement that tax risks and controls are tested and monitored, but also for an elaboration on the procedures relating to testing and monitoring activities with respect to tax risks and controls.

By communicating on these procedures, one point can be earned.

Contact us

Eelco van der Enden

Partner, PwC Netherlands

Tel: +31 (0)88 792 51 38

Dave Reubzaet

Director, PwC Netherlands

Tel: +31 (0)88 792 14 60

Evita van der Aar-Melger

Manager, PwC Netherlands

Tel: +31 (0)88 792 70 59

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