“India has moved on from Tax Terrorism to Tax Transparency” Hon. PM. Modi.
Nothing has been more opaque in this world than the holding structures of global multinational businesses. While some of these structures could be necessary, many of the corporate structures could be a result of complex tax planning and avoidance exercise. To back that up corporations document their legal positions in a transfer pricing report (TP report) which can be substantially different from the facts. Such structures take shelter under the secrecy norms of tax havens, ultimately resulting in to stacking of wealth away from the original source of the income and wealth. Non-visibility of such global transactions often results in a lack of trust from the stakeholders including the shareholders, customers, suppliers, public in general and government authorities mainly the tax authorities of various global economies.
While it is essential to build provisions to act as a deterrent to tax avoidance, it is equally important to build and restore confidence with the stakeholders. Any act of trust and confidence build-up could happen only with higher transparency levels. This is the broad level genesis of the Tax Transparency Report (TTR).
What is Tax Transparency Report (TTR)?
The TTR is a set of guiding principles and standards to highlight the disclosure of tax information by a business. The objective of TTR is:
- To encourage large and medium-sized businesses to publicly disclose their tax affairs to highlight fair payment of tax share and to encourage all businesses not to engage in tax avoidance.
- For large businesses, to take a lead in setting an example and being transparent with the stakeholders.
Thrust areas of a TTR encompass:
- company’s overall contribution towards economic development,
- its tax planning and sustainability under the current tax statutes,
- the tax governance and various strategies followed by the company in the form of substance and aligning the same with its commercial and business purpose,
- company’s contribution to government treasury in the form of various statutory taxes and levies,
- consolidated tax contribution summary for all group entities
- the overall group tax strategy statement in compliance with tax laws of the jurisdictions where it operates.
Which countries have adopted TTR?
With the advent of the Base Erosion and Profit Shifting (BEPS) project by the OECD, the principle around transparency has gained significant importance. The adoption of the Country-by-Country Report (CbCR), a local file in the form of TP Report and Master File, which was an outcome of the BEPS project has led to greater success in achieving tax transparency.
Being a tax or transfer pricing authority or a stakeholder, what CbCR lacks is the interpretation of the data that is submitted by the taxpayer to the tax authorities, which is then exchanged by automatic exchange of information. Such raw data and numbers could often lead to differential interpretation practices by varied tax authorities. Therefore, the rationale behind the numbers could be best explained by the management through the TTR. It brings uniformity to the interpretation across the globe and provides a clear policy statement from the management that helps in comprehending the numbers.
In addition to the CbCR reports, Australia’s Board of Taxation developed a tax transparency code defining standard guidelines for businesses on public disclosure of tax information. Likewise, in Canada, extractive companies are required to publicly disclose payments to governments, annually. The United Kingdom’s Finance Act 2016 requires large companies to publish an annual tax strategy in respect of activities relevant to UK taxation. Recently, the EU also laid down rules that require multinationals present in more than one country to publish the amount of taxes paid in each country.
How about its Indian implementation?
At present, there is no law that governs or mandates the maintenance and publishing of TTR in India. Companies like Cipla and Vedanta are already providing TTR in addition to the Annual Report published on a yearly basis. TTR is a voluntary disclosure for stakeholders about the contribution of the multinational group to the global and Indian economy. Such a document could add an intangible value to the company’s outlook and perception while laying down a clear policy and value statement from a management’s perspective. Further, in various tax representations, such a value statement can go a long way in bringing clarity on the way how management looks at taxes from a broader strategic level.
For large and mid-sized companies, TTR could be a golden opportunity to talk to their stakeholders about something that was never discussed before, i.e. taxes. It builds a higher level of assurance and trust with these stakeholders. Given the importance of tax transparency in business dealings and changing global tax landscape, TTR is the need of the hour.