which disclosures could add value to your business?
TRANSCRIPT
4. Explaining tax
Which disclosures could add value to
your business?
Building Public Trust Through Tax Reporting 2019
A series of five briefing papers exploring how companies are responding to the tax
transparency debate
PwC
Which disclosures could add value?
Tax is a complex topic – Can voluntary disclosures help?
Tax is a complex topic. Mandatory disclosures prepared under international financial
reporting standards do not always provide a clear picture of a company's tax affairs for a
non expert reader. Some companies are making voluntary disclosures to provide a better
understanding of their tax affairs, recognising always that there must be a business case
for voluntary disclosures.
The potential benefits and risks should be considered and debated before additional
disclosures are published.
Potential benefits for a company Potential risks for a company
Seen to be responding to the increasing
focus on a company’s tax affairs
Conflicting interests of different
stakeholder groups
Acknowledging the responsibility of the
company to pay tax as a corporate citizen
and alignment to wider ESG frameworks
Difficulties of communicating a complex,
technical area
Demonstrates board involvement in tax
strategy and governance
Scope for misunderstanding or misuse of
data
Tailored communication with key
stakeholder groups
Potentially conflicting pressures of tax
planning and tax transparency
Responding to increased focus from
investors on tax issues
Commercial and confidentiality issues
Responding to transparency initiatives and
contributing to debate on tax reporting
Resource, time and cost
Longer term reputational benefits Need to have governance in place to
ensure public statements can be reported
Better connected business decision making Once disclosure made, cannot be
withdrawn
Improved risk rating with tax authorities Need to demonstrate underlying controls
and governance over tax
Areas to consider:
Including narrative which answers some of the common questions (e.g. why do you pay
little corporation tax?, what is deferred tax?) has the potential to increase stakeholder
understanding and trust. By being more transparent around their tax affairs, companies
can respond to the evermore challenging environment and scrutiny they face.
Uncertain tax positions
IAS12 provides little guidance on uncertain tax positions (UTPs). In 2016, the Financial
Reporting Council published a thematic review, suggesting greater disclosure of uncertain
tax positions. In 2017, IFRIC 23 was published and it came into force from 1 January 2019.
The most important elements of IFRIC 23 are that it introduces a structure to assess UTPs,
guidance on how to measure a UTP and examples of when a company can reassess that
measurement.
Each uncertain tax treatment is considered separately or together as a group, depending on
which approach better predicts the resolution of the uncertainty. Looking at December year
ends, we found 41 companies making reference to UTPs, with roughly half that number (22
companies) quantifying the provision.
State Aid
On 25 April 2019, the European Council (EC) announced the conclusion of its investigation
into the group financing exemption of the UK Controlled Foreign Company regime. The EC
has determined that this regime represents unlawful State Aid by the UK Government. To
date, many companies have not fully assessed the implications of the judgement and the
method of calculation to be used. Some are responding to this uncertainty by providing a
range of estimates for any potential additional tax payable. A majority of companies state
that no provision is considered necessary.
Our review of half year updates in the FTSE350 showed references to the issue by 53
companies. Of these, 40 quantified the exposure, complying with the contingent liability
disclosure requirement, and five companies stated that they had provided for the liability.
Business model
In the days of straightforward supply chains, it was easier to understand the flows of tax in a
business. Today, companies are increasingly global and complex and the basis on which
companies are taxed is changing to reflect this. How the business model is described in the
strategic report and the links to tax is an important area to consider. This will become even
more important in the future as the OECD progresses with pillar 1 and 2.
Corporate responsibility
We are in an age of ‘Responsible Business’ and some companies link tax to the
Sustainable Development Goals (SDGs). This set of 17 goals saw countries ‘adopt a set of
goals to end poverty, protect the planet and ensure prosperity for all’. Tax is fundamental to
the SDGs since tax revenues are needed to fund investment. Many large corporates have
undertaken to include SDGs within their reporting and some are making the link to tax.
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PwC
A focus on the statutory/effective rate reconciliation
There is a need for companies to be able to communicate with stakeholders in an easily
understandable way about the tax they pay. Companies do not pay tax at the statutory rate of tax
in the country where their head office is located, but the reasons for the difference between
statutory and effective rate of tax may be a complex combination of legislative adjustments to the
tax base.
IFRS accounting standards1 require companies to explain the relationship between tax expense
(benefit) and accounting profit, but limited guidance is given on the format of that reconciliation2.
We have identified four areas of the statutory to effective rate reconciliation where there may be
scope for companies to develop their thinking and explain their tax affairs in a non-technical way
that stakeholders can understand more easily. Our comments are based on both our BPTA for
Tax Reporting review and a review of over four hundred statutory to effective rate reconciliations
from companies headquartered around the world. Of course, the drivers of the effective rate will
differ and it would not be reasonable or appropriate for all companies to adopt the same format.
1. Some companies exclude the impact of joint ventures and associates from profit before tax
in the reconciliation table so that this doesn’t become a reconciling item. Under IFRS, a
company includes its share of post-tax profits and losses from joint venture and associates
in the group profit before tax. There is no associated tax charge, so this is a reconciling item
unless removed from the profit at the outset.
2. Some companies use a weighted statutory rate to help understanding of the impact of
operations overseas. While many companies operate in a single territory, an increasing
number operate in more than one country but the reconciliation is to the statutory rate in the
head office territory. A weighted rate, using the statutory rates in all countries of operation,
helps the reader to understand the impact of operating internationally. It can be difficult to
calculate, if for example, there are losses or amortisation in particular countries.
3. Some companies provide detailed narrative to describe items reconciling the statutory and
effective rate. There is no ‘standard’ narrative although the 2016 FRC thematic review of tax
reporting recommended that reconciliations separately identify the tax impact of non
recurring items. Although the difference between the statutory and effective rate varies for a
number of reasons, we found that it was possible to categorise these into eight broad
headings, which are shown opposite. Allocating bespoke descriptions of reconciling items to
these broad headings may help stakeholders to better understand the nature of reconciling
items and whether they are likely to be recurring or one-off items. While we appreciate that
a standard format will not work for everyone, consistent headings, supported by bespoke
descriptions could provide clarity. In addition, we found examples of companies providing
separate narrative disclosure of significant items in their reconciliation and linking material
items to other areas of the annual report which assists with understanding.
4. Some companies explain the relationship between the tax charge and tax paid more clearly
which can help the reader to understand the legislative adjustments that mean cash tax paid
is not the same as the tax charge.
Non taxable income
Tax legislation does not tax certain
income, which is included in the
company’s profit and loss account, for
example, dividends received.
Impact of foreign operations
A company with international operations
will be subject to corporate tax at a number of
different statutory rates. This category
identifies the impact of those different
statutory rates compared to the rates in the
head office territory.
Tax losses
Tax losses are available to carry forward to
offset against future profits but if management
believe that losses may be unused, they will
not be included in deferred tax assets and
appear as a reconciling item.
Similarly, losses that have been previously
written off which are then subsequently used
will also appear as reconciling item.
Change in tax rate
A reduction in the statutory rate of corporate
income tax in a country of operation requires a
re-measurement of a company’s deferred
taxes.
Tax legislation disallows a deduction for tax
purposes of some business expenses which
are included as a cost in the company’s profit
and loss account, for example entertaining
expenses, write offs and some legal
expenses.
Non deductible expenses
This category includes unusual and one off
items, but with narrative to provide further
detail on the items included.
Other
Uncertain tax provision adjustments
Tax can be complex and a company’s
tax calculation may be finally agreed a number
of years after it was submitted. During the
period of negotiation, the company may have
carried a ‘tax provision’ to allow for the
uncertainty over the final tax charge for that
year. This category reflects that movement in
tax provision as a result of prior year
settlements.
Tax incentives
Fiscal regimes may contain items designed to
stimulate the economy such as tax incentives
and exemptions. As the CBI statement of tax
principles3 outlines, UK business may respond
to these and this category indicates the
extent to which the business is able to benefit
from tax incentives.
1. International Accounting Standard 12.
2. The Standard permits two alternative methods. (1) A numerical reconciliation between the tax expense (income)
and the product of accounting profit multiplied by the applicable rate(s), disclosing also the basis on which the
applicable tax rate(s) is (are) computed. (2) a numerical reconciliation between the average effective tax rate and
the applicable tax rate disclosing also the basis on which the applicable tax rate is computed.
3. https://www.cbi.org.uk/media/3710/2018-02-07-statement-of-tax-principles.pdf
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PwC
Extracts
1Pearson addresses common questions such as
“How much corporation tax does Pearson pay?2
Vodafone provide an explanation of corporation tax in the UK along
with some narrative on other payments made.
Source:
1. https://www.pearson.com/content/dam/one-dot-com/one-dot-com/global/Files/news/news-
annoucements/2018/Pearson-tax-report-2017.pdf
2. https://www.vodafone.com/content/dam/vodcom/sustainability/pdfs/vodafone_2018_tax.pdf
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PwC
Extracts
Source:
3. https://www.angloamerican.com/~/media/Files/A/Anglo-American-
Group/PLC/investors/annual-reporting/2019/tax-and-economic-contribution-report-2018-
full.pdf
4. https://www.lloydsbankinggroup.com/globalassets/lloyds_banking_group_tax_strategy_oct
ober2018.pdf
3Anglo American show temporary differences and special items in the
reconciliation.4
Lloyds Banking Group provide a comprehensive reconciliation from
the profit and loss tax charge to total UK tax paid.
4
PwC
Extracts
Source:
5. https://www.imperialbrandsplc.com/content/dam/imperial-
brands/corporate/investors/annual-report-and-
accounts/2018/annual-report-and-accounts-2018.pdf
6. https://www.prudential.co.uk/~/media/Files/P/Prudential-
V2/reports/2018/prudential-tax-strategy-2018
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6Prudential use a waterfall chart to show the
movement, by country, of corporation tax, other
taxes borne and taxes collected in 2017 and 2018
Imperial Brands outline why uncertain tax positions arise and quantifies the total
value of the provisions
5
PwC
Extracts
Source:
7. https://www.legalandgeneralgroup.com/media/2954/1403
2019_242100698_lg2018_tax_supplement_130319_v2.
8. https://www.vodafone.com/content/dam/vodcom/sustaina
bility/pdfs/vodafone_2018_tax.pdf
7For the first time this year, Legal and General include a
business model to demonstrate how taxes arise based on
assets, capital, people and customers.
8Vodafone provide a background to the Digital Services Tax
and a discussion on their position with recommendations
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Contacts
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
© 2019 PricewaterhouseCoopers LLP. All rights reserved. PwC refers to the UK member firm, and may sometimes refer to the PwC
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191119-135555-TO-OS
Questions to consider
1. What disclosures are
other companies
making on developing
areas such as State
Aid and uncertain
tax positions?
2. How does the narrative
in your statutory/
effective rate
reconciliation compare
to your peers? What
descriptive line items
do you use?
3. How do your tax
disclosures compare
to your sector and
country peers?
How can we help?
Using AI, we have developed an extensive and current data base of disclosures
made in the FTSE350, for example in the areas of uncertain tax positions and State
Aid.
Benchmarking effective tax rates and cash tax rates can provide insight into how
your tax affairs could be perceived by readers of the accounts. RobecoSAM’s tax
rate question assesses companies’ reported tax rates and average cash tax rates
for the last two years to determine any discrepancies between reported and
expected sector tax rates.
PwC’s effective tax rate and cash tax benchmarking data analytics allows you to
assess your key tax rates compared to your global sector or country index.
Benchmarking your tax disclosure narrative against your sector and country peers
provides insight into how an external reader will view your tax affairs.
A tax transparency workshop will consider the question ‘Tax transparency to whom
and for what purpose?’ and explore whether additional disclosures would create
value for your business. It will provide insight into the latest developments in the
evolving tax transparency landscape, discuss who is reading your disclosures,
provide information on the latest trends in transparency, review disclosures made
by the leaders in this area and help you prepare for the question (e.g. from the
Board) of whether you should be disclosing more.
Andrew Packman
Total tax contribution and
tax transparency leader
T: + 44 (0)7712 666441
Janet Kerr
Tax reporting and strategy
T: +44 (0)7841 781417
Tiffany Outred
Tax reporting and strategy
T: +44 (0)7428 027439
Andrew Wiggins
Global and UK Tax Accounting
Services Leader
T: + 44 (0)7803 737681
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