As companies prepare for the 2023 SEC filing season, they should also be ready for the inevitable press attention on the effective tax rates of high-profile multinationals. In a Customer notice last year, we predicted a recurrence of press attention that companies are paying their fair share of taxes. Since that time, numerous articles have appeared in the general and financial press, Senator Wyden continued his attack on tax positions on major pharmaceutical companies and activist shareholders starting battles by proxy to force better public tax reporting.
Whether or not a company decides to respond publicly, every company should be ready for the press about its global tax position. The need for preparation is obvious, but preparation will take on added significance as companies prepare for the mandatory public disclosure of their country-by-country reporting in Europe. In this blog post, we review our recommendations to help businesses prepare.
Form a tax transparency working group
A first step in preparing for a world of increasing tax transparency is to bring together internal and external resources in a Tax Transparency Working Group. These resources should include representatives from the tax, legal, finance, communications, ESG and investor relations teams. This group, often working under the auspices of the company’s Audit Committee, should develop the company’s strategy for tax transparency and eventual country-by-country public disclosure (“CbyC”) that would supplement the company’s existing tax information included in the its public documents.
This strategy should include assessing the benefits of the global tax policy statement discussed in our previous legal update. The Audit Committee or Tax Transparency Working Group often hires an outside consultant to help guide the process.
Understand your tax messages
A multinational corporation’s global effective tax rate is the byproduct of a multitude of decisions about how the corporation operates. These decisions include where the company conducts operations, where and how it invests in research and development, how it rewards employees, its current and previous operating history, and its plans for the future. Its global effective tax rate is also driven by tax policy in the United States and other countries around the world and therefore will be affected over time by global tax reform.
These factors and many others determine the effective tax rate and should therefore form the basis of how a company reports its global tax position. Too often companies take a defensive stance about their global tax positions, particularly in response to negative press. Understanding the factors that determine the effective tax rate allows a company to root its tax messaging in business operations and core values.
Develop a communication protocol
The Tax Transparency Working Group should be tasked with developing a communication plan covering decisions on internal and external tax communications. This plan should include consideration for developing a comprehensive tax policy statement as discussed in our previous legal update. A comprehensive tax policy statement provides the company with an outlet to direct the press and other inquiries about the company’s tax position. Currently, more than 25% of Fortune 500 companies have a publicly disclosed global tax policy statement.
The communication protocol should also include a strategy for deciding whether and how to respond to press questions on tax matters. A company does not need to respond to every article no matter how incomplete or misleading. However, a business should have a strategy for deciding when and how to respond.
Equally important is determining who within the company must respond and the internal approvals required before the response is released. It is essential that you do not respond to tax-related news articles without first consulting the tax or finance departments. The Tax Transparency Working Group can act as an internal approval authority for tax-related information.
The public disclosure of CbyC is already here
The EU Public Disclosure Directive will require all multinationals (including US-based multinationals) conducting material business in the EU to provide a CbyC public disclosure. For most companies, this reporting will begin in 2024. The Tax Transparency Working Group should begin reviewing what this reporting looks like in the context of their overall tax disclosure stance.
The press is not the only external interlocutor interested in the effective tax rates of multinationals. Multiple internal and external forces are driving changes in this area. Public disclosure of CbyC will accelerate this attention. As discussed more fully in our previous legal update, a business must be prepared to respond to growing pressures for greater tax transparency and take the necessary steps to control its tax narrative.