As businesses reach out across the globe seeking new markets, their tax policies and the amount of tax they pay are coming under increasing government, media, shareholder, and public scrutiny. With no signs of abating, the call for greater international tax transparency—spearheaded by an Organisation for Economic Co-operation and Development (OECD)-coordinated initiative surrounding base erosion and profit shifting (BEPS)—is being echoed around the globe. As a result, the debate is heating up on topics of corporate social responsibility, tax governance, enhanced transparency with tax authorities, and "fair share" tax accountability.
In response, tax directors from leading companies around the world are evaluating the potential impact of this fundamental shift in attitudes and approaches to taxation. Forward-thinking companies are also preparing now for several mandatory reporting regimes1 soon to come into effect, and for other possible regulations and requirements as governments respond to the OECD's BEPS Action Plan.2
One of these companies, a large multinational corporation (the "company"), asked for assistance from KPMG.
BEPS is an OECD-coordinated initiative motivated in part by high-level interest of certain jurisdictions to collaboratively address aspects of the international tax rules that are perceived as facilitating profit shifting, allowing for "double non-taxation," and contributing to the erosion of domestic tax bases. The focus is on reform, not enforcement. For more information on BEPS and the tax transparency debate in general, visit KPMG's BEPS | Tax Transparency website at: http://www.kpmginstitutes.com/taxwatch/insights/2013/tax-transparency.aspx.
The company anticipated the tax transparency issue and believed that tax transparency reporting requirements would move decisively in the direction of comprehensive disclosure requirements. The company was also concerned about the growing "tax morality" issue, having seen press coverage targeting high-profile companies and familiar brand names, as well the U.S. Senate and British Public Accounts Committee calling executives to testify. Additionally, because the company also has a large number of government contracts in several countries where government procurement rules are especially stringent, such as in the United Kingdom and the United States, it did not want to struggle—or be seen as struggling—to obtain tax data when new requirements went into effect.
Against this backdrop, the company decided to initiate a tax transparency reporting process to help aggregate and better understand its tax payments around the world under all types of taxation. The company not only wanted to be prepared for new tax transparency reporting requirements, but also wanted to be a leader in establishing the potential standards for disclosure of its global tax footprint with data that illustrated all of the company's tax payments.
The company asked the KPMG team, which included professionals from KPMG International member firms in several countries, to help build and refine the tax transparency reporting process—collecting, aggregating, analyzing, and reporting all of the tax payments made across the company's global operations.
The company's implementation plan included establishing new reporting procedures to operate internally for several reporting periods. The KPMG team also provided deeper reviews of data and processes in several complex jurisdictions where the company had significant operations to provide greater confidence and analysis of the tax reporting process. Overall, the project was designed to build continuous improvement and efficiencies to support the company's understanding of its data sources and gaps in available data, refinement of its data gathering processes, and validation of its tax reporting results before being required to share the tax transparency reporting externally.
One of the challenges faced in tax transparency reporting is properly capturing and categorizing the taxes paid. This typically starts with a common definition of a tax3—not always a straightforward proposition.
A "tax" in one jurisdiction might have been designated in company accounts as a "fee for services" in another. Some taxes, such as income tax, were borne by the company. Other taxes, such as sales tax, were collected by the company and then remitted to the government as a "pass-through" payment. In the case of employment taxes, a portion of the tax was borne by the company, while part was passed through.
To address these inconsistencies, KPMG developed a tax reporting framework for the company as well as tax definitions for multinational tax transparency reporting, including:
- Corporate income taxes
- Sales taxes
- Value added taxes
- Goods and services taxes
- Excise taxes
- License fees
- Property taxes
- Tariffs and customs duties
- Payroll taxes
- Social contributions
- Consumption taxes
- Transfer taxes
- Environmental taxes
Establishing the most accurate and efficient way to collect data for each type of tax, presented a major challenge. Corporate income tax data usually comes from the general ledger, while payroll tax data comes from a payroll tax system. Other fees, such as local taxes, certifications, and property taxes, are often found elsewhere in the general ledger. Tax payments (paid or passed through) should be captured on a cash basis, whereas in most large companies these amounts are usually reported on an accrual basis.
KPMG team members employed a data gathering plan that included identification of the specific nature of the tax data available from the company's ERP, payroll, VAT, and other systems. Team members also assisted the company to determine how best to extract and validate this data. When the team could not pull data from these central depositaries, KPMG worked with the company's country controllers using KPMG LINK 360 to distribute detailed questionnaires and compile responses. In other instances, KPMG employed statistical sampling and data analytics techniques to estimate taxes where the available information was limited.
In summary, KPMG helped the company:
- Ascertain where and how to obtain across-the-board tax data
- Gather data from centralized and noncentralized sources
- Aggregate the data for reporting purposes
- Review its internal processes for operational improvements.
KPMG helped the client establish a common taxonomy for the global reporting and roll-up of the company's local tax information, which in turn increased confidence levels on issues of data integrity for each of the countries' tax reporting. With all of the tax data collected and aggregated the KPMG team provided recommendations for the company's tax transparency report narrative.
The company is already benefitting from its tax transparency initiative. Seeing all taxes defined and quantified in one report has given management the ability to analyze its total tax contribution carefully. Visibility into the overall tax expenditure, as well as taxes borne versus taxes collected or remitted, is providing management with new insights into how it can better express its global tax narrative in a way that more clearly reflects the economic and social contributions the company makes in each jurisdiction in which it carries out its business. The company is continuing to improve its processes and integrate tax transparency reporting into its standard reporting obligations. KPMG is actively assisting the company with this evolution to help prepare the company for future tax transparency reporting requirements.
KPMG LINK 360 is a web-based application that helps a company monitor and control its compliance requirements and positions. KPMG LINK 360 provides a secure, structured environment to collaborate, manage processes, gather, and retrieve information. This connectivity not only helps enable the cost-effective fulfillment of compliance obligations, but also broader management of risk and planning.
With KPMG LINK 360, a company can:
- Improve compliance processes to better manage risks globally and achieve clearer visibility and evidence of process controls
- Oversee all tax and nontax filing requirements
- Create an information source with 24/7 access to data, files, and documents
- Obtain better management information
- Introduce comprehensive, consistent reporting across the group
- Attain cost efficiencies in data gathering and reporting.
With increased tax transparency reporting likely, companies should consider assessing potential brand and financial exposure by internally testing and refining their reporting processes before new rules go into effect. When tax transparency reporting becomes a reality, early adopters will be better positioned to maintain and, if needed, defend brand images, stay in front of competitors, respond to government inquiries, and mitigate risks of negative media scrutiny.
Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates.
The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.
1. Key transparency legislation includes Extractive Industries Transparency Initiative (EITI), Dodd–Frank Wall Street Reform and Consumer Protection Act, EU Accounting and Transparency Directive, and EU Capital Requirements Directive IV.
3. In the OECD classification, the term "taxes" is confined to compulsory, "unrequited" payments to general government. Taxes are unrequited in the sense that benefits provided by government to taxpayers are not normally in proportion to their payments.