This chapter is about the mandatory disclosure of income tax as required by international financial reporting standards (IFRS) and standards issued by Portuguese regulatory bodies. The chapter also elaborates the most relevant disclosures from the perspective of corporate social responsibility (CSR). Furthermore, it highlights the most influential CSR reporting standards to answer the question that whether these standards adequately address the issue of income tax payment as a factor of CSR. Finally, it also reviews the international and Portuguese theoretical and empirical academic research available about income taxes and related subjects, such as disclosures, corporate tax as a CSR matter, and tax aggressiveness of corporations. Future research may be conducted geographical reporting of income tax expense and its relationship with the effective tax rate (ETR) and other independent variables.
TopIntroduction
If one looks at the whole known history of humankind, corporate social responsibility (CSR) is a relatively new phenomenon (Wells, 2002). There are many views on what is exactly constitutes CSR and whether one should apply any limits to this phenomenon (Garriga & Melé, 2004). We are living in a world where technology is rapidly developing (Rafay, 2019), taking all other aspects of human life with it, including the phenomena which emerged with the industrial revolution and subsequent globalisation.
As CSR is a part of our life subject to constant change, we hardly can set any limits to it and the concept will take different shape each time there is a significant change in the corporate world. In this way, CSR has been developing and is changing over the time of its existence (Jusoh, 2020). From environmental concerns, human rights, health, and safety we see the development to respecting the legal order and, lately, we see that paying taxes is already being looked at as an element of CSR.
On one hand, income taxes are an element of financial reporting, virtually always present since public finances and tax is a constitutive element of the most of modern societies and states. Contributing to the public finances is clearly part of how business contributes to society, its sustainability, its development, and well-being. The other perspective, which is also embedded in the financial reporting, is that tax appears to be and may feel like a cost. In line with the basic laws of commerce and business, there is an effort to reduce the costs in search of more efficient profit-making.
These two approaches are being discussed in media and at the academic level. The debate has been even more prominent after the global financial crisis of 2008, conditioned by the slow economic recovery and the budgetary needs of many countries. As Avi-Yonah (2008) puts it, the question is “whether publicly traded U.S. corporations owe a duty to their shareholders to minimize their corporate tax burden through any legal means, or if instead, strategic behaviours like aggressive tax-motivated transactions are inconsistent with CSR” (2014). According to Scheiwiller and Symons (2014), who are discussing tax and CSR in an article published the OECD Observer online, “the groups campaigning on tax would like to see a change in reporting standards to require companies to report their tax affairs in much more detail in their accounts, essentially a profit and loss account, assets and tax charge for every country where they operate, known as country-by-country reporting”.
These two leading forces give an impetus to the debate, scientific research, and development in the field. As will be clear from further discussion, it looks that nowadays there seems to be already an agreement that paying tax has already started to develop as a CSR issue. Some companies have started to include tax payments as one of the issues discussed in their CSR reports. Scheiwiller and Symons (2014) give the example of the mining giant Anglo American: the total tax contribution by country is reported in CSR reports as part of their economic dimension, including all the different taxes paid and collected and explaining how all these taxes are generated across the life-cycle of a mining project, showing that two thirds of their tax payments are made in developing countries.
The inclusion of tax as an aspect for CSR reporting is indeed presenting tax information in a way that is easy to understand. Notwithstanding, considering that no international and/or mandatory standards effectively exist in this regard, the information highlighted in CSR reports might be selective information cherry-picked by the reporting entity. The financial reporting standards, on the other hand, provide for certain minimum mandatory reporting and disclosure on income tax matters.
The objectives of the research shall be to evaluate the existing accounting standards and social responsibility reporting rules in terms of whether these rules provide for sufficient disclosure in order to enable the users of the information to evaluate (i) the financial position of a company from the tax exposure perspective and (ii) assess the corporate responsibility of a company from the perspective of paying its “fair share” of tax bill, both items capable of eventually influencing the decisions of the users of financial information and decisions and opinions of the widest range of stakeholders.