The Role of Sustainability Reporting in Corporate Tax Transparency

Introduction

Tax, fair share, and tax avoidance issues have been increasingly debated over the past few years. Companies perceived as corporate taxpayers may employ aggressive tax avoidance measures by exploiting loopholes in regulations. Tax avoidance is deemed socially irresponsible when it involves schemes, strategies, or transactions without economic substance and can only be justified by the desire to minimize tax liabilities (De la Cuesta-González & Pardo, 2019). In some cases, companies try to reduce their tax liabilities by entering the field of tax evasion through illegal and intentional actions in order to minimize the amount of taxes to be paid (Alm & Torgler, 2011).

These behaviors, along with the associated corruption, represent a major obstacle to the political, social and economic development of countries (Branco & Delgado, 2014), so national and international regulatory bodies have developed several initiatives to reduce and/or eradicate them. However, corporate social responsibility (CSR) can also play a key role in this regard, by reinforcing information transparency.

The need for transparency and social responsibility are the cornerstone topics within this global debate (Albuquerque & Neves, 2021). Paying taxes is seen as an element of corporate social responsibility (CRS). It is an important way for firms to positively engage with society (Zeng, 2018). Paying taxes without engaging in aggressive tax planning practices is considered part of corporate accountability and can led to a positive relationship with the government, as well as a favorable public perception of companies (Triwacananingrum & Wijaya, 2022)

Effective governance at the country level helps to establish trust with all stakeholders and requires companies to provide more detailed information and transparency about their tax and CSR data (Cahan et al., 2016). Transparency is directly related to disclosure. In this regard, tax transparency has been defined as the state or outcome achieved by disclosing tax-related information, where tax disclosure is defined as the communication of tax-related information, from an issuer to one or more recipients, either on a mandatory or voluntary basis (Müller et al., 2020).

Public disclosure of information related to a firm’s tax activities has become an increasingly significant aspect of a company's overall sustainability strategy and reporting (Adams et al., 2022). Sustainability reports are one of the ways in which companies disclose their CSR activities regarding environmental, social, and governance issues (ESG). As far as tax transparency in non-financial statements is concerned, the existing most influential CSR standards are by the Global Reporting Initiative (GRI), an international non-profit organization that issues the most widely adopted sustainability reporting standards.

In 2019, GRI updated its standards to include GRI 207: Tax 2019, which covers for reporting on tax practices. This standard has been in force since January 2021. Its purpose is to standardize the disclosure of information published in sustainability and CSR reports on the fiscal approach to governance and tax control, risk management and stakeholder engagement. It includes disclosures on tax strategy, governance, and risk management that meet different stakeholder reporting expectations. In addition to qualitative information on the approach to tax, tax governance, and risk management that meet different stakeholder reporting expectations, this standard requires public country-by-country reporting (CbCR), with a comprehensive list of tax-related items to be recorded for each country.

Much of debate about taxes and CSR focuses on the practice of corporate tax avoidance. The linkage between corporate tax avoidance and to tax disclosures in CSR reports is contentious. On one hand, some studies focusing on the relationship between CSR/tax disclosure and tax avoidance found that companies with aggressive tax strategies have higher levels of disclosure in an attempt to change stakeholders’ perceptions (Lanis and Richardson, 2013; Santoso et al., 2019; Kao & Liao, 2021). Tax avoiders may try to improve their reputation by making socially responsible tax disclosures, whereas firms that engage in less tax avoidance are generally less motivated to disclose their tax information (Hardeck et al., 2020).