The long and winding road from concept to compliance

In their day-to-day routines, people are creatures of habit. It can often take time for a new idea to truly take root in the midst of routine.

For example, environmental, societal and governance (ESG) considerations are a huge part of business concerns today. But you have to go back 20 years, to the UN’s Who Dares Wins report, to find the green shoots of that particular example.

Another example is the issue of eliminating tax havens. Until fairly recently, this was regarded as a hereticical idea. Yet governments were calling for measures to “counter the distorting effects of harmful tax competition” at the G7 conference back in May 1996.

And, even when they are eventually adopted, the incorporation of new technologies and new ideas – such as sustainability – into business development can often show a cyclical pattern.

This begins with research and the development of new concepts, which are then followed by awareness campaigns, and often amplified by media hype. But disillusionment can often follow. The eagerness of businesses to jump on the sustainability bandwagon, for example, is frequently for the wrong reasons: driven by opportunism and virtue signalling rather than a genuine intent to pivot to new, more responsible business practices.

In the technology adoption cycle, disillusionment can take root in assumptions about what that technology can and cannot achieve. But in the case of sustainable business, it’s the realisation that some of the sustainability claims that brands make are in bad faith. Today’s press is awash with stories that reveal greenwashing practices, as well as social responsibility programmes that may hide substandard working conditions in far-off workshops. With toothless regulations, or no regulations at all, being applied to how companies report such things, investors and customers will find it increasingly difficult to get the true measure of such organisations to guide their decisions.

The concept and launch of SDGs

But although regulations are needed to ensure that companies don’t distort or obfuscate their true values, the balance can be tricky to get right.

The United Nations Global Compact, currently the largest corporate sustainability initiative, is based on voluntary CEO commitments to implement universal sustainability principles. Its members support the UN’s 2030 agenda for sustainable development, and the sustainable development goals (SDGs) that are the stepping stones leading to its timely delivery.

The 17 SDGs were launched in 2015, and much effort had since been made by the UN, businesses, non-profits and the media to raise awareness of them. Indeed, the dissipation of information about these initiatives has been so effective that they now form an integral part of public consciousness and discourse.

G for governance

Environmental and social goals are probably easier to grasp, as consumers hear more about them in marketing campaigns, product descriptions or information about corporate responsibility programmes.

But although there has been a lot of talk about greenhouse gas emissions, energy and water usage, fair wages or diversity, equity and inclusion (DEI) at the workplace in consumer media, aspects of good governance have been less in the public eye. The public may be dimly aware of the percentage of women on company boards, compared with how many there perhaps should be, for example, but it isn’t exactly front of mind.

Other areas that could come under governance, such as data privacy protection, anti-corruption policies or support for business integrity and transparency, which are integral parts of corporate governance, are mostly discussed only when they are breached in a criminal case.

The governance elephant in the room

But decisions about how much tax, and where, a company pays is undeniably a matter of corporate governance.

However, while tax evasion is a criminal offence and is prosecuted under jurisdictions where taxes are to be paid, tax avoidance – the offshoring of tax payments into low-tax or no-tax countries – has been the norm, in business at least, since the neoliberal Reaganomics of the 1980s.

Tax avoidance is a divisive topic. It made business sense in the heydays of globalisation as it was one of the main drivers of business growth, and technology of the day meant the level of transparency sovereign governments and regulatory bodies were calling for wasn’t feasible. A country could glean information about the foreign-paid taxes of a business entity based in its legislation only by officially requesting data from the other country.

The GRI 207 tax standards of the Global Reporting Initiative (GRI), an Amsterdam-based non-profit organisation founded in Boston in 1997 since, published in 2019, already enabled organisations to voluntarily report on tax practices as part of their sustainability reporting.

Evan more relevant to tax transparency regulation, the GRI 207 introduced the public country-by-country (pCbC) reporting of business activities, revenues, profit and tax. The importance of pCbC tax reporting in the context of tax transparency can’t be overstated.

As Chenai Mukumba, executive director of Tax Justice Network Africa, explained on a UN panel in October, 2023, “there are 49 African countries that are currently unable to benefit from country-by-country reports under existing OECD processes.”

“By and large,” he went on, “putting in place public country-by-country reporting can provide the tax transparency that’s required for many tax administrations to ensure that multinational companies are providing the revenue that authorities need in order to enforce existing tax rules, raise revenue, as well as craft tax reforms.”

Legislation to limit base erosion and profit-shifting

GRI 207 has already been extensively used for the past three years as one of the most recognised frameworks of voluntary tax disclosures. The real game changer, however, as far as offshoring taxes, or – to use the accounting jargon – BEPS (base erosion and profit shifting) is concerned, is the 15 per cent global minimum tax rate.

For a start, 55 countries are taking steps to implement it, including the UK, EU member countries, Japan and South Korea. There is a lot of scepticism regarding the effectiveness of the global minimum tax rate in staunching profit shifting.

The 15 per cent rate is seen by many nations with tax equality on the top of their agenda as something of a compromise – 25 per cent is the target for these countries. Also watering down the regulation is that it currently only applies to multinational groups with consolidated revenue over €750m.

To give a taste of the seismic potential of this new tax regime, Switzerland, traditionally regarded as an OECD tax haven and the poster child of bank secrecy, recently voted in a referendum (thanks to the country’s system of direct democracy) to implement the 15 per cent corporate tax, with 80 per cent of voters in favour. The country hosts the offices of around 2,000 foreign companies including Google, as well as 200 Swiss multinationals that will be affected. The parliament of Bermuda, meanwhile, another country with a hard-won reputation as a tax haven, passed legislation also enacting the new corporate tax minimum in December 2023.

That said, 15 per cent is still one of the lowest corporate tax rates globally, and any real breakthrough is unlikely without the “final boss” of tax havens, the Cayman Islands, accepting the global tax. And it’s beyond certain that the so called “carve-outs” that give exemption to payroll and tangible assets for multinationals with substantive, physical activities in a foreign jurisdiction will be used to shield some of a multinational’s revenues from the reach of the new legislation until such loopholes can be closed.

So for the time being, the new rate is unlikely to bring about the instant demise of worldwide tax havens. But what it does have is the potential to change the perception of what is acceptable or responsible in corporate accounting and taxation.

Aware of these roadblocks, Pascal Saint-Amans, the OECD’s former tax chief who spearheaded the reform, called the 15 per cent global corporate tax in an interview “The most significant international tax reform for MNEs in recent years, and arguably a rare success of multilateralism these days”, before adding the caveat: “provided it pans out as planned.”

It’s too early to say whether Saint-Amans’s hopes for the uptake of the new tax regime to reach critical mass in 2024 will be fulfilled. But it’s undeniably a good start.

What’s safe to say, though, is that the global corporate tax adoption entered a plateau in 2024 and the G in ESG has gained an important new criteria.

For PwC’s Pillar Two country tracker, click here.