The world is gradually trying to make corporations more transparent, accountable and responsible through approaches such as The International Integrated Reporting Council’s (IIRC) <IR> framework and supported by standards such as the Global Reporting Initiative (GRI) and the Sustainability Accounting Standards Board (SASB). Unfortunately, much of these efforts may “miss their mark” because the majority of suggested disclosure is voluntary; including those areas based on compliance with existing non-financial regulations. Truly little information is yet being disclosed around the inherent conflict between legality and ethical behaviour, which has long been a cause of problems for business and society. What may be legal, from a corporate perspective, could be unethical from a societal perspective.

One of the greatest challenges in this respect is the whole area of taxation. The public, rightly so, sees a failure to pay a “reasonable level” of taxation on corporate profits as socially irresponsible: yet much of this tax avoidance is deemed legal. Why wouldn’t a company save money on its taxes when the legal authorities allow it to do so? Tax evasion is illegal, and tax law can be unclear, so accountants may recommend a course of action that is rejected by the tax authorities and ends up in court. So the distinction between avoidance and evasion rests on interpretation.

The accounting profession is caught in the middle of the battle between legality and ethics. As part of advisory services, accountants are paid to save clients money. This is their job and as long as they abide by the law, they can use all levels of innovation and creativity to achieve the goal of paying less tax. This is one reason why there are global accounting practices that support global corporations – both are “supra-national.” Accountants abide by “Codes of Ethics” – largely based on a foundational requirement developed by the International Federation of Accountants (IFAC) that runs to 200 pages! These codes frequently mention “in the public interest” but, in many cases, refer to non-compliance or breaches of compliance.

Accountants must avoid breaches of the law but It would appear that, as long as the professional accountant informs the client where there may be ethical issues that have a “public impact”, the ultimate decision is in the clients’ hands. Accountants have no reporting requirement to provide ‘judgement decisions’ on the ‘ethics’ of their clients’ decisions. If the client is ultimately the one responsible, then disclosure of more tax information in annual reports is the answer. A recent GRI standard, GRI 207 (issued late 2019) requires organizations to disclose more about their tax paid. Standard 207-1 is a management discussion that outlines their approach to tax: –

  • 207-2 is about tax governance, control, and risk management
  • 207-3 discusses stakeholder engagement and management concerns related to tax
  • 207-4 provides country-by-country reporting

While it is too early for meaningful analysis, we can gain some insight from guidelines, on a country-by-country tax reporting basis, issued by “The B Team”; that have some similarities to the GRI standard. How well are “leading companies” doing in telling their story? One supposed leader in tax disclosure is Vodafone Group Plc., which provides tax information in their 2020 annual report – using the “B Team” guidelines.

While Vodafone provides additional data, I would put the information more in the “good PR” area than addressing socially responsible actions. First, they focus on payments to governments as an umbrella for tax. This is confusing two quite different things. Licenses and fees paid to buy spectrum is a “cost of doing business;” they are buying an asset that is then recovered in their billing rates to clients. This is not tax and this approach demonstrates the challenge of getting to the “bottom line” of where corporations pay fair amounts of tax and where they generate income.

In addition, confusing consumption taxes can also be misleading. For example, in a VAT/GST type of sales tax system, taxes paid on purchases (inputs) are often offset against taxes collected for governments on sales: so there is no cost to the company – it is a “pass through.” I cannot say that Vodafone is not a good corporate citizen – but their disclosure of tax information, paid by country, fails to answer my question as a member of society, as to whether they are contributing a fair share of their earnings to support each society within which they operate.

It appears that tax transparency will remain a particularly challenging area of social responsibility for the foreseeable future. I will be interested to see the outcome of another current activity underway by IFAC who have a task force addressing the challenge between ethical conduct and social responsibility in the area of tax avoidance. I think we have along way to go until society achieves transparency in this area.

Nick A Shepherd, FCPA, FCGA, FCCA, FCMCCouncil Member, Maturity Institute.



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