Tax transparency reporting by the top 50 JSE-listed firms

Abstract

As a result of increased regulatory focus on a number of firms’ tax behaviour, tax compliance is now recognised as a source of reputational risk. Transparency on the reporting of tax related matters in public corporate reports could mitigate a firm’s reputational tax risk. In this study, we develop a framework to evaluate tax transparency in such reports. This framework is then applied to the corporate reports of 50 large firms in South Africa to identify the performance of these firms in terms of the framework. We find that 86% of the firms comply with more than 70% of the mandatory tax reporting requirements. We also show that 50% of the firms are transparent regarding their disclosure of tax strategy and risk management, tax figures and performance, their total tax contribution and the wider economic impact of their tax behaviour.

Keywords:

• tax transparency
• voluntary disclosure
• integrated reporting
• total tax contribution

Acknowledgements

We would like to thank the two anonymous reviewers and participants at the 2015 Southern African Accounting Association biennial conference held in East London, for comments on an earlier draft of the paper, as well as Tanya Ackerman for research assistance. We are grateful to the PWC for making its Tax Transparency Framework and the evaluation method used in the PWC UK Building Public Trust Awards available to us.

Notes

1. We conducted a search on ‘tax transparency’ on Ebscohost and Google Scholar to establish this position.

2. This requirement is imposed in terms of the JSE's Listing Requirement 8.62(b) and section 29(4) of the Companies Act 2008, 71 of 2008 (South Africa, 2008)

3. Two recent Australian tax transparency disclosure developments happened since we collected our data. During September 2015, the CBCR was introduced into Parliament to implement the OECD's transfer pricing documentation standards (KPMG, 2015). In December 2015 the Tax Laws Amendment (Combating Multinational Tax Avoidance) Bill was passed by Senate. This legislation requires multinational corporations with global income of AUD 1 billion or more to lodge general purpose financial statements with the Commissioner of Taxation which the Commissioner in turn needs to submit to the Australian Securities and Investments Commission (ASIC). Documents filed with ASIC are publicly available (KPMG, 2015).

4. A fourth category is applicable to individual taxpayers who receive a receipt from the ATO detailing how each dollar received from that taxpayer is used health, education, welfare, defence, etc. Since the focus of our study is corporate tax, we do not include this in our analysis (ATO, 2015).

5. During 2015, after we had collected our data, the OECD Global Forum, the leading global multilateral body which works on tax transparency and exchange of information, focussed its work in three areas, namely (1) automatic exchange of information, (2) developing a standard for the exchange of information on request, and (3) incorporating developing countries in the Forum's work. These developments occurred after our data analysis.

6. For the sake of brevity, the checklist is not reproduced in the article, but is available on request from the authors.

7. These two coders were selected based on their IFRS expertise. Each coder evaluated 26 firms assigned randomly, with one firm being evaluated by both coders. A comparison was done between the separate evaluations of the firm evaluated by both coders and the result shows consistent coding between them.

8. For example, firms are required to disclose the amount of income tax related to each item of other comprehensive income. If the firm did not have other comprehensive income during the current year, this requirement did not apply.

9. The coders and reviewers compared their separate evaluations and reached consensus on the final evaluation of a specific firm.

10. As the primary focus of the study is tax transparency disclosure and not compliance with mandatory disclosure requirements, the extent of compliance with IFRS was weighted because allocating a point to each IFRS disclosure requirement would have distorted our objective. A Score of ‘3’ was allocated if the IFRS requirements were 100% complied with, ‘2’ if the IFRS requirements were at least 85% complied with and a score of ‘1’ if the compliance was less than 85% but some disclosure was still made.

11. We defined the term ‘developing world’ in its broadest sense. If a firm mentioned the word ‘developing’ countries in its breakdown of taxes paid, this item was coded. Alternatively, if the firm provided a breakdown by country, Australia, Canada, Western Europe, New Zealand, Scandinavia, UK, and US were taken as ‘developed’ countries, with the balance representing ‘developing’ countries.