As companies prepare for the 2023 SEC filing season, they should also be ready for the inevitable press attention on the effective tax rates of high profile multinationals.  In a Client Alert last year, we predicted a recurrence of press focus on whether companies are paying their fair share of tax.  Since that time, numerous articles have appeared in the general and financial press, Senator Wyden has continued his attack on the tax positions on major pharmaceutical companies and activist shareholders have been initiating proxy battles to force enhanced public tax reporting.

Regardless of whether a company decides to publicly respond, every company should be ready for press about its global tax position.  The need for preparation is obvious, but preparation will take on added significance as companies gear up for mandatory public disclosure of their country-by-country reporting in Europe.  In this blog post, we revisit our recommendations to help companies prepare.

Form a Tax Transparency Working Group

A first step in preparing for a world of increasing tax transparency is marshalling internal and external resources into a Tax Transparency Working Group.  These resources should include representatives from the tax, legal, finance, communications, ESG and investor relations teams.  This group, often working under the auspices of the company’s Audit Committee, should develop the company’s strategy for tax transparency and eventual public Country-by-Country (“CbyC”) disclosure that would complement the company’s existing tax disclosures included in its public filings. 

This strategy should include evaluating the benefits of the global tax policy statement discussed in our prior Legal Update.  The Audit Committee or Tax Transparency Working Group often engages an external advisor to help guide the process.

Understanding your tax messaging

The global effective tax rate of a multinational company is the by-product of a multitude of decisions on how the company operates.  These decisions include where the company conducts operations, where and how it invests in R&D, how it rewards employees, its current and prior operating history, and its plans for the future.  Its global effective tax rate also is driven by tax policy in the United States and other countries around the world and thus will be influenced over time by global tax reform. 

These factors and many others drive the effective tax rate and should therefore form the basis of how a company communicates its global tax position.  Too often, companies take a defensive posture with respect to their global tax positions particularly in response to negative press.  Understanding the factors driving the effective tax rate enables a company to ground its tax messaging in its business operations and core values.

Develop a communications protocol

The Tax Transparency Working Group should be tasked with the development of a communication plan that covers decisions on internal and external tax communications.  This plan should include consideration to the development of a global tax policy statement as discussed in our prior Legal Update.  A global tax policy statement provides an outlet for the company to direct press and other inquiries about the company’s tax position.  Currently, over 25% of the Fortune 500 have a publicly disclosed global tax policy statement.

The communications protocol should also include a strategy for deciding whether and how to respond to tax-related inquiries from the press.  A company does not need to respond to every article however incomplete or misleading.  However, a company should have a strategy for deciding when and how to respond. 

Equally important is determining who within the company should respond and the internal approvals necessary before the response is released.  It is essential that no responses to press articles relating to tax are issued without first consulting the tax or finance departments. Tax Transparency Working Group can serve as the internal approval authority for tax related disclosures.

Public CbyC Disclosure is Already Here

The EU Directive on public disclosure will require every multinational (including US based multinationals) conducting any material business in the EU to provide a public CbyC disclosure.  For most companies, this reporting will begin in 2024.  The Tax Transparency Working group should begin reviewing how that reporting will look in the context of their overall tax disclosure posture.

Concluding Observations

The press is not the only external stakeholder focused on the effective tax rates of multinational companies.  Multiple internal and external forces are driving changes in this area.  Public CbyC disclosure will accelerate this focus. As more fully discussed in our prior Legal Update, a company must be prepared to respond to the growing pressures for increased tax transparency and take the necessary steps to control its tax narrative.