When is tax material

As stakeholders’ measures of company performance expand beyond financial metrics to include impacts on the environment and society, it is essential to evaluate  the materiality of tax to the business. A  complete, interconnected and balanced narrative is necessary  to demonstrate how the company’s approach to tax aligns with its purpose, strategic priorities, and commitment to long-term value creation.

In our 8th Edition of Building public trust through tax reporting publication we note that tax directors play a key role in ensuring that tax is embedded as a key strategic influencer in fulfilling their organisation’s sustainability objectives. Ensuring that tax is included in materiality evaluations and communicated to stakeholders is crucial for enhancing understanding  of the risks, opportunities and sustainability impacts associated with tax. However, many tax directors are not part of the process of identifying relevant sustainability reporting topics.

It is important for sustainability teams to note that stakeholders, such as investors, highly value companies that prioritise responsible tax practices and are transparent about their economic contributions. According to the United Nations Principles for Responsible Investment (UN PRI) an increasing number of investors are integrating the risks posed by tax issues in their investment decisions. Additionally, some are beginning to consider tax issues from an impact perspective, as part of shaping sustainability outcomes.

Tax and sustainability experts need to collaborate to develop a shared understanding of tax within the context of sustainability, ensuring that tax is included in materiality evaluations. When assessing tax as a material topic, it is important to consider the potential impact of the following scenarios:

• Potential understatement of tax liability.
• Evidence of inconsistent governance impacting the company’s approach to tax.
• Perception that the company does not pay the correct amount of tax. 
• Unresolved or ongoing assessments, audits or recent settlements with revenue authorities.
• Perception that the company uses aggressive strategies to minimise tax.
• Limited or no public disclosures on tax.
• Operations in various low tax jurisdictions.
• Media scrutiny related to the company’s tax practices.

Many companies in South Africa are recognising that tax transparency sends a powerful message about their commitment to the environment and society. They understand the positive impact transparency has on their reputation and  the associated opportunities it brings. Whether tax is discussed in the integrated annual report, governance or sustainability report or a stand-alone tax report, the publication must be as robust and relevant as other financial reporting. This is achieved through implementing guidance from globally aligned reporting standards, for example the Global Reporting Initiative 207: Tax Standard (GRI 207).  

An organisation that follows GRI guidelines for sustainability reporting  should also adhere to GRI 207 if tax has been identified as a material topic by stakeholders. The GRI supports the concept of double materiality, which considers both the company's impact on sustainability topics and how topics affect the company in the future, including its development, performance and position.

In our review of 2022 year-ends, more than 60% of the companies included in our study utilised  the GRI standards in some capacity to report on sustainability. However, our findings indicate that only 23 companies used GRI 207 to guide the extent of their tax reporting. We anticipate this trend to increase as more companies recognise the external impacts of tax on the environment and society, as well as the internal impacts on their business models and strategies.

Discussing the growing, undervalued relationship of tax and ESG reporting in Bloomberg, Will Morris, PwC Global Policy Leader commented: “Tax might be material for three main reasons – what the data says about the business’s tax contribution to society, what the business’s governance structure says about its risk management, and what its tax strategy says about its view on tax sustainability.”