How to make tax transparency meaningful (Africa)
Context:
Increased tax transparency is coming for many, but businesses simply increasing the amount of data available does not automatically translate into stakeholders having deeper insights about their activities nor does it help build trust between business, civil society, decision makers and opinion formers.
Over the past 12 months, KPMG International and Jericho co-hosted a series of high-level discussions with policymakers, corporate leaders on tax and ESG, investors, rating agencies and civil society campaigners to dig into the complex issue of tax transparency reporting. A network of 103 professionals were involved.
The resulting report, Public Tax Reporting: Understanding complexity; making disclosure meaningful, outlined our findings and KPMG International hosted a roundtable discussion in October 2024 to discuss the suggestions laid out and where this important issue needs to go next.
Does transparency alone lead to greater understanding? Does transparency inherently build trust, or is the quality and context of disclosures – along with addressing confidentiality issues – more important? And what developments are needed in transparency practices, , to further improve understanding and trust?
This conversation focused on perspectives from Africa with an additional conversation looking at perspectives from Europe held on the same day. The conversation was conducted under the Chatham House Rule (which means participants are free to use the information received, but neither the identity nor the affiliation of the speaker(s), nor that of any other participant, may be revealed.) and was attended by seven expert participants (see below for a list of attendees). The write-up below summarizes the personal views of participants and does not necessarily reflect the view of any particular organization, including KPMG.
Executive Summary:
Transparency can play a crucial role in fostering understanding between stakeholders in tax matters, but challenges such as limited information exchange, secrecy in tax havens, and inadequate data processing capacity can hinder progress.
The presentation of data is vital in aiding understanding. Visual representations of data, as highlighted in recent KPMG reports, were seen can be effective tools for improving clarity.
Trust between tax authorities and taxpayers as well as confidentiality concerns must be addressed to balance public access with taxpayer privacy.
Corruption in certain countries was identified as a major barrier to both transparency and trust. Education was seen as a critical first step in changing public perceptions of tax matters within in certain jurisdictions.
Building capacity within tax authorities to ensure they can effectively use technology (particularly AI) to analyze and interpret tax data will be critical.
Improving the efficacy of transparency efforts will require a collaborative approach including cross-departmental partnerships and a move away from a siloed approach.
Does transparency lead to greater understanding?
Tax havens, exchange of information, and issues of capacity
Participants highlighted that transparency can play a crucial role in strengthening understanding between stakeholders, particularly in the context of tax information. Historically, issues regarding trust between countries has created barriers to the exchange of information, often reflected in treaties that limit the sharing of data unless requested. It was suggested that the prevalence of tax havens exacerbates these challenges, as their secrecy and lack of transparency further hinder mutual understanding.
A key issue raised was whether the introduction of Base Erosion and Profit Shifting (BEPS)1 measures, such as Country-by-Country Reporting (CbCr)2, which were intended to enhance transparency have done so; some participants suggested that these initiatives have fallen short. Concerns were raised that some tax authorities in the developing world may not have the capacity to process or interpret the data effectively. Moreover, the content, presentation and quality of the data provided in such reports, it was proposed, could be improved.
Participants suggested that current disclosures, such as those required under IFRIC-233 regarding uncertain tax positions, offer limited insight, and some participants recommended expanding the disclosure framework. One potential solution discussed was the inclusion of total tax contributions in financial statements, which could give a clearer picture of where taxes are paid and where profits are realized. It was argued that this is particularly relevant for source countries, especially in extractive industries, where there is a desire to ensure that corporations with mining rights are contributing their fair share.
Does greater transparency build trust?
Representing the data, issues of confidentiality
Participants agreed that while transparency is a key element in building trust, there are significant hurdles to overcome. For instance, how data is presented can either aid or impede understanding. Visual representations of data, as highlighted in recent KPMG reports, were seen as effective tools for improving clarity and aiding in decision-making. These tools can help make complex tax information more accessible to the public, civil society and investors.
However, confidentiality concerns were highlighted as an obstacle. While public access to certain tax data could enhance trust, the issue of taxpayer privacy must also be addressed. Participants explored the possibility of revenue authorities releasing information that balances transparency with confidentiality, as this could provide the public with meaningful data while respecting privacy concerns.
Additionally, trust between tax authorities and taxpayers was discussed. Participants noted that increased transparency could lead to fewer questions and less scrutiny from authorities as taxpayers and corporations that voluntarily disclose more information are often seen as more trustworthy. However, it was also recognized that trust varies by region, particularly when comparing Western countries with developing nations. In Africa, for instance, cross-learning among revenue authorities through initiatives such as the African Tax Administration Forum was highlighted as being helpful in sharing best practices, but more work is needed to nurture trust on a larger scale.
One participant pointed out that beneficial ownership disclosures could help address transparency issues. It was suggested that in cases where high-net-worth individuals are able to use tax havens to avoid paying taxes, revealing the true owners of assets and businesses would enhance trust. Overall, participants recommended that greater transparency, especially regarding ownership and tax contributions, could help build trust not only between tax authorities and corporations but also between the public and governments.
What issues need to be addressed and what needs to be developed further?
Corruption, AI, frameworks for sharing information, standards, silos
Corruption was identified as a major barrier to both transparency and trust. For instance, one participant noted that in Kenya misappropriation of funds is a significant challenge. Participants recommended engaging stakeholders at all levels, including the public, to raise awareness and promote a culture of accountability. Education was seen as a critical first step in changing public perceptions of tax matters, which are viewed negatively due to corruption in certain regions.
Another issue discussed was the role of technology, particularly artificial intelligence (AI), in processing and analysing tax data. While AI has the potential to sift through large volumes of information, participants cautioned that it is limited by the data available in the public domain. There are also concerns about how well tax authorities and the public understand AI's capabilities and limitations. It was argued, it will be critical to build capacity within tax authorities to ensure they can effectively use technology to analyse and interpret tax data.
Participants also explored the need for better frameworks for sharing information. The current siloed approach to tax transparency, particularly in Africa, was seen as a major hindrance. Tax-related issues are often managed by different departments that rarely collaborate, making it difficult to address transparency comprehensively. There were calls for a more integrated approach, with cross-departmental partnerships to ensure that transparency efforts are consistent and effective.
Some participants recommended that changes to international accounting standards could drive transparency forward. However, they acknowledged that such standards are not legally binding and would require national laws to enforce them. Furthermore, in the case of beneficial ownership, having transparent tax identification systems could help revenue authorities track ownership more effectively, though this would also require changes in national laws.
Ultimately, participants expressed hope that certain countries might introduce strong transparency rules, setting a precedent for others to follow. By addressing issues such as corruption, capacity constraints, and fragmented approaches to transparency, there is potential for significant progress in creating a tax system that fosters greater understanding and trust at both the national and international levels.
Contributors to the discussion included:
Dr Alison Futter, Senior Lecturer, Department of Finance and Tax, University of Cape Town
Barry Ger, Lecturer at the University of Cape Town
James Kinyua, Project Officer, Transparency International Kenya
Neal Lawson, Partner, Jericho
Chris Morgan, Head of Global Responsible Tax Programme at KPMG International
Grant Wardell-Johnson, Global Tax Policy Leader and Chair of the Global Tax Policy Leadership Group, KPMG International
Prof. Annet Wanyana Oguttu, Professor of tax law in the Department of Taxation and the African Tax Institute, in Faculty of Economic and Management Sciences, University of Pretoria
Footnotes:
OECD, n.d. Base Erosion and Profit Shifting (BEPS).
OECD, n.d. Country-by-Country Reporting for Tax Purposes.
IFRS, n.d. IFRIC 23: Uncertainty Over Income Tax Treatments.