In an era where tax transparency has become a focal point for global policymakers, mandatory public disclosure of tax information for multinational enterprises (MNEs) is positioned as a key tool to combat tax avoidance. However, as with many policy shifts, there are both potential benefits and inherent risks. The concept of ‘naming and shaming’ – where MNEs could be publicly criticised based on their tax disclosures – stands as one of the more controversial aspects of public tax reporting.
In our article, we explore the consequences of such transparency measures, examining how they can deter tax evasion while also highlighting the associated reputational and compliance risks for MNEs.
Mandatory public tax disclosure and its rationale
Recent years have witnessed an intensified global movement toward increased tax transparency for MNEs. This began with the Organisation for Economic Co-operation and Development’s (OECD) Base Erosion and Profit Shifting (BEPS) initiative, particularly its country-by-country reporting mechanism. Initially, country-by-country reports were meant to remain confidential between corporations and tax authorities. However, a shift towards making these disclosures public is underway, with jurisdictions like the European Union (EU) and Australia taking steps to mandate the public release of country-by-country information.
The primary aim of this push for transparency is clear: governments and policymakers seek to curb tax avoidance and restore public trust in national tax systems. This sentiment was echoed in the Australian Government’s 2022-23 Budget, which proposed the introduction of public country-by-country disclosure requirements to deter MNEs from engaging in aggressive tax planning practices. Similarly, the European Union’s 2021 directive mandated MNEs to publicly disclose tax-related details, with the stated objectives of fostering corporate transparency and regaining public trust in the fairness of tax systems.
The policy rationale behind public tax transparency is built on the premise that greater visibility into MNE tax practices will discourage aggressive tax planning. By making tax information publicly available, policymakers hope to expose companies that shift profits to low-tax jurisdictions, ensuring they pay their ‘fair share’ of taxes in the countries where they generate profits.
Additionally, there is the potential to foster greater trust in the tax system. When the public sees that large corporations are contributing equitably, it can enhance overall confidence in tax administration. In turn, this can bolster voluntary compliance among individual taxpayers, who are more likely to meet their own obligations when they perceive fairness and integrity in the system.
However, the shift is not without its risks
A significant concern revolves around the practice of mandatory public tax disclosure that, based on public disclosures, MNEs might be portrayed as not contributing fairly to the tax base. In particular, media outlets and non-regulatory entities could interpret the disclosed information without the full context of tax laws, leading to reputational harm for MNEs that are, in fact, compliant with tax regulations.
For example, an MNE might report zero or low tax payments in a particular jurisdiction due to legitimate tax positions such as carry-forward tax losses, which reduce current tax liabilities. Without understanding these nuances, the public and media might perceive the company as engaging in tax evasion or avoidance, sparking public backlash and potentially damaging the company’s reputation. This ‘naming and shaming’ can cause companies to face severe reputational harm, even when they have complied fully with the letter of the law.
While the aim of mandatory public tax disclosure is to enhance trust in tax systems, the potential negative consequences could undermine this very objective. If taxpayers perceive that the system unfairly targets or shames corporations, it could lead to decreased trust in the tax system overall.
Our article highlights this risk, noting that when MNEs are publicly vilified based on partial or misunderstood data, it can erode confidence in the fairness of the tax system. This is particularly concerning given the importance of trust in fostering voluntary tax compliance. Research shows that when taxpayers believe others, especially high-profile MNEs, are not paying their fair share, they are less likely to comply with their own tax obligations.
There is also the issue of ‘compliance fatigue’, where constant exposure to negative narratives around corporate tax behaviour could diminish the perceived importance of compliance among the broader community. If the media consistently reports that MNEs are underpaying taxes despite complex regulations, individual taxpayers might lose faith in the system’s ability to enforce fair tax compliance.
Balancing transparency and trust
Given these potential pitfalls, the design of mandatory public tax disclosure regimes is crucial to their success. We argue that policymakers must strike a delicate balance between transparency and the risk of unfair shaming. This involves ensuring that public disclosures provide enough information to give a complete and accurate picture of a company’s tax affairs.
The Australian experience with limited public disclosure via annual corporate tax transparency reports offers valuable lessons. Since 2015, the Australian Taxation Office (ATO) has published a report detailing the tax contributions of large corporations. However, this has often led to sensationalist media coverage that oversimplifies corporate tax positions, leading to public outcry despite legitimate reasons for certain tax outcomes.
To avoid these outcomes, we suggest that any mandatory country-by-country reporting regime should require comprehensive disclosures that allow for a nuanced understanding of a company’s tax position. At the same time, we caution against overwhelming the public with excessive data, which could lead to confusion and misinterpretation. Instead, the focus should be on the quality of information provided and the context in which it is presented.
The global trend toward mandatory public corporate tax transparency is likely to continue, driven by the desire to deter tax avoidance and improve public trust in tax systems. However, as we highlight, the potential for ‘naming and shaming’ carries significant risks, both for MNEs and for broader taxpayer compliance. If not carefully designed, public tax disclosures could inadvertently erode trust in the system and lead to unintended consequences.
Policymakers must therefore proceed with caution, ensuring that disclosure regimes are transparent but fair, informative but not overwhelming. With the right balance, public tax transparency has the potential to foster a fairer, more accountable tax system, one in which both corporations and individuals contribute equitably to the public good. However, we also caution that public tax transparency obligations, however well designed or intentioned, are no substitute for effective tax laws and regulations which minimise opportunities for legal but socially undesirable MNE tax minimisation strategies.
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