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ESG: How to develop a tax closure policy?

At the outset, it is essential that a company explains not only its compliance with tax laws and disclosure requirements and guidelines, but also the broader story that sets the context for its tax liabilities, such as its business objectives and risks, and the economic and situational factors of the industry and the countries in which it operates. For example, research and development is critical to a company that is highly dependent on an ongoing stream of new products or services, and therefore a lower tax rate may reflect investment concessions that are essential to its ongoing business development and sustainability.

how-to-develope-a-tax-closure-policy
How to develop a tax closure policy?

Reporting systems are often country specific, and different aspects of tax will be covered depending on the reports that are prepared. However, changes are taking place, both in terms of information that is shared by the tax authorities across borders and to the public more generally.


For example, the introduction of the European Union (EU) Mandatory Disclosure rules in March 2020 (DAC 6) aimed to implement procedural compliance requirements for intermediaries and taxpayers to disclose “potentially aggressive tax planning arrangements” by intermediaries or taxpayers to the relevant tax authority. As a result, via automatic exchange of information, all tax authorities in the EU share the information on reportable disclosures amongst one another on a quarterly basis.


In terms of public information sharing, the EU’s lead in making large Multi-National Enterprises (MNEs) publicly disclose the tax that is paid in different countries, may be the start of a more global requirement to share information externally. Under the EU proposal:

  • MNE’s are obliged to publicly disclose financial tax information on disaggregated basis for certain countries;

  • The report needs to disclose information related to the nature of the business activities, the number of employees, net turnover, income tax paid and accrued etc.;

  • In the case of a difference between income tax accrued and the income tax actually paid, the ultimate parent entity is required to provide an explanation in the report;

  • The disclosure rules apply where there is group revenue of at least EUR 750 million for each of the last two consecutive financial years;

  • The rules allow companies to omit certain commercially sensitive information for a set period of time;

  • The ultimate parent entity will be obliged to publish the report on its website, where it must be accessible for five years;

  • The first public country by country report (“CbCR”) will most likely concern FY 2024 and the CbCR will have to be published before 31 December 2025.

way-to-develop-a-tax-closure-policy
How to develop a tax closure policy?

Tax is no longer a “black box” and society’s attitudes to aggressive tax planning have changed significantly, such that there is an increasing recognition that companies need to develop, then implement and maintain a tax policy that reflects the interests of all stakeholders.


A well-formulated policy should support the company in building trust with its stakeholders, sustaining its long-term value, whilst growing its brand and reputational value. Underlying this policy, companies will require the following;

  • Good systems to gather the information – tax information is frequently stored and maintained in many different parts of the business (e.g., finance, inventory and logistics, HR, payroll, legal) and in multiple countries;

  • Careful analysis of the disclosures they wish to make (both those required by law and other voluntary measures) – it is likely information will be important for different reasons in different countries;

  • Understanding of their tax risk appetite – boards and senior management need to analyse and then document and maintain a risk profile that is appropriate for the business;

public-a-tax-closure-policy
How to develop a tax closure policy?
  • Finding the right balance between strong tax governance (the process) and “paying their fair share” (the outcome);

  • Qualitative and quantitative disclosures – both will be required, but provide different information and need to provide a consistent explanation of the tax position;

  • Compliance with fiduciary responsibilities that may exist (e.g., for trusts, pension, and investment funds);

  • Regular review to keep up to date with changing regulations and shifts in public policy.

Once developed, the policy should be clearly communicated to the organisation’s stakeholders via both its regulatory reporting and voluntary disclosures. It is also essential that the policy is supported by an organisational culture that reflects its values through actions.


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