How a decade of transparency forever changed the tax world

A decade of more tax transparency has had a very different impact on businesses and tax functions.

Most tax departments have now transformed from being a back-office function that primarily reconciled historical information on tax filings to playing a more prominent role in the C-suite, advising on how tax issues affect broader business strategies, especially as governments increasingly use tax policy to try to influence business behaviors. They also contend with new compliance obligations and heightened tax risk by investing in new technologies to keep pace both with regulatory change and the growing abilities of tax auditors. Often this means aggregating and de-aggregating data as necessary to satisfy a range of disclosure requirements.

“The cost of compliance for multinationals has surged. This might improve internal communication and tech upgrades, but it’s an inefficient route,” says Chris Sanger, EY Global Government and Risk Tax Leader. “Ultimately, the evaluation of the success of BEPS must also take into account the opportunity costs and the administrative burden placed on both governments and businesses.”

While the US FATCA program and its global counterpart the CRS, which primarily affect high-net-worth individuals with foreign bank accounts, were already in existence, global businesses turned their collective focus first to complying with Action 13 of the BEPS project. These so-called country-by-country reports (CbCRs) would, for the first time, annually require multinational enterprises to report the amount of revenue, profit before income tax, income tax paid and accrued, number of employees, capital, retained earnings and tangible assets for each tax jurisdiction in which they do business. The aim was to enhance transparency for tax administrations by providing them with adequate information to assess high-level transfer pricing and other BEPS-related risks.

The BEPS project also urged governments to require more details about transfer pricing, which governments believed was being used to shift profits from higher-tax jurisdictions to lower-tax ones. These details were to be provided in a so-called master file, which provides an overview of an organization’s global business operations and transfer pricing policies, including a global allocation of income and economic activities. It also required a more detailed so-called local file, which focuses on specific transactions between a local country entity and associated enterprises in other jurisdictions.

“For the first time, tax administrators will have full transparency around how global income and taxes are distributed around the world,” says Tracee Fultz, EY Global Transfer Pricing Leader.

The need for consistency quickly emerged as a key lesson from dealing with these first waves of new transparency obligations. This was especially true in an era of instant communication and social media facilitated by the internet, which created broader shifts in how society shared media reports about corporate taxation and reshaped views on corporate responsibility and accountability in the financial world.

“Tax has become a day-to-day issue,” says Luis Coronado, EY Global Tax Controversy Leader. “As I often tell people, even my mom knows what I do for a living now because tax issues are on the front page of newspapers.”

What a company does or says in one jurisdiction must align globally, says Joel Cooper, EY Global International Tax and Transactions Services Controversy Leader.

“Today you have to assume everyone knows everything,” Cooper says. “With the advancement of technology and analytical tools it’s crucial to prepare tax positions with the understanding that all information may be accessible. This doesn’t imply that information was hidden in the past, but that now transparency is unprecedented.”

Sustained budget cuts in the tax function, coinciding with more demands for tax transparency over the last decade, have complicated compliance efforts. The 2024 EY Tax and Finance Operations (TFO) Survey found cost pressures are now the top concern of tax and finance departments for the first time in the survey’s history, a factor of cumulative budget cuts over the last decade and recent inflation.

“Tax departments often struggle to find the necessary resources to keep up with this growing list of duties,” says Dave Helmer, EY Global Tax and Finance Operate Leader. “Also, significant IT support and data capabilities are essential to meet the growing demands of reporting and compliance resulting from more tax transparency. In many cases, companies are looking at co-sourcing routine activities so their own people can focus on the most critical issues.”

Double taxation and global minimum taxes

Concerns about double taxation resulting from global tax reform are also fundamentally transforming the way businesses operate. The original tax transparency initiatives of a decade ago have morphed into a new project under a second pillar of the BEPS project: an agreement by most jurisdictions to create a global minimum tax of at least 15% for international businesses with at least €750 million in revenues. More than 50 jurisdictions worldwide are in various stages of implementing those rules, many as early as 2024.

The EY Tax and Transfer Pricing Survey found an overwhelming majority of respondents face a moderate or significant risk of double taxation because of the global minimum tax called for under Pillar Two.

Concerns about double taxation, broader tax and legislative change, and business volatility are driving transfer pricing (TP) change within organizations in many important ways. Businesses are increasingly seeking certainty on their TP positions to facilitate more predictability in new calculations required to comply with the Pillar Two rules. This is evidenced by a surge in levels of interest in advance pricing agreements (APAs) and dispute resolution programs offered by tax administrations. This proactive approach allows for more certainty in both TP disputes and Pillar Two implementation.

Executives and TP professionals realize that data, particularly standard TP data, underpins certainty in controversy and predictability of Pillar Two calculations. The transition into a tax environment where global minimum taxes and public disclosures of the CbCRs compels corporations to standardize their internal data to manage the groundswell of controversy-related requests from tax authorities and Pillar Two calculations.

Multinationals are also preparing for a new era of tax transparency, with public CbCR becoming mandatory in the EU and proposed in Australia. Public CbCR extends tax transparency and raises the risk of misinterpretation by external users.

New public disclosure requirements raise new considerations for affected businesses. One key concern is the imperative to reconcile public CbCR information with non-public CbCR (if it differs) and with other tax disclosures — for example, if tax information is included in the company’s tax strategy or in sustainability or other integrated reports. The EY TP Survey found that 96% of companies say “somewhat” or “substantial” additional work is required to prepare for public disclosure of the reports. The EY TFO survey, published in October 2024, found the prospect of public CbCR is straining information technology systems: some 34% of companies say they face a “significant” number of adjustments to source system data to deal with CbCR reports, while another 47% say they face a “moderate” number of adjustments.

Voluntary disclosures

With mandatory public disclosure looming in some jurisdictions, some 56% of respondents to the EY TFO survey say they anticipate making voluntary public disclosures about the total amount of taxes they pay around the world, up from 38% in 2023.

“While tax authorities, the original recipients of CbCR, have the technical knowledge to analyze CbCR data, non-tax professionals are less likely to fully understand the nuance and context inherent in such information,” says Marlies De Ruiter, EY Global International Tax Services Policy Leader, who once led the Tax Treaty, Transfer Pricing and Financial Transactions Division at the OECD and was responsible for developing the organization’s Action 13 CbCR regime more than a decade ago.

In addition, multinationals that update their internal CbCR processes to include company-wide collaboration will be better placed to support and explain complex CbCR data to a wide range of stakeholders. Companies may consider going beyond the new reporting requirements and contribute to wider corporate goals around transparency and external stakeholder engagement.

The reality is a quagmire of operational challenges. Transparency initiatives and reporting requirements create a complex landscape that is difficult to navigate. Understanding the data and technology needs, voluntary compliance trends, and the impact of BEPS is crucial for managing these challenges effectively.

The ripple effects from tax transparency are also extending into other corporate objectives, including the environmental, social and governance (ESG) agenda, which integrates tax practices into governance models, emphasizing compliance, integrity and positive community impact.

Tax can be a material sustainability topic and therefore require disclosures around things such as green taxes and details about tax governance — for example, the EU’s Corporate Sustainability Reporting Directive (CSRD) includes new reporting requirements. Tax disclosures have evolved to address a wider audience, including customers and employees, covering strategy, governance and numerical data. Unlike long-term commitments like achieving net-zero emissions, a company’s tax “footprint” is immediately visible to stakeholders, and it’s also a metric for some ESG ratings agencies.

“While some companies report tax matters based solely on mandates under law, other companies go beyond legal mandates to disclose how taxes collected and paid contribute to the communities in which they operate,” says Brian Foley, EY Global Tax Accounting and Risk Advisory Services Leader. “Regulators and tax authorities generally favor increased transparency, as do parties aligned with ESG initiatives. Ultimately, the value of increased transparency is relative to one’s perspective and objectives — regulatory, compliance, or sustainability.”

For clearer and relatively uncomplicated regulatory requirements, Coronado says tax authorities could use advanced and “fair” tax systems that also help governments attract businesses and foreign investment. Implementation of BEPS Pillar Two and the push toward a global 15% minimum corporate tax rate have reduced tax competition from a rate perspective, he said; taxpayers will begin to prize efficient tax administrations and ways to reduce compliance costs.

Governments could also rate businesses as reliable taxpayers, resulting in less time spent defending audits and fulfilling complex reporting requirements, Coronado suggests. The gains in efficiency, more certainty and, hopefully, lower compliance costs will be attractive to many enterprises. Another benefit would be an improved level of corporate citizenship, which he says investors, media and the public would welcome.

A labyrinth of rules

Multinationals strive now to comply and act ethically, yet they face a labyrinth of intricate rules that complicate their efforts or create unintended consequences. For example, the adoption of global minimum taxes can limit the ability of larger multinational companies to benefit from certain tax incentives that encourage beneficial behaviors.

A closer look at tax-to-GDP ratios in different regions adds another layer to the discussion. In some developing countries, these ratios are lower than in OECD countries, yet their corporate tax-to-GDP ratios are twice as high. This suggests the issue may not lie with multinationals avoiding taxes but with gaps in personal income tax or VAT collection, possibly because these economies lack a substantial middle class, Cooper says.

“With all the focus on corporate transparency and taxing multinationals, we might be overlooking critical aspects of individual taxation,” he says. “If we overburden corporates, we risk diminishing their economic contributions. It might be time to broaden our perspective to understand and address the wider spectrum of tax challenges efficiently.”

Indeed, some policymakers are thinking along similar lines. Some members of the G20 proposed a 2% tax on the net worth of billionaires, including unrealized stock gains, to help pay for initiatives intended to arrest climate change, but such individual taxes involve complexities. Corporate taxes are allocated based on profits in each country, but taxing individuals requires determining residency, property ownership, and where their wealth was created.

Meanwhile, as tax transparency increases, the importance of data in crafting accurate tax returns will grow, yet the limited ability to interpret that data poses a critical challenge in digital tax administration. Traditionally, tax departments received numbers, interpreted them and determined tax liabilities. Now, tax departments often lack the complete information to do this in the time required. Governments will rely heavily on reports and digital submissions to make tax determinations, which does not always guarantee accuracy.

In Brazil, taxpayers and advisors often have to reverse-engineer outcomes to understand the government’s interpretation, Coronado says. This requires a system of checks and balances to ensure IT solutions align with accurate tax interpretations, allowing taxpayers to present their positions. A more collaborative strategy is needed that brings together IT, finance and legal counsel, to ensure that tax returns are both comprehensive and precise, reflecting the complexity of today’s business transactions.

Unprecedented action by the world’s governments requiring more tax transparency forced tens of thousands of global businesses to rebuild their approach to tax compliance and tax operations without a blueprint. Now, businesses are taking important lessons learned from that experience as they prepare for more change.

First and foremost, businesses need robust data management strategies, with centrally collected and managed data sources, to support tax reporting requirements. Governments are becoming more sophisticated consumers of data, and their appetites are only going to increase, especially as they move to a wide range of real-time filings, with a goal to include income taxes. The demand for tax data already covers a wide range of sources including e-invoicing, CbCRs and TP files, and governments are now sharing that information at record rates. Businesses exposed to BEPS Pillar Two have the added challenge of working with dozens of new data points to calculate global minimum taxes.

Soon, information will flow seamlessly into tax authorities, much like government e-invoicing. This will not eliminate hard-copy tax returns overnight, but it will lead to increased automatic information sharing, fundamentally changing tax management. Yet many businesses still manually produce and submit tax returns. Tax accounting teams must improve record-keeping, meet structured data requirements and collect more refined information about various financial affairs. And in the future, with data going straight to tax authorities, companies will need to validate data much earlier in the process, marking a significant shift in their approach to tax compliance.

This will become even more important as GenAI use cases grow and governments look to make use of GenAI to improve data collection. The good news is that having useful data can also help businesses gain insights about how taxes are affecting their own operations, which can improve the bottom line. And it can help businesses integrate GenAI into their own affairs, which can free tax talent to work on higher-level tasks and bring even more value to their C-suites.

Second, consider making transparency a tool. Much of the focus the last decade has been on the scramble to comply with new reporting requirements. Increasingly, however, businesses are discovering that being more transparent about their tax affairs can create goodwill with investors and other stakeholders. This is especially true in helping to fulfill corporate sustainability objectives and other community-based initiatives. Enhanced disclosures can also improve standing with tax authorities, many of which offer compliance assurance programs that reward good-faith transparency with more certainty around tax controversy.

Third, it’s essential to be consistent. A company’s tax data should align with what it is telling others about itself. The amount of available data today is staggering, driven by social media and online reporting. Businesses are at the center of this data explosion. This wealth of data offers insights into business operations and individual activities. Although access to this data varies by country, its potential for comprehensive analysis is enormous. As GenAI and other technologies advance, we can expect sophisticated tools to emerge that will dissect this information, offering detailed snapshots and cross-checks of company activities. Inconsistencies will create vulnerabilities and risk.

Finally, good governance is absolutely critical to managing this more transparent era. Strong yet flexible governance frameworks can anchor organizations in their core values, including their approach to tax and ESG transparency. It’s also essential to secure better data and data management and oversee the ethical integration of GenAI. And, like the good-faith efforts to proactively cooperate with tax authorities which have more information than ever, a strong governance structure that is acknowledged by authorities can reduce tax risk and controversy overall.