The Total Tax Contribution Framework (the Framework) has a relevance today that could not have been foreseen when it was developed over ten years ago. In the intervening years, the Framework has been developed as a voluntary framework. As the debate around company taxes continues to gather momentum, it’s more important than ever that disclosures are made on a consistent basis.
Questions have been raised about the treatment of particular payments to governments. Below we discuss the difficult and contentious areas that we have addressed and the view that we have taken on these areas.
We will update and add to these questions on this web page. The information below was last updated July 2021. Please contact Andrew Packman or Janet Kerr (see contacts at the bottom of the page) with comments or additional questions.
This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors.
The distinction between a tax borne and a tax collected is not always clear and excise duty is a prime example.
It is levied on production rather than consumption, so it’s for producers to decide how much of the tax is passed on to the consumer. While in theory there’s no direct correlation between an increase in excise duty and the price paid by the consumer, the duty is often passed on to the consumer.
But how should this be treated under the Framework where the legal liability for the tax lies with one entity (the producer) but the person usually bearing the tax is different (the consumer)? The purpose of the Framework is to help companies communicate their contribution to the tax revenues in a straightforward way. Without consumption, there would be no production and no duty paid. So we take the approach that the duty is borne by the company (or individual) consuming the goods, and the duty is collected by the company producing the goods irrespective of where the legal obligation for the tax lies.
For the end user, fuel duty is a tax borne, and for some sectors, e.g. retailers moving goods using the road network, can be sizeable. The fuel is purchased with duty included in the price and is a cost to the business. Since the tax is not separately identified on the invoice, it must be estimated from the quantity of fuel purchased and the duty price per litre. For the producer, this is a tax collected as it leaves the refinery.
In some instances, goods may be purchased for resale with ‘duty paid’. For example, retailers may purchase alcohol for resale with the duty included in the price. This duty should not be included in the retailer’s Total Tax Contribution, instead it will be a tax collected for the producer and a tax borne for the end consumer. Where alcohol duty is refunded to the producer/importer and paid by the retailer, we treat the excise duty as a tax collected by the retailer.
Air passenger duty is often a difficult tax to quantify. Amounts classified as taxes on an airline ticket may include airport charges (not paid to government) and it may be necessary to extract the company flight records and apply the relevant rate of air passenger duty to each flight depending on the destination and class of travel. For the airline, this is a tax collected and for the consumer, a tax borne.
Royalties, licence fees, planning permission and permits should be included in other payments to government to highlight that these payments were made to governments in their role as the landowner rather than as the taxing authority.
Companies should account for VAT on their value added (i.e. output VAT less input VAT) so net VAT is treated as a tax collected. That said, if output VAT is less than input VAT (perhaps due to exports or zero rated supplies) the company will be in a refund position. But the VAT refund is a repayment of tax already paid, so it should not be included in the Total Tax Contribution (companies tend to highlight and note the refund separately, particularly in countries where the refund is not made for some time).
If all input VAT is fully recoverable through the supply chain there’s no VAT borne until the final consumer pays it. But if the VAT ‘sticks’ in the supply chain and is irrecoverable at any point, it’s not passed on and we treat it as a tax borne at that stage.
Pension and social security payments can be a tricky area because different countries have different systems and structures. In the UK, national insurance contributions are paid into the central finances and used to fund social expenditure and so are treated as a tax. In India, while payroll taxes are paid to the government, all other deductions from employee wages and salaries are paid into the employee provident fund. In our view, payments made into general government funds, such as national insurance in the UK, should be counted as taxes. But provident fund payments in India are effectively pension arrangements that are paid into a personal employee fund and are not part of the government tax receipts, so don’t count as a tax. A similar situation arises in Australia where superannuation guarantee payments are not made to the federal government but are compulsory payments made on behalf of employees.
However, the payments in India and Australia are akin to social security payments in other countries. Therefore when collecting Total Tax Contribution data on a global basis, it is important to collect these payments to allow for comparison on a like for like basis between countries.
General retail sales tax is a product tax collected. If the tax concerns the ‘consumer use tax’ or ‘compensating use tax’ it would be a product tax borne.
Dividends are sometimes paid to governments by mining companies operating in that country. The dividends are paid to reflect the fact that valuable resource is being extracted from the country and should be treated as an ‘other payment to government’.
Property taxes paid on rented facilities should be included only if the tax is paid by the tenant to the tax authority. If the property tax is paid by the owner of the property, it is a tax borne by the owner of the property.
Mining taxes can be levied in a number of different ways and when including them under The Total Tax Contribution Framework it is important to consider whether the government has levied the tax in its capacity as a landowner or taxing authority. If the former, e.g. the payment is levied on production, then the payment should be treated as ‘other payments to government’, since there is a return of value (the ore) for this payment. If the latter, e.g. the payment is levied on profits, then it should be treated as a tax.
The emissions trading scheme places a cap on the CO2 emitted by businesses within the EU, but has also created a market – and a market price – for carbon allowances. Unused allowances (one per tonne of CO2 emitted) can be bought and sold in auctions managed by government or on the secondary market. Allowances purchased at a government auction are a payment by a company to government which would meet the definition of a tax, but allowances purchased on the secondary market would not be considered a tax (although the company may wish to highlight these payments).
Treatment of joint ventures (JVs) may differ between companies, but the treatment should be clearly explained. One option, if a JV is managed or controlled by a company or group, is to include 100% of its taxes in the Total Tax Contribution figures for that company or group. Our rationale is that if a group manages or controls a JV, it can be argued that the taxes are generated by its activity. On a practical level, the group will also have access to the books of the JV and therefore the tax data. Using this approach, 0% of the Total Tax Contribution of a non‑controlled JV should be included, although all parties may want to include a note detailing the contribution of the minority interest.
An alternative treatment to consider is to include all JVs in the calculation, even if the ownership is below 51% – but only to include a portion of their taxes at a rate that corresponds to the ownership interest.
The accounting treatment of the JV should be used to guide the approach taken so that, when preparing key indicators, for example based on Total Tax Contribution and profit, the same percentage is used in both measures.
Whichever approach is used, it’s important to explain clearly the basis for the calculation.
PIS and COFINS have different methods of calculation depending on the transaction and taxpayer. PIS/COFINS under the non-cumulative regime are calculated similarly to VAT being, therefore, taxes collected.
PIS/COFINS under the cumulative method, on the other hand, are product taxes borne. These are revenue based taxes which do not generate credits and are calculated on specific types of services (e.g. telecommunication, education and technology services). These are a product taxes borne.
A third category in which PIS and COFINS are paid would be imports. We would recommend reporting these as part of Customs Duties and Excise Taxes.
The Framework is designed to be easy for a non‑tax expert to understand. For this reason tax payments are included on a cash basis; there are no provisions or accruals. A company’s Total Tax Contribution is a measure of the contribution it has made to the government tax revenues in the year and is a measure of cash payments made during the year, not in respect of the year. Generally, there’s a reasonable match between taxes accrued and taxes paid, but as this is not always the case with corporate income tax, this should be clearly explained in any disclosure of the numbers. Any additional tax payments relating to previous years should be included in the Total Tax Contribution.
Some companies have included a reconciliation between corporate income tax paid and accrued to explain to the user why the two measures differ. With the introduction of country by country tax reporting for some sectors on a tax paid basis, this type of reconciliation is becoming more common.
We always recommend a prudent approach to Total Tax Contribution, so there’s no case for the numbers to be challenged. If anything, this often means that the contribution is understated. In the case of a rebate, it’s important to know whether the payment was treated as part of the Total Tax Contribution in the past. If so, the rebate should be included in the Total Tax Contribution when received, even if the payment and refund occurred in different periods.
Withholding tax deducted from payments made by the company to third parties (e.g. on cross border payments) should be treated as a tax collected.
Withholding tax deducted from intra-group payments are ultimately borne by the Group at a consolidated level. As a result, we suggest treating these as a tax borne in the country where the payment was made.
We suggest that withholding tax suffered on payments received from third parties (i.e. where the payment is received net of withholding tax) be included as taxes borne on profit by the recipient of the income. While the tax has not been paid in that country, this treatment is consistent with country-by-country reporting under OECD BEPS. Consistency is important to avoid introducing further complexity and a need for reconciliation into the disclosures. If amounts are significant, we suggest highlighting in a note to explain the treatment and amount involved. Although no payment has been made by the receiving company to the government, exclusion from the total could present a misleading picture particularly where the tax deducted is substantial.
Partner, Tax Transparency and Total Tax Contribution Leader, PwC United Kingdom
Tel: +44 7712 666441
Senior Manager, PwC United Kingdom
Tel: +44 (0)7841 781417