What is tax cloaking?
Like tax washing, where communication on certain issues is selected in a way that is misleading, tax cloaking is where some information is not presented at all.
For example, it may seem obvious that a business choosing to publish their financial statements would publish them in full, but many do not. Sometimes only a consolidated or abbreviated version is available to the public.
Businesses may register their parent entity in a secrecy jurisdiction, or take advantage of leniencies afforded to their private equity status or smaller size. In such cases, not only is tax paid (or not) obscured, but also income and profit, which amounts to tax cloaking.
As well as obscuring the true picture of the business’ tax conduct, it is concerning that a business should be averse to general public scrutiny and engagement.
Similarly, despite increasingly mandated public Country-by-Country Reporting, businesses may refuse to break down their economic footprint by country, thereby not providing information that may give insight into profit shifting behaviours that an overview of their footprint would not.
Tax cloaking should raise a red flag for consumers, clients, employees or investors in a business, as it is often indicative of other negative behaviours. The Fair Tax Foundation recently published a report for investors highlighting a variety of red and green flags they should look out for at their investee companies in five key areas of conduct.
Key Performance Indicators of responsible corporate tax conduct – and their green and red flags encourages investors to look at their businesses’ tax activities in their annual financial statements, their responsible tax commitments, their country-by-country reporting, their disclosure of uncertain tax positions and their corporate cash taxes paid over a five-year period.
Publishing a full set of financial statements, and detailed country-by-country disclosures, along with accompanying narratives to explain certain positions, leaves no danger of tax cloaking, and is part of the journey to responsible tax conduct.
