ESG and the Tax Function

Businesses today are increasingly adopting and articulating tax principles, aligned to their broader Environmental, Social, and Governance (“ESG”) agenda. 

In the modern world external stakeholders are increasingly interested in a business’s corporate and income tax behaviors and expect to see evidence of the level of tax responsibility it adopts in terms of aggressive tax strategies as well as the level of economic contribution the business makes to society.

This is also vital in the M&A space where an investor’s ESG program will include evaluation of the investee entity’s tax framework. 

In response, many businesses are publishing wider tax statements and also signing up to increasing transparency standards including the OECD/G20 Principles of Corporate Governance, the GRI (Global Reporting Initiative) for comprehensive tax disclosure and the International Business Council (IBC) of the World Economic Forum – Stakeholder Capitalism Metrics.

In Europe, the CSRD Directive will also come into effect for FY 2024. The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

Companies subject to the CSRD will have to report according to European Sustainability Reporting Standards (ESRS). The standards were developed by the EFRAG, an independent body bringing together various different stakeholders. The standards are tailored to EU policies, while building on and contributing to international standardisation initiatives.

The CSRD requires assurance on the sustainability information that companies report and will provide for the digital taxonomy of sustainability information.

When we look at the areas of tax which most specifically fall within the ESG agenda we see these as:
1)    Tax and the Environment: for example, carbon taxes, plastic taxes; CBAM, green subsidies and investments, deforestation regulations
2)    Social taxes such as PRSI, USC, flexible workforce, gig economy, supply chain ethics and transparency 
3)    Governance and Tax: Aligning ESG policy with Tax behavior, understanding and applying CSRD and CSDDD, payment of appropriate global corporate taxes, process controls and compliance, assessing the total tax contribution.

This is a lot of information and new controls and reporting requirements that are being placed on companies. Companies may face difficulties with data collection and analysis, understanding reporting standards, resource constraints, and availability of reporting tools.

What is the key takeaway for companies?
  • ESG is on the Board agenda.
  • Tax should be pro-active in aligning to wider ESG initiatives.
  • Conversations to be had can focus on: 
    • Be aware of country and multilateral legislation and initiatives that will impact their level of tax disclosure.
    • Benchmark their tax disclosures to their industry and peers.
    • Support the business in terms of internal governance and tax risk management.
    • Ensure a culture of no surprises when it comes to tax risk and tax transparency.