All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Luxembourg: Mapping the EU’s path to sustainable tax governance

Sponsored by Sponsored_Firms_deloitte.png
The EU has set out plans to enhance sustainability and tax transparency

Grégory Jullien of Deloitte Luxembourg looks at how tax policy is evolving to create a more transparent and sustainable environment for businesses in the EU.

Tax became a focal point for European public opinion in the aftermath of the 2008 financial crisis. Since then, transparency towards tax administrations has grown continuously in the EU. With the shift towards sustainable economic growth - the main pillar of the EU policy agenda - tax has become a fundamental part of corporate sustainability strategies.

Enhancing sustainability

The success of this EU strategy is dependent on the measurement of sustainability. There are few legal requirements for businesses to be publicly transparent regarding taxes (such as in Australia, Spain, and the UK, or in the extractive and banking sectors) beyond pure financial reporting obligations like the international financial reporting standard (IFRS) or the Sarbanes-Oxley Act (SOX) in the US. However, a significant number of voluntary best practices exist as put forward by bodies such as the B Team and the Global Reporting Initiative (GRI).

From 2021, the EU will enhance sustainability reporting by connecting it to financial reporting and creating tax transparency obligations. Taxation will become embedded in sustainability reporting aimed at measuring business performance based on environmental, social, and corporate governance (ESG) criteria. Businesses will have to report about tax twice - once for financial reporting purposes to their shareholders, and a second time for sustainability reporting purposes to a much wider base of stakeholders, including tax administrations, governments, regulators, investors, clients, and the general public.

For example, under the EU Sustainable Finance Disclosure Regulation, financial market participants and advisers must disclose sustainability risks in all investments, notably with respect to companies’ good governance practices and in particular tax compliance, while the revised Non-Financial Reporting Directive will probably include a tax dimension in 2021. The challenge posed by sustainability in relation to tax requires businesses to anticipate, adapt and act proactively by developing and mastering tax policy, tax governance, and tax communication, which are interdependent.

Creating business confidence through transparency

In this evolving and complex environment, where the costs of cross-border business are rising due to increasing tax risks and double taxation, businesses are facing growing pressure for tax transparency. Society requires them to explain and demonstrate the sustainability of their tax governance and control framework for fulfilling their tax obligations (i.e. to explain their strategy and approach to tax management).

Businesses are also expected to explain the outcome of this sustainable governance (the taxes paid and collected) based on data that is not yet available. Communication regarding taxation is an important and constituent part of sustainable governance, but it is a highly technical subject that may be difficult for stakeholders to understand. As a result, tax transparency will continue to evolve.

Anticipation is key on tax matters, especially to adapt and align communications about tax to sustainability expectations regarding appropriate oversight and control of tax risk. Businesses must adopt a forward-looking attitude to understand future regulatory and tax policy trends. Mastering tax policy is a pre-requisite for creating sustainable tax governance. This implies developing the resources to monitor the tax policy agenda of national, EU, and international institutions in order to be part of the tax policy discussion, rather than being its subject.

Growing pressure is placed on businesses to better manage tax and related risks by strengthening the control environment governing reporting processes and by facilitating real-time compliance and data-oriented auditing by tax administrations. It is time for companies to assess the sustainability of their tax governance and control framework in order to adapt and meet sustainability expectations and reporting obligations. This will take time and require significant resources. Clearly, sustainable tax governance can no longer be considered in isolation from a broader business governance and sustainability strategy.

Businesses taking pre-emptive action to understand the landscape, and creating a tailored tax governance and control framework, will be able to participate in tax policy discussions and share their experience and point of view. They will also be in a position to produce the data needed to communicate effectively about tax and demonstrate the sustainability of their tax governance in fulfilling their tax obligations. Sustainable tax governance should produce many other benefits, such as a reduced tax risk and associated costs, the proactive identification of gaps, enhanced processes, improved tax reporting to the board and stakeholders, evidence of effectively managed tax risk, etc. It will also allow businesses to enter into cooperative tax compliance arrangements, which will evolve further in the EU and improve tax certainty and relationships with tax authorities.

Whatever the form and extent of tax transparency obligations, and regardless of any link to sustainability, there will be an incentive for businesses to voluntarily exceed requirements (especially if public country-by-country reporting is adopted) so that they can deliver their vision of the management of taxation and provide meaningful explanations of highly technical and complex tax information to their stakeholders. They can draw on the growing body of voluntary tax transparency measures, such as the GRI or B Team, to achieve this goal.

Businesses will only be able to successfully address the challenges of sustainability in relation to tax by creating sustainable tax governance.

Grégory Jullien

Senior manager

E: gjullien@deloitte.lu

More from across our site

This week European Commission officials consider legal loopholes to secure minimum corporate taxation, while Cisco and Microsoft shareholders call for tax transparency.
The fast-food company’s tax settlement with French authorities strengthens the need for businesses to review their TP arrangements and documentation.
The full ALP model will be adopted through a new TP regime, which is set to boost the country’s investments and tax certainty.
Tax professionals have called on the UK government to reconsider its online sales tax as it would affect the economy at the worst time.
Tax professionals have called on companies to act urgently to meet e-invoicing compliance targets as the EU plans to ramp up digitisation.
In the wake of India’s ambitious 25-year plan for economic growth, ITR has partnered with leading tax commentators to discuss what the future will look like for India and for the rest of the world.
But experts cast doubt on HMRC's data and believe COVID-19 would have increased the revenue shortfall.
EY’s plan to separate its auditing and consulting businesses might lessen scrutiny from global regulators, but the brand identity could suffer, say sources.
Multinationals are asking world leaders to put a scale on carbon pricing to tackle climate change at the 48th G7 summit in Germany, from June 26 to 28.
The state secretary told the French press that the country continues to oppose pillar two’s global minimum tax rate following an Ecofin meeting last week.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree