Tax – the missing piece in ESG
Evi Geerts and Jonas Van de Gucht of PwC Belgium explain why tax is a critical, but often underestimated piece of the ESG puzzle.
There is certainly no need to explain to you what ESG is, it is hard to miss one of the hottest topics in business right now.
ESG is everywhere, it influences investors’ portfolio management, MNE’s strategic decision making and global policy and lawmakers to name just a few. With the proliferation of ESG reporting and ratings also comes the need to ensure ESG data is consistent and performance can be accurately measured. Tax is a critical, but often underestimated piece of that puzzle. Let us tell you why.
First of all, taxes say something about a company’s integrity. A company’s brand serves as a vehicle for its values. And consumers test how a company delivers on those values. Net zero pledges and diversity initiatives may serve as a great foundation, but there is more to bring to the table. This is where taxes play a role. Taxes have evolved from a mere cost of doing business to a payment for a company’s license to operate in society. ESG has put pressure on MNEs to be clear about their purpose. It forces them to think about how that purpose can make a positive social and environmental contribution. Taxes are an important metric that will help test this contribution empirically.
Secondly, ESG also serves as a great overlay for sustainable tax management, which in turn helps companies to make tax transparency meaningful. Over the past year we have seen an ever-increasing push towards tax transparency, with a clear focus on corporate income tax.
The EU’s public country-by-country reporting requirements and pledge to work towards disclosure of effective tax rates are but two examples of this. These measures force companies to disclose information that allows stakeholders to test the sustainability of their tax policy. Mandatory tax disclosures give only a small snapshot of the big picture. Consequently, they risk giving an incorrect or incomplete view of an MNE’s economic activity and overall contribution to society. This is why it is vital for companies to have a clear tax strategy and to offer stakeholders meaningful transparency on their total tax contribution.
Finally, it is worth zooming in on the E in ESG from a tax perspective. Taxes are not only a contribution to society, they are also a means for governments to steer and incentivise behaviour. That is why taxes will play an important role when it comes to the environmental piece in ESG.
Climate change and environmental impact are at the centre of the international political debate. The EU wants to play a steering role in the world in this field, with the Green Deal and more specifically the EU’s recently published ‘Fit for 55’ package. This package includes a number of tax measures, such as a revision and expansion of the EU emissions trading system (ETS), the introduction of a carbon border adjustment mechanism (CBAM) and a revision of the existing energy taxation directive.
It Is clear that a trend is set and it is written in the stars that international organisations like the OECD and the UN will try to shape the future of environmental tax policy. Indeed, addressing climate change will require changes to the tax system as a whole. Against this backdrop, there is no doubt that environmental taxation will become a key pillar of a company’s tax strategy and management in the future. This fundamental change will require companies to adapt their tax function and strategy in the short term.
What to do as a tax professional?
Assess the tax policy and total tax contribution from a sustainability perspective. Does the tax contribution align with the ESG goals? In our next article we will go deeper into what one may expect from a sustainable tax policy and contribution and what a tax control framework can add.
Now is the time to prepare for the wave of new taxes. Next to environmental taxes, you can expect to see a ‘greenification’ of existing taxes such as corporate income tax and VAT.
ESG is high on the agenda of the board and C-suite. This creates a unique opportunity for the tax team to be part of that broader conversation and leverage that momentum to move towards a sustainable tax strategy, including meaningful tax transparency.
Needless to say, we have barely scratched the surface here and there is certainly much more to come, so stay tuned for our next deep dive.
Jonas Van de Gucht