Corporations must consider their ESG commitments within transfer pricing analyses, according to panellists at ITR’s Global TP Forum Europe, held in Amsterdam last week.
“The TP analysis is tied to the value creation. It is not easy from a TP perspective to predict when the ESG value is going to be evident for the company,” said Fernanda Navarro Barragan, EMEA TP manager at Trane Technologies in Brussels, speaking on Wednesday, September 28.
“Some companies see very short returns. The complexity lies in the long term. These profound changes are going to return value – ESG is bringing value to the table,” she added.
The challenge for corporations is to include the ESG value within their TP analysis, according to Barragan.
“As a TP specialist, we really need to look at our value chain analysis. The ESG changes are impacting every single part of the value chain,” she said.
The challenge is significant for TP directors as ESG changes will have an impact on every aspect of an organisation’s supply chain.
At Trane Technologies, the corporation chooses suppliers that align with its commitments to ensure they are carbon neutral.
But the ‘S’ and ‘G’ elements of ESG must also be considered, according to Barragan, which is why the company is also focused on increasing women’s leadership and promoting transparency from a governance perspective.
“The change was coming from the top and was then cascaded to the whole value chain,” she explained.
Norman Wingen, principal at the European Bank for Reconstruction and Development in London, also assessed the link between ESG and tax.
The link falls under the concept of governance (‘G’), in which more transparency is needed to become a responsible taxpayer.
Tax is also critical from a social (‘S’) perspective for countries to raise revenue and create a framework that fosters investments.
Finally, the environmental (‘E’) feature is also key, as policymakers must promote sustainable behaviour such as plastic or carbon taxes, according to Wingen.
Responsible taxpayers
Xin Liu, TP associate director at Teva Pharmaceuticals in Amsterdam, shared how her company was significantly involved in ESG.
In 2021, Teva issued the largest ever sustainability-linked bond in the pharmaceutical industry, worth $5 billion. Its targets included a reduction of greenhouse gas emissions as well as an increase in access to essential medicines in low- and middle-income countries.
However, issuing this type of bond has its pros and cons: while doing so can attract a large pool of investors, it can also create financial uncertainty .
“Does the bond enable us to borrow more, and at a lower cost? No, we have a huge effort to lower the level of debt in the group,” said Liu.
“The interest rate – potentially we have a lower rate because of this but it’s difficult to escalate the effects of the ESG feature with the issuance. It’s also difficult to measure and benchmark as well – especially as this is the largest-ever issued a bond in the market,” she added.
Corporations issuing ESG bonds will have to assess the relevant tax and TP aspects by ensuring they are a responsible taxpayer, according to Wingen.
“It’s about making sure the client I’m dealing with adheres with the tax and TP principles, from the issue of the bond up to the controlling ownership chain,” he said.
“If the TP is correct and if the entities have substance, we look at transparency,” added Wingen.
