ESG and taxation: a new challenge ahead
International Tax Review is part of the Delinian Group, Delinian Limited, 4 Bouverie Street, London, EC4Y 8AX, Registered in England & Wales, Company number 00954730
Copyright © Delinian Limited and its affiliated companies 2024

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement
Sponsored

ESG and taxation: a new challenge ahead

Sponsored by

sponsored-firm-mlgts.jpg
city-1799658.jpg

João Miguel Fernandes of Morais Leitão, Galvão Teles, Soares da Silva & Associados considers the societal factors and international initiatives driving the increasing adoption of ESG concepts in business strategy.

The various challenges that society is facing – triggered by factors such as digital transformation, climate change, the COVID pandemic and the war in Ukraine – are contributing to a fast paradigm shift regarding the principles and purposes that traditionally ruled society, in general, and economic activities, in particular.

This context has led to a significant growth in the importance of matters such as responsible investing, sustainability and wellbeing. The primary focus of business practices has moved from costs and short/medium-term profitability to an approach more focused on long-term value creation, through the adoption of ESG concepts in business strategy.

Although influenced by several factors – such as industry, geography or culture – the cornerstones of ESG tend to be:

  • At environmental level – climate change; energy, waste and water sustainability; and carbon and green taxation;

  • At social level – employees’ health and safety, talent management and workplace diversity; and

  • At governance level – executive board independence and composition, executive board compensation, transparency for stakeholders and responsible tax policies.

International initiatives to promote ESG

During the past few years, a large number of international organisations have promoted initiatives to develop and spread principles and standards for ESG reporting, such as:

In turn, several institutional investors have also developed ESG investment requirements and some ratings agencies, such as S&P and Sustainalytics, have developed ESG ratings and rankings.

Moving towards a fairer system

The general ESG trend is also in line with the updates that occurred during the past decade within the scope of taxation that aimed to adapt the tax system to the challenges of today and towards a fairer allocation of tax bases and income, grounded on the proper economic substance of tax structures. Examples are the OECD BEPS and BEPS 2.0 projects and the package of EU directives to implement measures against tax avoidance practices and increase tax transparency, such as the two anti-tax avoidance directives, DAC6 and the unshell directive proposal.

Therefore, taxation is a key part of ESG, on one hand, as a useful tool to be considered by the economic actors in the structuring and setting up of ESG policies, and, on the other hand, as a relevant standard to assess if those economic actors are ESG compliant.

The Portuguese tax system

Within the scope of the first dimension referred to above, it should be highlighted that the Portuguese tax system sets out several regimes and tax benefits that should be considered when structuring ESG policies in order to implement them efficiently; namely:

  • The corporate income tax regime for the granting of social benefits to employees;

  • The tax benefits for investment support;

  • The tax benefits for real estate allocated to the production of renewable energies; and

  • The creation of car and/or bike-sharing systems.

With regard to the second dimension, ESG will put an additional pressure on economic actors to provide qualitative and quantitative information about their tax policies, strategies and risks, improving and extending reporting duties towards stakeholders and tax authorities. Nevertheless, in a scenario where this challenge is properly addressed by the economic actors, the tax policies developed for ESG purposes may represent a relevant instrument.

In fact, such tax policies may be useful to document and relate the adopted tax strategy with the company’s overall values and evidence their economic substance and alignment with its business purpose, allowing taxpayers to properly evidence the economic rationale and substance of their structures and/or transactions, if challenged by the tax authorities.

Adaptation is key

Considering the above, this is a moment at which companies should focus their attention on the development and implementation of ESG policies to adapt their structures proactively and efficiently to these new demands, taking into consideration the particular importance that this matter may have for tax purposes.

more across site & bottom lb ros

More from across our site

Despite the relief, Brazil’s government has also presented a bill which seeks to re-impose a tax burden on companies’ payroll, one local tax specialist told ITR
Jeremy Brown arrives at the firm after a near 16-year career with Deloitte
PwC could elect a woman into the senior leadership position for the first time; in other news, KPMG Australia has extended its CEO’s term
The Senate report into PwC’s scandal is titled ‘The cover up worsens the crime’
Law firms that are conscious of their role in society are more likely to win work, according to a survey of over 23,000 in-house professionals
The firm’s tax business generated a quarter of HLB’s overall revenues in 2023
While successful pillar two implementation will require collaboration across all units, a combination of internal and external tax advice is at the centre of the effort
Binance has also been accused of manipulating foreign exchange rates via currency speculation and rate-fixing
Six individuals should have raised questions over information they received but did not breach professional standards, according to the firm
The partnership of KPMG UK has installed Holt for a second term as CEO and senior partner; in other news, a Baker McKenzie partner has sued the IRS
Gift this article