Exploring the Integration of Tax in EU Sustainability Regulations

Integration of Tax in Corporate Sustainability Strategies

Integration of tax in the corporate sustainability strategy is necessary to:

• Support commitment to tax compliance, including paying the right taxes in the right places at the right times.
• Prevent causing harm in relation to tax, through guarding against aggressive tax strategies, i.e., those which involve contrived or artificial arrangements and lack commercial substance, which cause harm to society and the economy.
• Detect and use opportunities in grants and incentives to finance the corporate green transition.
• Apply robust tax governance to manage tax impacts, risks and opportunities, including risks related to new taxes (e.g., carbon taxes) on the business model and value chain.
• Report transparently on tax, supporting (re)building of trust in corporate tax practices.

Various international organisations, including the United Nations (UN), the Organisation for Economic Co-operation and Development (OECD), the European Union (EU), the UN Principles for Responsible Investment (UN PRI), the Global Reporting Initiative (GRI) and the World Economic Forum (WEF), acknowledge the important role of taxes in sustainable development as well as the harm that aggressive tax strategies cause to society and the economy. This is also visible in the tax expectations various international investors have towards their investments.

Corporate Sustainability Reporting Directive (CSRD) and ESRS

The CSRD and ESRS modernize and strengthen rules concerning the social and environmental information that companies must report. Tax, as a sustainability matter, should be included in ESRS 2 general disclosure requirements, which apply to all sustainability matters across four dimensions: (1) governance, (2) strategy, (3) impact, risk and opportunity management, and (4) metrics and targets. One of the general disclosure requirements of ESRS 2 is the double materiality assessment. As a sustainability matter, tax must be incorporated into the double materiality assessment to ensure a comprehensive evaluation of the organisational material impacts, risks, and opportunities.

If, based on the required double materiality assessment, a company and its stakeholders consider tax as a material topic, the organization is required to publicly disclose information on this matter in line with the ESRS, including more exhaustive general requirements in ESRS 2. If the necessary (ESRS) standard is not available, which is the case for tax, entities can use the Global Reporting Initiative (GRI) standards to report on material topics. For tax this means that the GRI 207 Tax Standard can be used for reporting under the CSRD.

When tax is not considered a material topic, organisations can still choose to voluntarily report on tax matters, thereby recognizing tax as a fundamental topic. Companies that opt to share their tax approach and data do so for various reasons, including meeting specific tax disclosure requirements (e.g., Australia tax transparency reporting, UK Tax Strategy, EU Public Country-by-Country Reporting) which have sustainability considerations. This helps to build trust within communities and strengthen the license to operate.

EU Taxonomy Regulation

For tax this means, amongst other things, that organisations:

• Should comply with the letter and the spirit of tax laws and regulations.
• Should treat tax governance and tax compliance as important elements of their oversight and broader risk management systems.

Sustainable Finance Disclosure Regulation (SFDR)

The SFDR is the EU’s transparency framework that sets out how financial market participants have to disclose sustainability information. Under the SFDR, tax is relevant in multiple ways, including:

• As part of the SFDR definition of a “sustainable investment”, it is a requirement that “such investments do not significantly harm any of those [sustainability] objectives and that the investee companies follow good governance practices, in particular with respect to sound management structures, employee relations, remuneration of staff and tax compliance”.
• As part of the investor’s policies on the integration of sustainability risks in the investment decision-making process, tax is one of the risks to be considered during the life-cycle of the investment.
• As part of the SFDR, the principal adverse impact indicators include: violations and lack of processes and compliance mechanisms to monitor compliance with OECD MNE Guidelines (including tax), and investments/revenues in jurisdictions on the EU list of non-co-operative jurisdictions for tax purposes.

An increasing number of investors are now publicly stating their tax expectations for investees and using methods such as shareholder engagement and voting to emphasize responsible tax practices as essential for sustainable development and enterprise risk management. Tax transparency is a critical initial step in these dialogues.

Recommendations

In conclusion, we offer some recommendations that may prove beneficial for the ongoing advancement of sustainable tax practices:

• (Further) develop an approach to tax that is aligned with the sustainability strategy and organisational stakeholder expectations, taking into account international accepted standards.
• Challenge yourselves to think and act beyond mere compliance when pursuing goals like sustainable development.
• Apply robust tax governance, risk and data management to ensure adherence to the tax policy, including public commitments to (responsible) tax initiatives.
• Adopt a recognized multi-stakeholder reporting standard for their tax disclosures, such as GRI 207, which is acknowledged by the CSRD/ESRS and the EU Taxonomy Regulation. Employing such a standard facilitates compliance with these regulations.
• When transparently reporting on tax, consider focusing on the larger tax contributions (e.g., total tax contribution reporting that also takes into account incentives received).
• Consider the depth of your tax disclosures and whether you want to include a variety of taxes, such as indirect taxes and wage taxes, as well as environmental taxes like carbon taxes and plastic taxes, and incentives.
• Be aware of the risk of being perceived as engaging in greenwashing through publishing incomplete tax reporting and/or using a "self-made" or "business-only" methodology.
• Consider requesting external assurance for public tax reporting to provide comfort to stakeholders.

Dive Deeper into the Details

Want to explore the full details of how tax integrates into EU sustainability regulations? Download the full articles for comprehensive explanations of the CSRD, ESRS, SFDR, and more. Gain detailed insights and practical guidance by accessing the complete PDF downloads included on this web page.