ESG factors: Tax is also in the spotlight

There is considerable discussion around the impacts of environmental, social and governance (ESG) factors on private and public companies with the introduction of mandatory and voluntary measures involving disclosures. This can impact companies of all sizes and across a variety of industries.

The ESG framework aims to integrate environmental, social and governance risks and opportunities into an organization's strategy to help develop a future based on sustainability, growth, and profitability. These factors can then be used by investors and consumers to assess a business based on its approach to these risks and opportunities.

Examines performance as an environmental leader

Examines how the business treats its employees, suppliers, and the community as a whole

Examines how the business regulates itself and is managed

Corporate social responsibility is increasingly important, including the way the public and investors view their operations and behaviour as corporate citizens. For example, a business could be more willing to “pay its fair share” of income taxes and apportion its global revenue base more equitably. There could also be greater board accountability regarding tax and transparency obligations.

Responsible fiscal behaviour is now recognized as a key component of sustainable business. There are also many more disclosure and fiscal transparency obligations due to growing stakeholder demand (including tax authorities). How can tax departments manage these demands, and do they have the tools they need to meet these obligations?

In establishing an effective ESG strategy, it will be important for a business to develop and incorporate internal policies and procedures regarding these new obligations as well as a stringent framework for managing tax risks. It is critical to adopt risk management policies that clearly identify the various risk owners. Who is held accountable for tax risks? Is a board-approved tax strategy or policy in place? If so, is it available and does it clearly outline the business’s organizational tax approach? Is the strategy being implemented across all jurisdictions and are there mechanisms in place to ensure awareness and buy-in?

Given the growing demand for reports and data, it may also be a good idea to automate some compliance services/tasks. In an environment where more and more data is processed, this automation could help better meet demand while ensuring the quality of the information transmitted. Tax automation can streamline specific everyday tasks that can otherwise be time-consuming and repetitive. To name a few, automation could be used in such functions such as gathering data from several sources, generating jurisdiction-specific adjustments and reports, performing reconciliations, etc.

In today’s fast-paced and complex business landscape, global tax transparency, real-time information sharing, and compliance management have become increasingly common and continue to be time-consuming. In the current and future tax department, transforming or modernizing the tax function through technology is fundamental. Through this transformation, the technologic tax strategy should include tax automation technologies and should aim to maximize the tax functionality of existing platforms. Altogether, this will bring new value to the business. Simply put, constantly doing more with less is the name of the game.

Several tax technologies, innovative software and improved data analytics are now available to help tax departments deal with regulatory changes, turn data into value and enable effective collaborations between functions in the business – a more holistic approach is key. Thus, tax technology tools can bring efficiencies, increase data accuracy, enhance transparency, and contribute to timely delivery. In addition, innovative technology can help support tax data management and contribute to minimize risks and manage exposure.