By end of March, more than 200 “wave 1” companies had published their CSRD-aligned annual and sustainability reports. Going through these reports, we find many different approaches to dealing with tax reporting under this new regulatory framework. This article does not aim to be exhaustive, but rather to point out some of the interesting findings from the first batch of reports. For a much more detailed analysis of the state of tax transparency in Europe based on FY22 and FY23 disclosures, we recommend the EBTF’s report published end of 2024, which KPMG member firms prepared for the EBTF.
To start, we should acknowledge that out of the 200+ companies that have now reported under CSRD, the majority do not yet report on their tax affairs beyond the statutory obligations of the financial statements. However, many do at least acknowledge that “taxation” is a component of the minimum safeguards under the EU Taxonomy, even if they do not always provide evidence for their compliance. We should also note that many companies are still to publish their FY24 annual reports, so this initial assessment may not be representative of the whole.
Before digging deeper into how companies did include tax reporting, one company stood out for having entirely dropped its reporting on tax, despite fully reporting in compliance with GRI 207 in the past. While this is one logical step when not identifying tax as a material topic, it would have been valuable for their stakeholders if they had explained why a topic that previously met the impact materiality standard of GRI did not meet it as part of their CSRD reporting. As we discussed in a previous blog post, companies who used to report on a topic as part of their sustainability report and who stop reporting on it under CSRD should ideally explain the reason why – and to ensure doing so, the best approach is to include all previously reported sustainability topics in the double materiality assessment.
Then, looking at companies that do publicly report on their tax affairs, there are three main camps, each with subdivisions:
- Companies that address the topic of tax, and their management of tax, as part of their sustainability statement, i.e. as part of their CSRD reporting.
- Companies that report on their tax affairs in another section of their integrated annual report, but not as part of their CSRD reporting.
- Companies that largely report on their tax affairs outside of their annual report, either on their website or in a separate tax report. They may link to this reporting in their annual report, either in their sustainability statement or in another section of the annual report.
Tax in the sustainability statement
While, probably unsurprisingly to habitual readers of this newsletter, many Nordic companies continue to report in detail on their tax affairs, they have also taken different approaches:
- Some identified tax as a material topic as part of their double materiality assessment (DMA) and therefore reported on tax as an entity-specific topic. In some cases, they also opted to publish a separate tax report, providing much more detail than what is included in their sustainability statements.
- At least one company included its information on tax management in ESRS 2 – General Disclosures, and in addition linked to country-by-country reporting data on its website.
- Some companies included information on tax management or included their tax policy in the Business Conduct topic (ESRS G1).
Of course, many companies outside of the Nordics have also included tax in their CSRD reporting, whether in Spain, France, Italy, the Netherlands, and more. Spanish companies, particularly in the financial sector and the energy sector, have quite consistently identified tax as an entity-specific topic – more so apparently than in any other country. One reason for that could be that the corporate governance recommendations in Spain list as a principle that companies “should deploy an appropriate environmental and social sustainability policy, as a non-delegable board power, and report transparently and in sufficient detail on its development, application and results”. As a recommendation to that principle, they add that “environmental and social sustainability policies should identify and include at least the principles, commitments, objectives and strategy regarding shareholders, employees, clients, suppliers, social welfare issues, the environment, diversity, fiscal responsibility, respect for human rights and the prevention of corruption and other illegal conducts” (emphasis added).
In other words, the Spanish Good Governance Code of Listed Companies specifically identifies tax as a sustainability issue that should be overseen by the Board and reported on. Combined with CSRD and the expectations it sets regarding the structure of the annual report, it seems logical that tax should be included in the sustainability statement (i.e. the CSRD report) of the integrated annual report.
Tax outside of the sustainability statement
More companies continue to report on their tax affairs outside of CSRD and the sustainability statement. Looking through these reports, we find companies detailing their tax affairs and publishing tax data in the Governance Report, in the Management Report, in sections dedicated to shareholder information, or, quite often, in the tax notes to the financial statements.
One finding is that the location chosen by companies to include their tax reporting does not necessarily provide much insight into the level of detail or the quality of their reporting. Some companies, while referring to tax in their CSRD report, do not specifically follow GRI 207 or provide a comparable level of information. At the same time, some companies who elected to put their tax reporting in other sections of their annual report did provide very detailed reporting, sometimes also based on GRI 207.
This is also true when it comes to assurance levels; while including tax in the CSRD report ensures that it will have been part of the limited assurance review, many companies who did not cover tax as part of their CSRD report still decided to ask for a limited assurance review.
It will be interesting to see whether approaches ultimately converge over the next few years, and how key stakeholders respond to the “wave 1” companies’ approach to tax reporting. We should also keep an eye on how investors react to companies’ approach to evidencing compliance with the minimum safeguards; indeed, many companies only claimed compliance without providing any evidence of said compliance.
Finally, while Romania already required large MNEs to publish country-by-country reports under the EU directive in 2024, the reporting obligations will start in the rest of the EU for FY25, with reports to be published in FY26. The interaction between CSRD and the EU directive on public CbCR – as well as the Australian requirements on public CbCR – will be a key issue for companies, especially for those who do not yet report on their tax affairs.
Indeed, companies will need to ask themselves whether they want to explain their data with a narrative, and will then need to decide how and where to include that narrative. One logical option would be to integrate that reporting in the annual report, either as part of the sustainability statement or not, which would also require to have the country-by-country data ready by the time they publish their annual report – much earlier than the timeline those same companies will have been following to submit the “private” CbC reports to tax authorities.
