Responsible Tax Matters

The latest draft text of the EU’s Corporate Sustainability Reporting Directive (CSRD), representing the political agreement between the EU Council, EU Parliament, and EU Commission was released in late June 2022. The next step is for the EU Commission to adopt a first set of delegated acts by June 2023, followed by sector-specific delegated acts by June 2024. Companies in scope of NFRD will need to start reporting under CSRD in 2025 for financial year 2024, while those not in scope of NFRD, but meeting the extended scope of CSRD, will need to start reporting in 2026 for financial year 2024.

The delegated acts, known as the European Sustainability Reporting Standards (ESRS), are being developed by the European Financial Reporting Advisory Group (EFRAG). As we reported in our first edition of the Responsible Tax Matters newsletter, GRI has a working agreement with EFRAG, and the Directive requires the EU Commission to take existing sustainability reporting standards – such as GRI into consideration.

The aim of CSRD is to review and update the Non-Financial Reporting Directive (NFRD) in order to improve and standardise reporting on ESG & sustainability matters. In turn, this should help investors assess reporting companies and direct their investments where they can best support the objectives of the European Green Deal, the Action Plan on Financing Sustainable Growth, and the objectives of the Paris agreement.

Tax as a sustainability matter is not specifically mentioned in the draft Directive. Therefore, at this stage, it is unclear whether, for instance, the requirement for companies to describe their “policies in relation to sustainability matters” could create a requirement for companies to publish a tax policy or not. It would depend on whether governance matters are defined as including tax governance issues. 

Considering the role of tax in sustainability and ESG matters, it could be argued that CSRD’s requirements to report on governance issues should include tax governance, as it refers to: the role of the Board with regards to sustainability matters; business ethics and corporate culture; political activity and lobbying activities; companies’ internal control and risk management systems in relation to the sustainability reporting and decision-making process. 

As the Directive does not specifically mention tax, we will need to wait for the EU Commission’s delegated acts to be published (EFRAG’s ESRS), which will specify what information companies will have to report on.

In conclusion, we cannot say yet whether tax reporting requirements will be included in the EU Commission delegated acts of CSRD – but the draft text of the Directive does not explicitly refer to tax. At this stage, the only certainty with regards to mandated tax reporting in the EU is the public CbCR Directive. It is also too early to tell if any of the CSRD reporting requirements will be aligned with GRI or another standard, or whether it will simply take inspiration and end up with, again, setting similar yet different requirements (like the EU’s public CbCR Directive).

For more insights on CSRD, we invite you to read KPMG’s latest CSRD publication here.

The Australian government recently announced that it will introduce Country-by-Country Reporting (CbCR) requirements for income years commencing from 1 July 2023. This was published in the government’s Budget Measures on 25 October 2022. Below is an extract from their publication, which provides a high-level description of what MNEs with revenue above AUD 1 billion can expect:

The Government will require:

• large multinationals, defined as significant global entities, to prepare for public release of certain tax information on a country by country (CbC) basis and a statement on their approach to taxation for disclosure by the ATO
• Australian public companies (listed and unlisted) to disclose information on the number of subsidiaries and their country of tax domicile and 
• tenderers for Australian Government contracts worth more than AUD200,000 to disclose their country of tax domicile (by supplying their ultimate head entity’s country of tax residence).

More details are yet to be published on what type of data will need to be reported, but we already note that, in addition to quantitative reporting on a country-by-country basis, disclosure requirements include a statement on the approach to taxation. 

Romania is the first EU Member State to announce having transposed the EU Directive on Public CbCR into domestic legislation. The rules will enter into force on 1 January 2023, six months before the deadline set out in the Directive.

Additionally, the rules will start applying on that same date, well ahead of the Directive’s deadline of June 2024. This means that, for calendar year taxpayers, the first reporting deadline will be in December 2024 for Financial Year 2023, instead of, respectively, December 2026 for Financial Year 2025, as set out in the EU Directive.

While it would be contrary to the Directive if non-Romanian EU-headquartered groups with activities in Romania found their reporting obligations to be triggered by the Romanian transposition of the law – the text of the Romanian law is unclear on the matter. Our KPMG colleagues in Romania are thus in the process of getting clarification from the Romanian tax authorities on the matter, and we will update you when we can.

However, the early adoption of the rule will impact non-EU headquartered MNEs with a “qualifying presence” in Romania, triggering Country-by-Country Reporting requirements on all their EU activities, as well as on their activities in jurisdictions listed as non-cooperative by the EU. 

In a recent hearing, the US Securities and Exchange Commission (SEC) chair Gary Gensler made statements indicating that the SEC supports the Financial Accounting Standards Board’s (FASB) efforts to increase tax transparency by introducing increased reporting requirements for corporate income tax payments. He stated: “I think that would be a productive approach to have such disaggregation that FASB is considering right now,” with reference to current efforts of the FASB considering introducing some form of public Country-by-Country Reporting. FASB’s considerations about the future of tax disclosures have previously been met by calls for public CbCR coming from investors. 

In a board meeting on 11 May 2022, FASB directed employees to further explore potential disclosure improvements by disaggregating income taxes paid by jurisdictions and by requiring additional information about tax rate reconciliation items. 

It is too early to say if this will lead to disclosure requirements for public CbCR in the US and whether it will be compatible or as extensive as the EU public CbCR requirements. But the SEC’s support is significant, considering that a bill requiring Country-by-Country Reporting in the US was passed by the House last year, but has not yet been introduced in the Senate. It signals that the direction of travel in the US is also towards greater levels of disclosure and that tax transparency, including CbCR, may end up being based on actual reporting requirements in the US as well.          

What environmental taxes, incentives and grants are adopted by governments around the world to help fight climate change? How will carbon emissions be priced tomorrow? Where are plastic taxes being implemented, and how?

The regulatory landscape is rapidly changing, and policymakers adopt different approaches from country to country, creating a need for an overview of environmental initiatives in every corner of the world. The KPMG ESG Tax Tracker provides a high-level overview of what environmental taxes, incentives, and other such policy initiatives are being developed and implemented around the world. 

This tracker is based on a larger database maintained by our network of KPMG experts, which provides detailed insights into taxes, incentives, and grants within the global ESG and Sustainability landscape. You are welcome to reach out to, for instance, discuss how the tax shift to green taxation is impacting your business; how to leverage the EU’s Fit for 55 package to support your company’s climate actions; or to get regular, tailored updates on new environmental tax initiatives around the world.

• On 30 November, KPMG’s ESG hub in Denmark will hold a seminar on decarbonisation plans, titled: “You’re on your net-zero journey – what comes next?” Søren Dalby, CEO of KPMG Acor Tax, will talk about the role of tax within the wider ESG agenda, and within the decarbonisation agenda in particular. Find out more information and sign up here.
•  “Big shifts, small steps” – KPMG Sustainability Reporting Survey 2022 is out and shows, amongst other things, that the GRI reporting framework remains the most widely used sustainability reporting framework around the world.