Responsible Tax Matters: Tax transparency, governance and sustainability

During April Økonomisk Ugebrev (ØU), Danish business journal, published their annual ranking of Danish companies based on their “Tax Governance” rating, which aims to measure, and encourage companies’ responsible approach to tax through transparent reporting.

In one of our newsletters last year, we wrote about the changes in ØU’s methodology for rating and ranking, including an 8th metric (on Total Tax Contribution), a new extra point in the metric on engagement with stakeholders, and some clarifications in its expectations, particularly with regards to the Tax Haven-metric. Consequently, companies could achieve 14 points instead of 12 points.

This meant that the metrics for 2024 were as follows:

1)    A published Tax Policy

2)    Information regarding Tax Havens

3)    Information regarding Tax Incentives

4)    Country-by-Country reporting

5)    Dialogue with Stakeholders

6)    UN Sustainable Development Goals

7)    If the Tax Policy is part of the Groups policies in their reporting

8)    The total amount of tax paid and collected during the reporting year.

Observations on the ranking for 2024

ØU decided to publish the metrics for 2024 in the Autumn of 2023 giving companies knowledge on both their redefinitions of the metrics as well as the new metric on Total Tax Contribution.

For some companies this may not have changed their strategy on tax reporting. However, we know positively that for some companies, the publication of the metrics in advance gave them an opportunity to develop their tax reporting and also define their agenda.

Vestas and Ørsted were the winners of the Large Cap segments. The two Groups have expanded their tax reporting significantly in the last years. In the Mid Cap segments, Cbrain was the winner in a segment where well-known Groups such as Tivoli, Matas, B&O, Flügger and Gyldendal are placed. However, none of them achieved a double-digit result.

In the unlisted companies’ segment , the winners were Grundfos and Stark – again Groups who have advanced on their tax reporting within the last couple of years.

Lars Larsen Group is – however – the one most noticeable. Lars Larsen Group achieved 5 points in 2023. In 2024, they have achieved a significant increase to their result getting 12 points of 14 points possible.

So, the overall picture is that the desire of Danish companies for transparency towards tax is not less ardent than before.

Evaluating New Metric no. 8 – Total Tax Contribution 

The wish for companies to disclose the total amount of tax they have paid and collected during the reporting year is not something new. Therefore, it is interesting and noteworthy that ØU decided to include reporting on total tax contribution, i.e., not only on taxes paid, but also taxes collected. However, it is quite peculiar that many companies have not received a point this year for disclosing a Total Tax Contribution, when they are known to disclose this information. Companies such as Carlsberg and A.P Møller Maersk have not received points on the metric for Total Tax Contribution. Nevertheless, they do indeed disclose their tax payments, but not within the scope of the new metric in the ØU Tax Governance Rating.

To some extent this could mean that the Tax Transparency agenda of the companies are more advanced than the ØU’s rating suggest.

New requirements?

ØU have been known to both redefine and set new metrics every year. Therefore, it will be quite interesting to see if ØU will set new metrics for 2025. If so happens, it will also be interesting whether companies’ qualification of tax in relation to CSRD will become a topic.

If you are interested to know more about the connection between tax and CSRD, you should save the date 6 November for attending our Sustainability and ESG in Tax Conference. Read more below.

The Danish Parliament has adopted two new legislative proposals, which involve a restructuring of the current CO2 tax and the introduction of a new CO2e emissions tax. Both will take effect on 1 January 2025. The new rules are an implementation of the political agreement on a green tax reform for industry and are a significant step towards achieving Denmark’s 2030 climate goal.

The taxes will be phased in from 2025 to 2030, and upon full implementation in 2030, the tax levels will be as follows (2022 prices):

The new rules mean significantly increased costs for companies' CO2 emissions, primarily from fossil fuels such as oil, natural gas, and coal. At the same time, the structure of the tax system will change significantly, as the current energy taxes will be restructured into a tax on CO2 emissions. These changes will thus introduce a high and uniform CO2 tax while reducing energy taxes on fuels.

The aim is to create a clear price signal for CO2 emissions, similar to what we know from the EU's emission trading system (EU ETS). Therefore, the level of the current CO2 tax will increase to match the expected price of an EU ETS emission allowance (1 ton of CO2) in 2030. Companies outside the EU ETS sector will thus have to pay a CO2 tax equivalent to the allowance price within the EU ETS sector based on expected future CO2 prices.

For companies covered by the EU ETS, there will be a CO2e emissions tax, which amounts to only 50% of the general CO2 tax (please refer to the table above). These companies will thus receive a 50% tax discount but will also incur the costs for purchasing CO2 allowances to fulfil their EU ETS obligations. Companies covered by the EU ETS with so-called mineralogical processes, etc. (e.g., cement and glass manufacturing) will receive an additional tax discount since they are considered to be at particular risk of carbon leakage (please refer to the table above).

Non-EU ETS companies currently granted a base deduction in the CO2 tax should be aware that this base deduction will end on 1 January 2025. The base deduction has been granted to certain companies previously covered by the rules for the so-called heavy processes.

It is politically planned that the rules will be revisited in 2026 and 2028 to ensure that the increased CO2 taxes work as intended, while also considering the competitiveness of Danish companies compared to EU and non-EU production.

As the new rules will take effect in just 6 months, it is important for companies to budget for the tax increases and update spreadsheets and calculation models. Additionally, EU ETS companies must register for the new CO2e emissions tax, although this is not yet possible.

In addition to the new carbon tax scheme for industries described above, the Danish government has also just announced the world’s first carbon tax on agriculture after a five-month negotiation with farming and conservation groups. From 2030 farmers will have to pay DKK 300 per ton of CO2e, rising to DKK 750 from 2035 onwards. However, a base deduction of 60 % means that the effective tax rate will be DKK 120 per ton of CO2e in 2030 rising to DKK 300 in 2035. Under the new tax framework, landowners will pay based on their emissions from livestock, fertilizer, forestry and the disturbance of carbon-rich agricultural soils.

Join us on 6 November 2024

Companies today must adapt their strategies and develop sustainable business models to join the green transition and remain relevant tomorrow. How companies respond to this challenge is not only shaped by new regulations, but also by stakeholder expectations, from investors and customers to their own employees and society at large.

All business functions are impacted and have a role to play. The tax function is finding itself playing an increasingly more strategic role: new laws directly impact the Head of Tax agenda; companies’ approach to tax is is being subjected to more and more intense scrutiny; governments funnel trillions of tax credits, grants, and incentives to shape behaviour and investment decisions; and changing business models encourage tax functions to reconsider their tax governance and risk management framework.

To dive deeper into the tax function’s role in the sustainability journey, we are pleased to announce that, after the success of last year’s event, we will be hosting a second Sustainability & ESG in Tax Conference 2024.

When taking part in the conference, you can expect to be introduced to the latest ESG developments from a tax angle and get insights into the practical role that the tax function can, and must, play in partnership with the business and sustainability teams.

The conference is therefore tailored not only for Heads of Tax and their teams, but also for Heads of Sustainability, Sustainability Managers, and C-level Executives.

Moreover, the facilitation of the conference will include a number of breakout sessions and panels, hosted by experts, both from KPMG and external partners.

Save the date now!

• CSDDD, aka CS3D, the EU’s corporate sustainability due diligence directive was finally approved in a watered-down version. KPMG colleagues addressed some of the impacts, including tax considerations, of CSDDD in a Bloomberg article.

• UK High court rules that the government’s climate plans are unlawful, as they do not consider enough the risks related to their high reliance on yet-to-be developed new technologies to meet targets.

• EU adopts new rules requiring 90% emissions reductions from trucks and buses by 2040.

• The B-Team published an accountability report on its responsible tax principles signatories’ advances – accountability report 2024.

• Vanderbilt Law Review article The Missing “T” in ESG finds that some of the highest rated ESG companies are also some of the worst in terms of tax behaviour. The article thus argues in favour of integrating tax avoidance behaviour in ESG ratings.
• Equinor non-state investors are unhappy with strategy and emissions reduction trajectory.

• The EU Tax Observatory published a Global Tax Evasion Report, branded as “an unprecedented research collaboration investigating the successes and failures of the fight against tax evasion over the last decade, building on the work of more than 100 researchers globally”.

• As an example of how emission reduction targets impacts all areas of an organisation, the LEGO Group employees’ bonus are now linked to emission targets.