Responsible Tax Matters: CSRD reporting and tax transparency

In the past year, we have published a number of articles and blog posts on the topic of tax transparency, CSRD, and GRI 207. With CSRD reporting just around the corner, and as companies must finalise their decision on how to treat tax under CSRD, taking into account the impact it has on their tax transparency reporting strategy, here below is a summary of our articles, with links to the relevant pieces.

The Corporate Sustainability Reporting Directive is the EU’s new directive on sustainability reporting, replacing and vastly expanding the Non-Financial Reporting Directive. It is a key component to the EU’s sustainable finance framework and part of the EU Green Deal.

Direct references to tax in CSRD, ESRS, and EU Taxonomy are few. However, the OECD MNE Guidelines, referred to in the EU Taxonomy and a source for the Final Report on Minimum Safeguards, have a full chapter on taxation. While not one of the topics for which EFRAG drafted a European Sustainability Reporting Standard, companies must report on tax if they identify the topic as a material one. To decide whether or not to report on tax, companies must assess whether tax is a sustainability matter, and if so whether it is a material one.

CSRD requires companies to conduct a “double materiality assessment”, meaning that companies must report on sustainability topics that are either financially material to them, and/or on the material impact of their operations on sustainability topics. If they do identify tax as material, they should report on it using GRI 207.

Reporting in line with GRI 207 can be challenging. In a series of blog posts, we discussed how to start and addressed some of those key challenges:

• How to get started
• GRI 207-2: Tax Governance, controls, and risk management
• GRI 207-3: stakeholder engagement and management of concerns related to tax

A major requirement of GRI 207 is the data disclosures. Collecting, validating, and getting the data ready for external assurance review and publication within the necessary timeline is a challenge.

Our solution is the Tax Footprint Analyzer, a technology-enabled tool that extracts individual tax payment journal entries from any ERP system, providing auditable consolidated data with fast and efficient processes.

As companies finalise their preparations for CSRD, there may still be disagreements on where tax fits. Some companies may have initially concluded that tax is not a material topic under CSRD, while still wanting to voluntarily report on it. This creates challenges and risks and may not be the best path forward for all.

With the first reporting cycle under CSRD around the corner, some companies have already given indications, either explicitly or implicitly, about how they will treat tax under CSRD. Analysing these reports may give you insights into approaches and possible trends in Denmark and abroad.

As per EU Directive 2021/2101, large companies and groups in scope with a consolidated revenue in excess of EUR 750m are required to disclose a lot of information on their European footprint, including revenue, earnings, tax payments, brief description of activities, number of employees, and other information.

In the last couple of years, companies across the EU have been gearing up to meet the requirements of the Directive. Some companies have even gone above and beyond and started to voluntarily report this required information – and earlier than required by the Directive.

Increased transparency on earnings, tax payments, substance and types of activities in various jurisdiction is all helpful in understanding the tax profile of a group. However, while numbers are important, they do not necessarily tell the full story, and purely reporting numbers without context or narrative causes a risk of companies’ approach to tax being misunderstood.

There are a number of valid reasons why a company may report significant profits in their financial accounts in a given jurisdiction and yet not report a tax payment equaling the statutory tax rate times the reported profits. This comes down to differences in how profit and loss is calculated according to applicable accounting standards and national tax legislation.

In some cases, there may be legitimate reasons for tax payments being minimal or non-existing despite reporting significant profits. This may for instance be due to accelerated tax depreciation allowed under the laws of the jurisdiction where the activity is conducted. Or it may be a result of incurring qualifying R&D expenditure granting tax credits or increased tax allowances (step-ups) under national law. Further, it may be the case that the company in prior years incurred significant operating losses, and these losses are now carried forward and offset against taxable income in the current year, or that the company receives dividends from subsidiaries benefitting from a participation exemption. 

By providing the narrative and context around the company’s tax contributions and by providing clear and concise explanations to why there may be significant differences in the reported profits and the profits or losses for tax purposes, companies assume control over their own story rather than leaving it to stakeholders to guess and draw conclusions based on an incomplete overview.

An accompanying narrative of the mandatory CbCR can thus be a powerful ally in helping your stakeholders and investors understand your approach to tax and avoiding misleading or misguided stories in the press, and it can help guide tax authorities to understand why numbers look the way they do.

What should be included in the narrative?

The narrative will always be individual to your company and your operations, and a standard template is thus not meaningful. However, where material to your operations, we generally recommend elaborating on:

• Background for any deferred taxes and reconciliations between current taxes and deferred taxes,

• What tax incentives you use and how, and how they impact tax payments.

• Losses carried forward from prior years (origin and impact),

• Withholding taxes (where did they arise, and how are they recognised in the accounts)

• Significant pending tax cases, including provisions and timeline for expected settlement.

There may be a number of other relevant topics to include depending on the particulars of your business operations and tax profile.

Summary

Like it or not, large companies in the EU will be required to be more transparent about their earnings and their tax payments in each country within the EU. More and more companies also disclose CbCR numbers for a broader range of jurisdictions than required under the Directive.

Providing a tailored narrative about and context of your reporting gives you the opportunity to take control over the storyline and inform and educate your stakeholders to enable them to take an informed view of your tax payments. Conversely, providing these numbers without appropriate context and narrative creates risks of stakeholders drawing incorrect or misguided conclusions about your approach to tax.

At KPMG Acor Tax, we are naturally at your disposal to help guide how the narrative can be structured and create meaningful understanding with your stakeholders.

• KPMG US colleagues discussed the potential business impacts of the new UN Tax Treaty in a recent Bloomberg article

• Our colleague Kevin Perry wrote a blog post on the TP considerations of carbon markets

• The UK government announced it will introduce legislation to regulate ESG ratings providers

• In a blog post on the IMF’s website, two IMF staffers discuss how tax policy can help deal with the massive carbon emissions from AI and crypto 

• KPMG colleagues published an insightful report on what the taxation of the circular economy means for businesses