Where tax fits into the CSRD jigsaw

The world of corporate sustainability reporting is awash with acronyms; CSRD, ESRS and DMA to name but a few. Tax Partner Paul O'Brien explains the role tax plays in corporate sustainability reporting below.

Even if you are not yet fluent in the language of the CSRD, there are two key facts you need to be aware of:

From 2024, over 50,000 EU based companies are expected to be in scope for additional annual reporting requirements under the Corporate Sustainability Reporting Directive (CSRD).
To comply with these requirements, these companies must carry out what is known as a Double Materiality Assessment of various aspects of their business.

A Double Materiality Assessment (or DMA for short) is a relatively simple concept. It requires that companies assess both the impact of the company’s actions on natural and human resources and also the financial impact of climate change and sustainability on the company itself and its future prospects. As JFK may have put it, you are required to ask not only what the environment will do to you, but what you will do to the environment.

While the concept of the DMA is simple, the detail which sits behind it is not. As a result, there are a large number of organisations undertaking quite significant projects to get data collection and reporting systems into shape to meet the demands of the CSRD.

Tax may not instinctively be thought of as a material piece of the overall CSRD reporting jigsaw. However, it can be an important feature in some circumstances and certainly should not be ignored.

Tax as part of the Double Materiality Assessment

As an outcome of the DMA, companies must disclose material topics that have “financial materiality” or “impact materiality” on the environment or society in general. Financial materiality is easily understood, as it requires that you consider which sustainability related matter (e.g. climate change, biodiversity, workers’ rights) has a material financial impact on the company’s future growth prospects.

Impact materiality is less easy to grasp for more traditional businesses. It requires disclosure of sustainability related matters that have an actual or potential, positive or negative material impact on the environment or society in the short, medium or long term.

The originators of the CSRD, the European Financial Reporting Advisory Group (EFRAG – another acronym!) have called out tax as a potential material topic for some companies.

Disclosure standards

Where tax is a material topic, the form of the disclosure may be based on the GRI 207 Tax Standard. While there are specific reporting standards for some topics, such as “Climate Change”, “Pollution” and “Own Workforce”, contained within the European Sustainability Reporting Standards, there is no specific disclosure standard for tax.

Under the GRI 207 standard the following disclosures are required:

Disclosure 207-1: Approach to tax. Disclosure required on the organisation’s tax strategy, oversight and alignment with its sustainability strategy.

Disclosure 207-2: Tax governance, control, and risk management. Disclosure required on the organisation’s tax governance structure and how tax risks are identified, managed and monitored.

Disclosure 207-3: Stakeholder engagement and management of concerns related to tax. Disclosure required on the manner in which the organisation engages with its stakeholders on tax matters.

Disclosure 207-4: Country-by-country reporting. Disclosure required on quantitative data, including its revenue, tax, and business activities on a country-by-country basis.

The importance of the CSRD in terms of moving from a “best practice” to a legal requirement, cannot be overstated.

Paul O'Brien

Partner

KPMG in Ireland

Relevance of the EU taxonomy

Under the CSRD, in addition to the items that meet the double materiality threshold for reporting, companies must also report the percentage of their current revenues and the percentage of their future revenues (capital expenditure) from activities aligned with the EU Taxonomy. The EU Taxonomy is a common classification of economic activities significantly contributing to environmental objectives, developed by the EU.

The Minimum Safeguards are part of the EU Taxonomy Regulation and have been developed at the request of the European Parliament to ensure that entities carrying out environmentally sustainable activities also meet certain minimum governance standards and do not violate social norms, including human rights and labour rights.

In other words, the Minimum Safeguards are meant to ensure that activities that are sustainable also meet a broader set of criteria around: human & workers’ rights, corrupt practices and bribery, taxation, and fair competition.

Regarding tax, the Minimum Safeguards require alignment with the OECD’s Guidelines for Multinational Enterprises. The OECD MNE Guidelines include a separate chapter on Taxation, which prescribe that companies should comply with the letter and the spirit of tax laws and regulations in which they operate. Therefore, companies should treat tax governance and tax compliance as important elements of their oversight and broader risk management systems.

Clear trend

The importance of the CSRD in terms of moving the dial from a “best practice” to a legal requirement, cannot be overstated. In tandem, the EU has introduced a public country by country reporting directive which requires large multinational groups to publicly make available specific tax related data on their operations on a country-by-country basis. Although those rules have been implemented in Ireland, they will apply only for financial periods starting after 22 June 2024.

Get in touch

The movement towards public disclosure of tax strategy, tax controls and tax data for large companies is clear and it’s happening now. KPMG has specialist tax and ESG reporting advisors who can help companies in this space manage their obligations and ensure they have adopted best practice.

If you have any queries on ESG, environmental taxes, and transparency reporting, please contact Paul O'Brien of our Tax team. We'd be delighted to hear from you.