Tax and the ESG agenda are inextricably linked.
The need for companies to ‘do the right thing by society’ has shone a light on their tax affairs. Meanwhile, governments are keen to drive tax transparency, and to use tax as an incentive to help achieve their environmental and social ambitions.
At the same time, tax is itself an ESG metric. As stakeholders apply an ESG lens to their assessments of businesses, tax strategy and governance have become an important pillar of a firm’s ESG story and reputation.
In this context, as a tax leader you must consider not just how to support your organisation’s ESG journey, but also how to add value to it.
That’s not to suggest that every firm will need to transform its tax strategy and governance. But ESG is now a boardroom priority, and that will mean heightened scrutiny on tax functions – particularly their risk-management processes and controls.
Executives will expect to take advantage of the incentives, grants, subsidies, and reliefs that governments introduce to encourage the right behaviours. And they’ll want reassurance that the organisation is fully compliant with all applicable laws and regulations.
As a tax leader, then, you need to be part of the ESG discussions happening at board level. And you’ll need to integrate your tax practices and governance across the organisation’s functions – to support your businesses’ ESG programme in five critical focus areas:
1) Net zero
The tax function will be expected to support the net zero drive. For example, by introducing employee benefits that incentivise eco-friendly behaviours.
But its role in decarbonisation goes further than this. Any changes made to the business could have tax implications – for instance, developments in the supply chain may affect transfer pricing. Plus, as noted, it will be down to you and your team to access the appropriate green incentives and reliefs.
Tax governance goes beyond executing the organisation’s tax strategy and approach to managing tax risks. You’ll need to implement the processes and controls that will enable you to do so. And you must be able to demonstrate that they’re in place.
Ask yourself: how confident are you that they’re working as they should? Do they provide adequate coverage across all of the taxes that the business is exposed to? Does your team have the resources required to operate them effectively?
Also, are they documented in enough detail? The same goes for the internal testing procedures you use to monitor their effectiveness.
Without robust evidence that you’re following the organisation’s tax strategy, it will be difficult to show stakeholders that your organisation is managing tax risk properly.
Finally, are you prepared for future risks? A horizon-scanning programme will help you identify, assess and comply with any new tax regulation affecting your business or suppliers, in any of the countries where you operate.
Being transparent about your tax arrangements will give you licence to tell your own ESG story. That’s vital in today’s climate. Public and political pressure to tackle unsavoury tax practices is on the rise. And crucially, investment decisions are being influenced by ESG factors.
Increasingly, investors are asking to see what tax a firm has reported, with some institutional investors introducing ESG and tax transparency measures into their selection criteria. And we’re seeing companies divest from businesses perceived as having weak tax reporting strategies, or as not paying the right amounts of tax.
For large corporates, public country-by-country reporting is increasingly going to become mandatory. Yet even for companies not caught by the rules, many are disclosing how they’re paying the right amounts of tax, in response to changing stakeholder demands around ESG credentials.
It’s the tax function’s responsibility to ensure that the tax aspects of ESG-related compliance and reporting expectations are met – and that this is done with suitable transparency. That will mean explaining your approach to tax, and how it aligns with the organisation’s ESG strategy.
4) Supply chain
The tax function must support efforts to decarbonise global supply chains, while fulfilling its legal commitments and maintaining cost competitiveness.
To achieve this, you’ll need to work with the operations team to make your supply chain sustainable and resilient. And you’ll need to navigate the maze of tax penalties and incentives introduced by different governments.
Working to these rules and regulations will have implications for transfer pricing, income tax and other aspects of your tax arrangements – all of which you’ll need to interpret and manage.
Under pressure to make good on their promises, organisations are embedding ESG metrics into their executive remuneration and employee benefit plans.
As well as supporting the firm’s ESG strategy, these reward packages are being demanded by staff, who want greener and more socially conscious offerings from their employers. The tax function will play a lead role in designing these.
For tax functions, contributing to the business’s ESG programme is a vast undertaking, which should be approached in bite-sized steps. Your first priority is to be part of ESG discussions at board level, so as to identify how best to address the six focus areas.
Please contact us if you’d like to discuss how KPMG can help you support your organisation’s ESG journey.