• Carol Newham, Partner |

The transition to Net Zero is at the forefront of organisations’ ESG programmes – and it has complex tax implications. It therefore has to be a critical area of focus for tax leaders, as I highlighted in a previous blog.

Under growing public pressure, organisations are committing to material reductions in their carbon emissions. Meanwhile, tax authorities worldwide are introducing fiscal ‘carrots and sticks to promote decarbonisation, and accelerate the move to low-carbon economies.

Your organisation’s decarbonisation roadmap will depend on the nature of the business. But it’s likely to demand rapid and fundamental transformation of its operating and supply models – which will in turn require significant investment.

This combination of business model change and an evolving tax landscape makes decarbonisation one of the most complex and challenging aspects of ESG for tax leaders. It will bring about significant new tax risks and costs. But it will also present opportunities for tax functions to add important business value. 

Government initiatives

We’re seeing a rise in environmental ‘carrots and sticks’ from tax authorities worldwide. Keeping abreast of this fast-moving landscape is critical to understanding where the risks and opportunities lie; and what this means for your tax position and compliance obligations.

  • Reliefs, claims, grants and incentives

Funding and relief schemes can offer huge financial value to organisations. The onus will be on tax leaders to capitalise on the reliefs available to their organisations, to fund the transition to a green economy. 

This is enormously complex. The UK alone offers over 100 business grants and funding opportunities, as well as R&D tax relief, capital allowances and the patent box – many of which can be used to fund decarbonisation efforts. Other jurisdictions are also bringing in more “carrots”, creating a vast and rapidly evolving tax environment to navigate.

  • Environmental tax charges

On the ‘stick’ side of the equation, we’re seeing more taxes targeting organisations’ impact on the environment. You’ll need to work closely with other functions to identify:

  • The costs to your organisation, given its current operating and supply models
  • How innovation and transformation can reduce your environmental tax liability
  • The impact of any proposed changes to your business or operating models – and therefore your tax position.  

What’s more, you’ll need to ensure compliance with new environmental taxes as they come into force. That could throw up data, systems and governance challenges for tax functions. 

  • Carbon pricing

One of the most notable, and far-reaching, actions from governments has been the introduction of carbon-pricing mechanisms.

These are often in the form of ‘emissions trading systems’ (also known as ‘carbon markets’), and carbon taxes like the EU’s Carbon Border Adjustment Mechanism (CBAM).

These new markets open up new opportunities. Businesses may invest in carbon reduction projects and – if successful in reducing their carbon footprint – may create new revenue streams by trading excess carbon credits.

Such changes to the business model will trigger tax implications. Tax leaders must support the wider business in understanding the correct tax treatment – for example, of traded carbon credits and emission allowances. At the same time, they must meet their compliance obligations under these carbon tax schemes. 

Operational matters

Transitioning to Net Zero, and responding to governments’ green fiscal measures, will force organisations to reconsider various elements of their operations.

  • Operating model

Overhauling operations – for example, sourcing products more locally or changing manufacturing locations – will have a dramatic impact on your tax position. It can affect transfer pricing, intellectual property, VAT rates and recovery, customs and excise tariffs, and much more.

In addition, transforming supply and value chains brings a whole different set of challenges for tax leaders – which I will examine in a separate blog.

  • Energy sources

As organisations look to source renewable electricity, power-purchase agreements are growing in popularity. 

There are several different types of these agreements. And depending on how they’re structured, they can have derivative or lease-tax consequences, along with cross-border considerations. 

  • M&A

Decarbonisation adds an extra level of complexity to transactions from a tax perspective.

Through forward-looking assessments and due diligence, you’ll need to identify the tax risks, costs, and value opportunities presented by a target business, now and in the future. This is especially important in a fast-moving environmental tax landscape.

  • Employee value proposition

Changes to people operations will be crucial to achieving decarbonisation – for example, by revising travel policies, greening pensions, or switching to electric vehicles.

Investing in a greener employee value proposition will also help attract and retain the best talent. That’s because increasingly climate-conscious employees want benefits that align with their environmental values.

But such changes will affect an employer’s tax position and compliance requirements. Regular communication with HR will be key to staying abreast of any people-related developments with tax implications.  

Find Out More

Wherever your organisation is on its decarbonisation journey, we can help you to understand, quantify and manage the tax considerations.

Please contact us to discuss how the KPMG tax team can support you as your organisation makes the transition to Net Zero.