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Sustainability (reporting) and tax

  • Anne Marie Anselmi, Director |

For a number of years, tax transparency has been widely debated which has led to a number of initiatives (e.g. BEPS) and reporting requirements (e.g. CbCR). Taking this one step further, taxes are increasingly playing a role in sustainability, investment and CSR discussions. The introduction of the GRI Tax Standard, the most commonly used standard for sustainability reporting, takes this one step further.

Introducing the GRI Tax Standard

The GRI (Global Reporting Initiative) Sustainability Reporting Standards are the first and most widely adopted global standards for sustainability reporting. By 2017 over 90% of the world’s largest 250 corporations voluntarily reported on their sustainability performance and 74% of these use GRI’s standards to do so.

According to the GRI, “the practice of disclosing sustainability information inspires accountability, helps identify and manage risks and enables organizations to seize new opportunities. Reporting with the GRI Standards supports companies, public and private, large and small, protect the environment and improve society, while at the same time thriving economically by improving governance and stakeholder relations, enhancing reputations and building trust”.

Taxes are not only an important source of government revenue but are also central to the fiscal policy and macroeconomic stability of countries. Further, tax expenses are usually a significant expense position for companies and the optimization of such expenses, e.g. via transfer pricing schemes and offshoring might need to be balanced between shareholders interest, the public and tax authorities and can result in significant reputational and financial risks but also opportunities. The GRI Tax Standard is therefore specifically intended to support public reporting of a company’s business activities and payments within tax jurisdictions, as well as their approach to tax strategy and governance. The Standard is effective for reports published on or after 1 January 2021.

Who needs to report and what needs to be reported?

An organization which publishes its sustainability report applying the GRI standards and which has identified tax as a material topic is required to report its management approach for this topic as well as disclosing certain country-by-country reporting (“CbCR”) information. While the definition of “material” is not clearly defined, tax revenues generally drive a country’s development and taxes often represent a material position in the financial statements of companies. Various stakeholder groups (including the public, regulators, etc.) are also becoming more interested in this aspect of a company. It is therefore likely that a company will in most cases need to consider „tax“ as a material topic and report thereon.

Also, while previous initiatives such as the Extractive Industry Transparency Initiative (“EITI”) already required a certain level of public disclosures for certain industries, the GRI Tax Standard is principally applicable for all industries.

Specifically, for a comprehensive reporting, the standard requires disclosures on:
 

  • The approach to tax (disclosure 207-1) including a description of the organization’s tax strategy, the governance body, the approach to regulatory compliance and how the approach is linked to the business and sustainable development strategies of the organization;
  • The tax governance, control, and risk management (disclosure 207-2) including the governance bodies accountable, how tax is embedded within the organization and the approach to tax risks;
  • Stakeholder engagement and management of concerns related to tax (disclosure 207-3);
  • CbCR (disclosure 207-4) on a tax jurisdiction basis including information on revenues, profits and corporate income taxes paid and accrued as well as a recommendation to also disclose significant uncertain tax positions

What could be the consequences?

Increasingly, there is a clear expectation both by internal governing bodies as well as external stakeholders that a company’s tax strategy is sustainable, leads to a “fair” distribution of taxes and can be explained to non-tax specialists.

The GRI Tax Standard again provides a tool for increased tax transparency and even goes as far as making certain CbCR information available to the public. As a result, while sustainability reporting is principally voluntary, if a company wants to continue obtaining the respective adherence level or assurance for their sustainability reporting under the GRI standard and/or obtain good results in sustainability rankings, they will have to also address the GRI Tax Standard.

Taking this one step further, as “Tax Transparency” is also relevant in certain rating methodologies relevant for investors (e.g. in the MSCI ESG ratings methodology) the content and quality of such information in sustainability reports could also increasingly become relevant in investment decisions.

As such, the introduction of this standard will likely again increase both the internal and external pressures with respect to tax transparency e.g. as competitors increasingly publish such reports and as the tax function now has to contribute to existing sustainability reports.

What do companies need to consider now

Considering the fast-approaching implementation date, the following actions should be taken by organizations:
 

  • Is the company’s sustainability report currently published applying the GRI standards and if so, is tax a material topic that needs to be reported on going forward?
  • Who is responsible for preparing the content under the GRI Tax Standard and what is the timeline to prepare and publish the next sustainability report?
  • To what extent can existing information/documentation be used (e.g. tax strategy, information on the control framework, CbCR documentation and where are reconciliations to published financial statements needed?
  • Are additional steps required to be able to report under the GRI Tax Standard both in terms of content and presentation?
  • Should an independent assurance be obtained for some or all of the data reported on?

In any case, the implementation of the GRI Tax Standard means that impacted companies – now more than ever – not only need to have a solid tax strategy in place but also need the tools and resources to set-up and maintain a well-functioning tax governance, control and risk management framework.

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