Responsible Tax Matters Q3 2023: Impactful initiatives are on the horizon

For the past couple of years, Økonomisk Ugebrev (ØU), a Danish business journal, has been publishing an annual ranking of Danish companies based on their ‘Tax Governance’ rating, which aims to measure and encourage companies’ responsible approach to tax through transparent reporting. While it is difficult to ascertain the effect that this rating has had on the state of tax transparency in Denmark, the annual publication has become a mainstay of the Danish tax landscape and is likely to have triggered discussions between heads of tax and their management and boards.

Until now, ØU would look at 7 different metrics, which were refined year after year, with some metrics being attributed one point, and some others a possible extra point, leading to a maximum score of 12 points in its latest ranking.

Now, in a recent article, ØU has announced additional changes in its methodology for next year’s rating and ranking, including an 8^th metric (on Total Tax Contribution), a new extra point in the metric on engagement with stakeholders, and some clarifications in its expectations, particularly with regard to the Tax Havens metric. Consequently, companies can now achieve 14 points instead of 12 points.

One point will be attributed to companies that disclose the total amount of tax they paid and collected during the reporting year (not necessarily on a country-by-country basis), split between taxes borne and taxes collected.

While this angle on tax contribution is not new, it is interesting and noteworthy that ØU decided to include reporting on total tax contribution, i.e. not only on taxes paid, but also taxes collected. Indeed, the focus of other standards, frameworks and accreditations has tended to be primarily on corporate taxes paid, with the disclosure of other types of taxes paid and collected seen as secondary or more voluntary.

Arguably, corporate income taxes are only a share of what businesses contribute to society, with indirect taxes, property taxes and energy taxes sometimes dwarfing the size of corporate income taxes paid. When it comes to taxes collected, indirect taxes and employee taxes will often represent the largest share of taxes in the total tax contribution figure, but are objectively indirect indicators of a company’s size and role in the wider economy rather than direct indicators of a business’s direct contributions to government revenues.

While these indicators can be quite valuable, and information on carbon taxes (or other such taxes) paid per country could be a way to track companies’ decarbonisation efforts, the lump sum approach, even if split between paid and collected, will not provide readers with much additional value or insight into the operations and sustainability of companies’ approach to tax.

However, as this updated methodology shows, it may be that ØU is setting the stage for more detailed disclosure requirements in the future. 

Tax Havens

Økonomisk Ugebrev requests companies to be more explicit about whether they are currently present in any low-tax country to gain one point. If companies have activities in tax havens, an extra point can be achieved by disclosing which Tax Haven Countries, the reason for the presence and the activities conducted.

It is important to note that statements such as that the company ‘does not operate in tax haven countries to obtain tax benefits’ without stating whether they are present in any such country, will not be awarded any point.

However, ØU does not provide any indication on what jurisdictions are to be considered tax havens.

Tax incentives

For 2024, Økonomisk Ugebrev has redefined the requirements regarding Tax Incentives. Companies must now (i) describe their approach to tax incentives, and (ii) disclose at least one example of a tax incentive they benefitted from during the reporting year, along with the country in question, to earn one point in this category.

Furthermore, to achieve an extra point, companies must disclose an exhaustive list of the tax incentives they have used, and in which countries. Only providing a few examples of incentives will not be enough.

This extra requirement is far-reaching, and may be the first to call for this level of detail. It is likely to result in some additional administrative burdens for companies wishing to achieve a full score in this category.

Dialogue with stakeholders

An extra point will be attributed for companies that disclose their approach to stakeholders other than tax authorities. An example of achieving this point would be to disclose the company’s approach with legislative bodies and the use of influence to support certain tax legislations and initiatives, etc.

With these new requirements, we are certainly curious to see the new rating when it is published in May 2024. 

While more than 2,000 companies will need to comply with the EU’s Corporate Sustainability Directive (CSRD), Børsen recently reported the results from a survey by Lederne, showing that 48% of 1,015 managers in private companies reported not being familiar at all with CSRD. When looking only at large companies with 500+ employees, the results were very similar, at 45%.

Considering the timeline (first reporting period is FY2024, with reports to be published along with the annual reports in early 2025) and the scope of CSRD, these figures are concerning. Complying with the reporting obligations under CSRD will require cross-functional efforts, which cannot be solely carried by sustainability teams or financial reporting teams.

Tax managers will also have a role to play, firstly with the double materiality assessment process to decide whether tax is a material sustainability topic, and secondly by figuring out how to report on tax affairs in compliance with CSRD, if found to be a material topic.

As mentioned in our previous newsletter, the role of tax in EU sustainability regulations has been discussed in a recent article by Dave Reubzaet, formerly of GRI. More recently, two articles from KPMG Acor Tax and the KPMG EU Tax Centre also dived into the topic, concluding among other things that for companies that identify tax as a material topic under CSRD, GRI 207 should be used as a reporting standard.

Find out more about CSRD and related data requirements.

After many years and multiple attempts, the Financial Accounting Standards Board (FASB) came to a unanimous decision about updating the income tax Accounting Standard, which has been described as ushering in a new era for the tax transparency of US based groups. FASB is the designated accounting standard setter recognised by the SEC that develops US Generally Accepted Accounting Practices. The standard will apply to financial statements using US GAAP for reporting periods starting on 15 December 2024 or later for public companies and from 15 December 2025 for private companies. The final wording of the standard is expected in Q4 of 2023.

The new ASU 740-30 standard introduces slightly more transparency around the taxation of US based groups by requiring financial statements using US GAAP to include details about income taxes paid at federal and state level as well as specifying the amount of taxes paid to foreign jurisdictions. Additionally, groups will be required to specify tax payments for individual jurisdictions making up more than five percent of the net tax payments of the group.

The standard also introduces requirements about a reconciliation of the effective tax rate in the financial statements to the statutory rate expectation of the company, including requirements regarding the level of detail to be presented in the reconciliation.

The process and results of FASB’s effort to create an investor-focused standard for US groups while being mindful of the cost of compiling the information notably resulted in the standard containing thresholds for providing disaggregated information, leading to significantly less geographical disaggregation than e.g. in the EU.

The result may be that users of financial statements can gain slightly more information about US group’s tax payments in assessing if their reported taxes are sustainable, while users hoping for insights into country-by-country information about tax payments will not see that this time around.

While this approach avoids the far-reaching implications for company disclosure requirements of prescriptive public country-by-country reporting, the users pursuing tax transparency for reasons of public scrutiny will probably find that a materiality level for providing additional information based on tax payments is unhelpful when looking for what is not there.

On 1 November, we will host an event about Sustainability & ESG in Tax, looking at the role of the tax function in the successful implementation of ESG strategies, achieving sustainability goals, and the strategic value that the tax function can bring to this agenda.

The afternoon will see a mix of panel discussions, presentations, and break-out sessions covering issues ranging from decarbonisation and the impact of ESG transformation on TP, to tax transparency, leveraging data solutions and AI, and the role of funding and incentives.

The event will be facilitated by our own KPMG Acor Tax experts, as well as by guest speakers and external experts in sustainability, ESG, data, and AI:

• Asthildur Hjaltadottir, Chief Sustainability Officer at the Global Reporting Initiative (GRI)
• Frederik Gylling, Partner Tech Strategist, Data & ESG and AI at Microsoft
• Nicole De Jager, Senior Tax Manager, green taxation and decarbonisation expert, KPMG International
• Richard Marcos, Global Leader of KPMG’s Credits, Grants and Incentives practice, KPMG US
• Gerard Campbell, EMEA lead co-ordinator for Credits, Grants and Incentives, KPMG UK
• Michael Birkebæk Jense, Partner ESG & Products Lead, KPMG Denmark
• Søren Dalby, CEO & Senior Partner, KPMG Acor Tax
• Peder Reuther, Transfer Pricing Partner, KPMG Acor Tax
• Thomas Iversen, Corporate Tax Partner, KPMG Acor Tax
• Mikkel Papendick Andersen, Director, data management & technology expert, KPMG Acor Tax
• Sebastian Houe, Director, environmental and green taxation specialist, KPMG Acor Tax
• Sandeep Sanghera, Senior Manager, ESG funding and opportunities specialist, KPMG Acor Tax
• Nynne-Maria Holst, Manager, tonnage tax and tax transparency expert, KPMG Acor Tax
• François Marlier, Manager, Sustainability & ESG in Tax, KPMG Acor Tax

• Eurodad reports on recent news regarding the UN Convention on Tax, noting growing support even by some OECD countries. The OECD remains against moving global tax coordination to the UN, citing its close collaboration with other institutions and non-OECD countries.
• 27 Danish Businesses reiterated their support for the UN Sustainable Development Goals, and stated their high ambitions for a just and green transition to a net zero future, acknowledging that net zero targets call for comprehensive business transformation in their own operations and supply chains.
• The EU Parliament adopted a new voluntary standard for the use of a ‘European Green Bond’ label, the first of its kind in the world. The label is aligned with the EU Taxonomy Regulation, and at least 85% of funds raised would have to be allocated to sustainable activities in line with the Taxonomy.
• KPMG published its 2023 CEO Outlook, based on responses from 1,300 global CEOs. We note that 69% of CEOs reported having fully embedded ESG into their business as a means to value creation, while 68% reported that current ESG progress is not strong enough to withstand potential scrutiny.
• KPMG’s Global Tax Function Benchmarking Survey also came out recently, with a specific section on ESG in tax. Of the various findings, we note that only 20% of heads of tax reported that tax is a significant consideration, and that the tax function participates in driving their company’s ESG strategy, while 49% reported that their organisation currently does not leverage tax data and analytics tool, and are not considering it.
• On 17 October, the ECOFIN Council adopted updates to the EU list of non-cooperative jurisdictions. Key takeaways include Belize and Seychelles being moved to Annex I, and BVI and Costa Rica being moved to Annex II. More details here.