Corporate tax departments have a key role to play in helping companies develop and implement their ESG strategies going forward.
“Environmental, social and governance (ESG) fundamentally means being a responsible corporate citizen,” said April Little, National Partner of Grant Thornton’s Tax Accounting and Financial Reporting Practices.
A company’s contribution to the communities it serves is one of the most positive drivers of a company’s decision to develop and implement an ESG strategy. In fact, one of the biggest and most obscure ways companies achieve this end is by paying taxes to the communities in which they operate.
There are tax-related ESG credits and incentives to reward positive corporate behavior and taxes to discourage negative behavior. The corporate tax function is critical to practices that best serve the company’s objectives through the financial support of the communities it serves.
What may surprise many tax novices is the many elements of an effective ESG policy that can be factored into a company’s tax strategy. Environmental concerns include water efficiency and emissions control. Social goals include ensuring human rights and promoting diversity, equity and inclusion (DEI) policies. Governance includes strong business ethics and anti-corruption policies.
For example, in the environmental sector, it is becoming increasingly common to encourage behavioral change through taxation and incentives. Many countries around the world are encouraging moves away from environmentally damaging products and practices through tax incentives or discouragements. Such taxes can address carbon and other pollutants, plastics, landfill waste, water pollution, and certain chemicals. The result is a rapidly changing new tax landscape that includes carbon, waste, water, plastic packaging and chemicals. Thus, as governments focus on measurable improvements in the environment, companies will simultaneously have access to many credits and incentives in the environmental sector.
Under the social category, corporate transparency on how income tax is paid by country can indicate that companies are not evading, avoiding, or artificially reducing taxes in a particular region. I can do it.
Additionally, obtaining tax credits and incentives for diversity and corporate giving are common social tax initiatives, which include:
- Hiring and Retaining a Diverse Workforce — For example, the Work Opportunity Tax Credit provides tax incentives for hiring eligible segments of the workforce, such as the government-supported workforce and individuals with long-term unemployment or felony convictions. I admit it. Opportunity Zone Credits also encourage businesses to relocate to government-designated areas subject to renewal work.
- charitable donation — Tax credits incentivize companies to give back to the communities in which they operate by providing funds, time of community service, or in-kind donations.
Changes in the regulatory environment across geographies are also important in determining the role of the corporate tax department in a company’s ESG strategy. Corporate income tax is one of the most fundamental elements of a governance strategy, starting with a “tone at the top” and including strong tax risk management policies.
Grant Thorton’s Little explains: When addressing governance strategies, such policies target the core investments companies make, such as determining facility locations and finding tax planning opportunities.
According to Little, “management tone” guides tax decisions, especially those with ESG implications. For example, companies may choose to enter into transfer pricing agreements to transfer profits from one jurisdiction to another. This is a perfectly acceptable decision within the transfer pricing guidelines of the two different jurisdictions. However, in line with governance goals, tax risk management policies may help guide companies in determining part of their global tax base. both Limit jurisdictions instead of minimizing overall taxes.
Tax risk management policies are generally more detailed and robust in Europe as they are required for European Union-wide and UK listed companies. “Companies operating in these regions are typically required to post these policies on their websites or make them publicly available,” said Little.
Taxes are charged first
A company’s ESG efforts generally start with a company’s management deciding to move forward in the ESG area. This declaration is usually followed by benchmarking exercises to understand what your peers are doing. A materiality assessment to determine which ESG issues are most important to a company’s stakeholders. Determining what data will be available for reporting and how progress will be measured.
There are important tax implications during the development of an ESG strategy. For example, tax functionality helps minimize taxes along the supply chain and increase return on investment by identifying credits and incentives. This is especially important for companies operating in the EU and UK. Because these regions determine the tax framework for disclosure in his ESG landscape.
The tax function then assists in implementing scenario planning for accounting methods, such as performing cost segregation studies to enhance or accelerate deductions from a tax perspective. To maximize the value of your deductions, you can change your depreciation method to accelerate or defer deductions.
Such detailed tax decisions, aligned with a company’s ESG strategy, can have a significant impact on a company’s ability to achieve its twin goals of generating profits. When Act responsibly as a corporate citizen.
According to recent research, forward-thinking tax leaders are already beginning to reveal the big picture, embedding ESG principles into tax policies and practices, communicating tax implications as part of regular disclosures, and establishing governance mechanisms. Develop a strategy for implementation. A place to ensure your tax decisions are sustainable.