Tax and CSRD series

The role of tax in CSRD double materiality assessment

  • Blog
  • 6 minute read
  • April 05, 2024
Aidan Lucey

Aidan Lucey

Global Tax CSRD Leader, Partner, PwC Ireland (Republic of)

Opeyemi Osunsan

Opeyemi Osunsan

Tax, Manager, PwC Ireland (Republic of)

Why tax needs to be considered as part of the Corporate Sustainability Reporting Directive (CSRD) double materiality assessment

The EU’s Corporate Sustainability Reporting Directive (CSRD) will impact more companies than any sustainability regulation to date, bringing approximately 50,000 companies in scope. The aim of CSRD is to drive accountability and transparency by mandating companies operating in the EU to publicly disclose information on material sustainability topics. Even if companies have reported non-financial data in the past, they will likely need to expand the nature and extent of their disclosures.

For some companies, tax could be considered as a material sustainability topic given the significance of tax contributions to society and also heightened investor scrutiny on tax. This means that they will need to publicly disclose information on tax. Therefore, companies must understand the specific tax disclosures that may be required under CSRD.

In the first release of our Tax & CSRD series, we explore why collaboration between tax departments and sustainability teams is crucial to ensure that tax is properly understood as a sustainability topic and considered in CSRD double materiality assessments.

Team working on project

CSRD and double materiality

Companies within the scope of CSRD are required to make disclosures on material sustainability topics in accordance with the European Sustainability Reporting Standards (ESRS). The ESRS cover sustainability topics across environmental, social and governance pillars and prescribe specific disclosure requirements.

To determine the sustainability topics to be disclosed, companies must carry out a double materiality assessment. This involves an assessment of a company’s impact on the environment and society (“impact materiality”) and an assessment of how sustainability topics may affect the future performance of the company (“financial materiality”).

If there is a sustainability topic that is material to a company but is not addressed by the ESRS, the company must still disclose information about it to enable readers to understand its sustainability-related impacts, risks or opportunities. Interestingly, the European Financial Reporting Advisory Group (EFRAG), who developed the CSRD standards, explicitly calls out “tax” as one of such topic on which organisations could make disclosures[1].

Why tax could be considered a material topic

In determining what sustainability topics are material for a business and its stakeholders, companies must consider many factors. While materiality considerations will differ for every organisation based on their specific sustainability and stakeholder profile, there are broad factors that could make tax a material consideration:

Tax is an indicator of company’s social impact

Tax is not just a cost of doing business, it is also a social responsibility.The taxes paid by an organisation, including those that it collects on behalf of governments, can represent its biggest monetary contribution to society. Those taxes fund public services, green infrastructure and community projects. Consequently, tax can be seen as a powerful indicator of a company’s societal impact.

In order to assess that impact, stakeholders are demanding a greater level of transparency on tax. They want to understand a company’s approach to tax, how tax matters are governed, and how much taxes are paid.

Investors are demanding increased tax transparency

Tax is being factored into investor considerations when assessing the sustainability of a business. An organisation’s approach to tax can pose significant risks that affect investment returns in the medium and long term. To address these concerns, investors are taking steps to influence companies to make more comprehensive tax disclosures that will allow them to evaluate not only financial aspects but also governance and reputational risks associated with their approach to tax. Some investors have released codes of conduct encouraging transparency from investee companies on tax. Others have filed shareholder motions mandating tax disclosures under GRI 207, a specific tax standard released by the Global Reporting Initiative (“GRI”) to enable companies to disclose on tax as part of their sustainability reporting.

Tax disclosures under CSRD can provide companies with an opportunity to build trust with investors, customers and civil society. Even where a company concludes that tax is not a material topic in its own right - possibly because other sustainability topics are viewed as higher priority - tax disclosures could be considered under an existing ESRS.

For example, ESRS S3: Affected communities, emphasises transparency regarding the impact of an organisation’s own operations on the community. In this context, the standard references “aggressive strategies to minimise taxation” as a potential impact on affected communities. Similarly, the financial impact of environmental taxes may need to be disclosed under one of the environmental standards.

What type of tax disclosures may be required under CSRD?

Where an organisation deems that tax is a material topic, EFRAG has indicated that GRI 207 could be used as the basis for its tax disclosures. GRI 207 consists of four categories of disclosures.

  • Disclosure 207 - 1: Approach to tax. This requires an organisation to disclose details on its tax strategy and who oversees it, and how its tax strategy aligns with the organisation’s broader sustainability strategy.
  • Disclosure 207 - 2: Tax governance, control, and risk management. This requires the disclosure of information about an organisation’s tax governance structure and how tax risks are identified, managed and monitored.
  • Disclosure 207 - 3: Stakeholder engagement and management of concerns related to tax. This disclosure considers how an organisation engages with its stakeholders on tax matters.
  • Disclosure 207 - 4: Country-by-country reporting. This disclosure requires an organisation to report on quantitative data including its revenue, tax, and business activities on a country-by-country basis.

What actions can tax teams take to prepare for disclosures under CSRD?

  1. Engage with the sustainability team
    Currently, there is a disconnect between tax departments and sustainability teams. Tax departments are not aware of CSRD or how it could impact their tax strategy, governance and tax risk profile. Sustainability teams view tax as an item in the financial statements rather than a sustainability issue. It is important that tax departments and sustainability teams engage to ensure that impacts, risks and opportunities relating to tax are identified and considered in double materiality assessments. Even where tax is not considered material, it is important that tax departments help inform this decision.
  2. Determine what factors could make tax a material topic
    The question of whether tax is material will differ from organisation to organisation. By conducting an analysis of its tax profile and the expectations of key stakeholders such as investors and tax authorities, an organisation may conclude that tax disclosures could help provide assurance to stakeholders on their approach to tax and broader societal impact.
  3. Consider alignment with GRI 207
    Where an organisation is already making some level of tax disclosures, the first step should be to carry out a gap assessment of existing disclosures to those required under GRI 207. Further, an organisation should undertake a current state assessment of its tax control framework and consider remediation actions in view of future public disclosure requirements. As CSRD disclosures will be subject to third-party assurance, it is important that organisations can evidence the operation of its tax control framework.
  4. Evaluate the optimal approach towards quantitative tax disclosures
    GRI 207 mandates the disclosure of country-by-country (CbCR) information and provides organisations with the option to disclose additional data related to their total tax contributions. The EU’s public CbCR regime solely focuses on corporate income tax which alone does not mirror the entirety of a company's tax contributions. Hence, tax departments should evaluate the potential benefits of disclosing data on the total tax contribution to control the narrative surrounding their organisation's tax payments and provide a more holistic perspective on their contribution to society.

A double materiality assessment is an essential step towards CSRD compliance. Full engagement between tax departments and sustainability teams will ensure that impacts, risks and opportunities relating to tax are identified and considered in the double materiality assessment. We can support you with your overall double materiality assessment process and integrate the assessment results into your risk management and decision-making processes. We can also support you in understanding your tax disclosure obligations under CSRD.

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