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Why aren’t we talking about tax as a cornerstone of sustainable business?

Eelco van der Enden ESG Leader, Global Tax and Legal Services, PwC Netherlands 16/12/20

Tax is rarely mentioned as an ESG metric, yet it is the measure of a company’s contribution to society. The good news is it can also be a value driver.

COVID-19 has made the case for sustainability more effectively than the most ambitious corporate social responsibility programme ever could. The weaknesses of short-termism have been exposed, from the origins of the virus in the trade in wild animals to the collapse of fragile extended supply chains.

Sustainability goes hand-in-hand with resilience and, as a result, money has flowed into funds that invest according to environmental, social and governance (ESG) factors this year. ESG funds attracted net inflows of $71.1 billion between April and June 2020, taking assets under management to a new high of just over $1 trillion.

Multinational corporations know very well that they must keep pace with this accelerated interest in climate change, sustainable value chains and responsible investment. To this end, they are making sustainability a key pillar of their strategies and working to communicate their intentions clearly. However one key metric has remained largely absent from the ESG conversation – and that is tax.

This is because many companies, and tax authorities, still believe tax matters are best kept in-house. Yet tax is often a company’s largest contribution to society. Taxes enable governments to pay for public services and the kinds of exceptional support seen during the pandemic, such as wage subsidies. As the US Business Roundtable identified in 2019, the purpose of companies today is to operate for the benefit of all stakeholders, rather than solely to maximise shareholder returns. Being transparent about tax is a fundamental way for companies to demonstrate their commitment to this change.

There is also reputational impact to consider. Companies may be outspoken on the subject of their ethical credentials – for example, retailers banning the use of child labour in their clothing factories in India or Bangladesh and making investments in local schools instead. Yet if at the same time they set up perfectly legal structures that mean they pay little or no tax in those countries, can they still claim to be a good corporate citizen? 

Can tax also be a value driver?

The simple answer is yes. Take carbon taxes. The transition to a low-carbon economy will be achieved by a carrot and stick approach in which governments offer incentives on low-carbon technologies and tax high-carbon industries. As a result, the most sustainable form of tax planning that advisers can offer is to help clients not pay carbon taxes. The way to do that is to work with them to transform their operations to reduce manufacturing pollution, for example, or to reconfigure supply chains to be closer to their customer base and cut transport emissions.

Getting on the front foot

The pressure for companies to be more transparent about their tax arrangements – and to be seen to pay a “fair” share of their income, in comparison with the taxes paid by ordinary citizens – has grown markedly following the financial crisis of 2008. Then, governments were forced to bail out large publicly listed companies, sparking public and political resentment.

Tax transparency is now backed by global institutions including the UN PRI, OECD and EU, and being discussed by others. The UN’s Sustainable Development Goals (SDGs) mention tax as a key metric to take into account when contributing to the goals. Multinationals based or doing business in the EU, and intermediaries including financial advisers and law firms, must report on a wide range of cross-border tax arrangements under the new DAC6 directive.

Given the unprecedented financial support governments have given companies during the COVID-19 pandemic and the massive debts incurred, further public scrutiny of corporate profits and tax arrangements seems inevitable. Companies will avoid unnecessary controversy by being transparent and making sustainable tax arrangements, rather than waiting until their hands are forced by regulators or legislation.

How do companies put transparency into action?

An organisation’s approach to tax transparency is not taken in isolation; it must be agreed on as part of the overall business strategy and sustainability commitments, which includes reporting to stakeholders more broadly. Companies are already doing this when it comes to voluntary climate-related disclosures such as carbon emissions.

Examples of voluntary tax transparency include companies publishing their tax strategy, sharing information on tax governance, risk management and tax contribution figures. There is no common global standard yet, however the World Economic Forum, in collaboration with PwC, Deloitte, EY and KPMG, recently published a universal set of stakeholder capitalism metrics that includes tax contribution reporting. The suggested disclosures are adapted from the tax-reporting standard set out by the Global Reporting Initiative (GRI), a non-governmental organisation.

As companies seek to build resiliency in such dynamic times, a tax strategy that is sustainable both for the business and for the wider society it operates in will build long-term value for all stakeholders.

If you would like to learn more, please contact Eelco van der Enden.