Why is it important to have an ESG Tax strategy and how do you go about embedding it?
How does a tax strategy align with the broader firm ESG strategy?
While rarely the most visible area of an ESG strategy, it’s clear that how an organisation manages its tax affairs will have an important role in achieving its wider ESG strategy, even if non-tax stakeholders are often not completely clear as to how. A good place to start unlocking that uncertainty is to break ESG down into its constituent parts for tax.
Where is Luxembourg on tax governance more generally?
Financial institutions in Luxembourg without a solid tax governance and an agreed strategy are more likely to be exposed to risks of increased tax liabilities, penalties, missed opportunities and reputational damage.
Luxembourg has reinforced the new tax governance requirements with the Commission de Surveillance du Secteur Financier (CSSF) circulars relating to AML and tax crimes (i.e., Circulars 17/650, 18/702, 20/744, 22/807). In the context of the EU Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy it is noted that companies are required to indirectly report on tax risks and tax governance.
More broadly, the EU and OECD have long been viewed as being in the vanguard of generating new tax governance requirements with tax avoidance reporting obligations (DAC6, DAC 7, Public Country-by-Country Reporting), and multiple OECD publications urging global tax authorities to take action on various topics such as tax evasion, cooperative compliance and tax controls framework. For instance, the law of 18 June 2020 known as the Luxembourg “FATCA and CRS governance law” requires that all Luxembourg financial institutions establish a FATCA/CRS compliance programme.
These all sit firmly within the Governance element of ESG. Given the amount of public focus on this topic and the current fiscal climate, it’s hard to see how this can be avoided in the short term. This will continue to be an area of focus for tax leaders.
Links between ESG issues
It is of course necessary to consider ESG issues in the round and understand the connectivity between them. The following summary of some key factors that we have considered, all point to the need to have a coordinated and coherent approach to addressing tax aspects of the ESG agenda:
- The increased measures levied by governments on environmental taxes, levies, and incentives to encourage the required societal transition.
- The growing pressure on firms to highlight the positive contribution they make to society.
- The heightened expectations on firms in terms of disclosing how they manage their tax affairs in a way that is aligned with ESG requirements.
- The proliferation of tax governance and compliance requirements domestically and internationally.
In a way to improve voluntary tax compliance and create sustainable framework, some countries, such as Belgium or Australia, have implemented Cooperative Tax Compliance Programmes with the view to reinforce relationships with taxpayers, implement a tax control framework and exchange good practices and experiences on cooperative compliance.
A brief overview of cooperative tax compliance
Cooperative tax compliance is a modern approach to tax administration that aims to enhance the relationship between tax authorities and taxpayers. It emphasises collaboration, transparency, and trust, rather than the traditional adversarial model. This approach seeks to achieve greater tax compliance and efficiency by fostering mutual understanding and cooperation.
Key elements of cooperative tax compliance
Benefits of Cooperative Tax Compliance
Examples of cooperative tax compliance programmes
- OECD’s Co-operative Compliance: A Framework – From Enhanced Relationship to Co-operative Compliance1
- OECD International Compliance Assurance Programme (ICAP) is a voluntary assessment and assurance programme for multinational enterprises (MNEs) and tax administrations to engage cooperatively. It uses transfer pricing documentation and Country-by-Country reports to enhance tax certainty, reduce resource burdens, and minimise disputes. ICAP facilitates efficient, multilateral tax assessments and can improve compliance actions when needed2
- UK’s “Framework for co-operative compliance” contains a set of principles that both large businesses and HMRC should apply to the way they work.
- Netherlands’ “Horizontal Monitoring” is a voluntary programme which partially replaces the traditional top-down, post-filing review and scrutiny – known as “vertical” monitoring – with the real-time, collaborative “horizontal” monitoring of participating companies.
- Belgium’s “Co-operative Tax Compliance Programme” (CTCP)
- US IRS’s “Compliance Assurance Process” (CAP): This programme involves real-time collaboration between the IRS and large corporate taxpayers to resolve tax issues before the filing of tax returns.
- Australia’s “Cooperative approach”.
On June 25, the Luxembourg Ministry of Finance announced that Luxembourg's two main tax administrations, the Administration des Contributions Directes (ACD) and the Administration de l'Enregistrement, des Domaines et de la TVA (AED), agreed to share more data and implement joint controls under the memorandum. This will be achieved in various ways, such as through the compulsory spontaneous exchange of information above certain thresholds of turnover and deductible expenses. In addition, tax offices will now be able to take part in simultaneous audits (still coordinated centrally), alongside the service des révisions (ACD) and the service anti-fraud (AED). Key building blocks in this approach involve the framing of a tax strategy/policy that provides an overall view of how a company approaches ESG and the design and embedding of a robust tax governance, risk and control framework to ensure adherence with the strategy.
So how should the financial services industry respond?
For the ninth consecutive year, PwC has supported the Dutch Association of Investors for Sustainable Development (VBDO) in conducting the Tax Transparency Benchmark. The current edition shows that companies have been significantly more transparent about their taxes. Compared to last year, this is noteworthy because this year's benchmark has reviewed fewer Dutch companies and more European companies.
Based on that and what we commonly see as being the chief tenets of a robust response to the ESG agenda, you can consider taking the following steps:
- Formulate or review your approach to tax and make it publicly available.
- Provide insight into how your company approaches tax and tax reporting by providing concrete examples of the implementation of the tax strategy.
- Consider alignment of your tax reporting with voluntary tax standards.
- Elaborate on how your approach to tax supports your sustainability strategy.
- Be aware of the link to tax under the CSRD and determine if tax is a material topic.
- Align your tax transparency reporting with your transfer pricing filing.
- Analyse the data requirements under Public CbCR, Pillar 2 CbCR safe harbour and GRI 207-4 CbCR.
- Elaborate on the tax risks, tax risk management and the tax control framework.
- Engage with internal and external stakeholders to improve your approach to tax and report on it.
These steps will offer your company the opportunity to build trust with your stakeholders and demonstrate your commitment to society by being transparent about your tax position.
The scale and scope of the ESG tax challenge should not be underestimated. Many organisations will already have some of the key components at least partly in place, so the effort level should be incremental. Others will be starting from a significantly lower base so much more will be required. Either way, the dynamic and varied nature of the ESG agenda means that some level of action should be taken now by all to ensure that this important area is being appropriately addressed.
Contact us
Murielle Filipucci
Tax Partner, Global Banking & Capital Markets Tax Leader, PwC Luxembourg
Tel: +352 62133 31 18
Nenad Ilic
Tax Partner, Banking & Capital Markets Tax Leader, PwC Luxembourg
Tel: +352 62133 24 70
