Five questions about CSRD and the role of tax departments

'The CSRD and tax are absolutely connected, even though the new EU directive does not contain a separate reporting standard for tax,' says Sanders. 'In fact, the CSRD increases the number of publications that companies must provide about the so-called material sustainability issues. Companies that report based on the CSRD should in particular carry out a double materiality assessment to determine which sustainability issues are most important to them and their stakeholders. This is the starting point – also for tax specialists.'

'Companies have an impact on the environment and society – we call this the inside-out approach', Melger answers. 'While most people assume this pertains to any damage possibly being done to nature or the violation of human rights, the issue of whether taxes are being paid is also relevant. The UN and the OESO recognise this and emphasise that taxation is necessary to achieve sustainability goals.'

'In addition, sustainability-related developments and events create risks and opportunities for companies – what we call the outside-in approach', Melger continues. 'Taxation is used as a policy instrument to influence behaviour. For instance, the so-called “ESG taxes” for carbon, plastic and waste are designed to discourage non-sustainable activities, there are (financial) risks for companies that fail to increase their sustainability level, and sustainable behaviour is stimulated via tax facilities and subsidies to create opportunities.'

In a similar vein, climate is a topic that will be material for many of the companies which are subject to the CSRD. Melger: 'This automatically has tax implications. CO2 taxes may be a relevant factor, for example, when quantifying risks. The chances of higher taxation are considerable, especially in scenarios where climate goals are not being achieved fast enough or even at all.'

In addition, Melger says that major increases in efficiency can be achieved when the CSRD is embraced. 'Data collected related to scope 1 and scope 2 greenhouse gas emissions can be used for other reporting and tax mechanisms such as the EU Carbon Border Adjustment Mechanism (CBAM) and Dutch CO2 taxation. This enables you to reduce the compliance burden your company may experience.'

'There is a clear and direct link between the CSRD and transfer pricing. The CSRD states that companies must be transparent about their strategy, policy, goals and governance with regard to all material issues', Sanders clarifies.

'All transfer-pricing specialists probably recognise these elements as they are essential parts of the functional analysis which is at the basis of business profit allocation. Although this involves very specific topics, they are also the topics that are material and, therefore, strategically relevant.'

Melger: 'This information will soon be publicly available, including for the tax authorities. It often describes new or different risks than those traditionally included in a transfer-pricing analysis, and that’s what makes the information relevant. For example, think about water shortages in many areas or storm damage: are these risks you can manage centrally or not? And what does that mean for a qualification such as “limited risk manufacturer”?’

All companies that will have to report under the CSRD must also apply the EU Taxonomy. 'The EU Taxonomy is in fact a kind of dictionary that helps companies classify green activities in a transparent way', explains Sanders. 'Companies that perform activities which are initially allowed must then show they are is making a significant contribution to areas like the environmental goals and complying with minimum safeguards. This is where taxation comes in as the tax behaviour of the entire company plays a role in classifying business activities as ‘green.'

In addition to human rights, ‘taxation' is one of the four key elements of the minimum safeguards. Taxation is defined based on the OESO guidelines for multinationals related to corporate social responsibility. This means that a company must be able to show that it operates based on both the letter and the spirit of the law, and that it is in compliance. Proving this is complicated because it involves an open standard and no universal standard exists. How will accountants assess this?

Sanders: 'Within PwC we have considerable experience with tax governance and transparency on the one hand, and the development and implementation of tax control frameworks on the other. You can wait until the standard is imposed or get started and help shape it.'

'Absolutely, many opportunities in fact', affirms Melger. 'The CSRD is much more than a reporting obligation. Companies must be transparent about their strategy and goals, and about the progress they’re making. In practice this means they often have to invest, for instance in new products, new factories and new offices.'

Business cases are being developed within this framework, and Sanders believes that tax specialists can have a major contribution here too. 'This often involves the so-called ‘cost of doing nothing’, due to new taxes, for example. But available tax facilities and subsidies are also essential components of a business case.'