ESG and tax

Five questions about CSRD and the role of tax departments

Vijf vragen over CSRD en de fiscale afdeling
  • 31 Oct 2023

The word ‘tax’ is not actually included in the CSRD, the European directive which mandates reporting on non-financial information and comes into force in 2024. That does not make the directive irrelevant for tax departments, however. 'The CSRD has more connections than many tax specialists think’, says Noor Sanders, responsible for sustainability matters within the tax practice of PwC.

'Taxation is implicitly part of every aspect of the CSRD'

'The CSRD is more than just an obligation to report', continues Sanders. 'The directive is a framework for impact, risks and opportunities of material issues in relation to sustainability. At the same time it’s important to realise that taxes are a major policy instrument for governments. Taxation is therefore inextricably linked with and implicit to every aspect of the CSRD.'

'And this is the time to learn more about the CSRD,' adds Evita Melger. As a PwC expert in the field of sustainable taxation, Melge feels people are insufficiently aware of the role of the tax department within the CSRD. 'The CSRD train may have left the station, but tax departments have yet to climb onboard. That’s a shame as both the route and the final destination are exceptionally interesting, especially from a tax perspective at the strategic level.' The two tax specialists are receiving an increasing number of questions about the CSRD, reporting and the role that tax departments can play in achieving a company’s sustainability goals. The five most asked questions are answered below.

Five questions about the CSRD and tax

'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.'

Five questions about CSRD and the role of tax departments

The essence: tax specialists as crucial business partners

Five questions, five answers, one message: a new world is dawning. A new world of sustainability reports and new legislation and regulations comes with obligations… But also offers opportunities. 'As long as tax specialists embrace them', says Noor Sanders.

The advice from both tax specialists is clear: tax professionals should board the onward-rushing CSRD train. Companies are transforming and tax departments can and must be an integral part of this transformation. 'In the past, the tax function often operated independently from the business side', says Evita Melger. 'The motto was ‘tax follows business’. We are now moving towards ‘tax as a crucial business partner’, and that’s an entirely different role to play.'

Sanders and Melger are in agreement. 'The CSRD is more than a reporting directive. As a tax specialist this is the time to become part of the strategy, of policy, of sustainable progress and of the future of the company', concludes Melger.

Sanders: 'The expertise, knowledge and perspective of tax specialists are increasingly in demand. Familiarise yourself with the subject, understand the interests at play, gain insight into the potential impact and make sure you are heard. This is my urgent and optimistic advice'.

Like to discuss what the CSRD means for your company?

Contact us

Noor Sanders

Noor Sanders

Partner, PwC Netherlands

Tel: +31 (0)65 389 65 39

Evita van der Aar-Melger

Evita van der Aar-Melger

Senior Manager, PwC Netherlands

Tel: +31 (0)61 088 13 39

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