Tax and the ESG agenda are inextricably linked – and there may be tax implications of an organisation’s activities across each aspect of E, S and G.
Tax can play a key role in the ESG journey by encouraging behavioural change and funding operational changes to the business.
Tax transparency is itself an important aspect of responsible business – closely linked to the Governance agenda of ESG.
The focus on tax transparency for life sciences businesses is increasing, driven by regulators, investors, other stakeholders and the public. Governments are also keen to drive tax transparency to shine a light that encourages businesses to ‘do the right thing’ by society and pay their fair share – and use tax as an incentive to help businesses achieve their environmental and social ambitions.
‘Owning the narrative’ is key: in terms of how much and where tax is paid and the group’s approach to tax governance and strategy. There is a trend towards increasingly more transparent, comprehensive disclosure, with more focus on how tax risk is managed.
The introduction by the EU of mandatory public country by country reporting, alongside the increased pressure from stakeholders for organisations to comply with voluntary frameworks such as GRI: 207 (tax) will further drive the tax transparency bar up.
While ESG is driving greater transparency and disclosure, it is also leading to changes in business activity itself that will have tax implications, reinforcing the importance of integrating your tax approach into the ESG agenda. Environmental and social pressures are forcing many businesses to shift their strategic focus, even as far as divesting from certain commodities or activities or reinventing themselves as zero carbon or zero harm enterprises.
This has ramifications for the supply chain, which will have implications for the procurement function and also tax impacts.
The tax implications of supply chain changes need to be carefully examined, such as:
Collaboration with your supply chain partners will be required to ensure that all changes are being correctly implemented, recorded and reported.
Such fundamental shifts are an opportunity to reconsider a group’s entire value chain, intellectual property (IP) and transfer pricing (TP) model and footprint, especially in tandem with Base Erosion and Profit Shifting (BEPS) legislation as the international tax environment rapidly changes and responsible tax awareness grows.
Governments across the world are introducing new taxes – “carrots and sticks” – to change behaviour and drive decarbonisation. Some of the proposed policies that are interesting for life science companies from a tax perspective are:
Plastic packaging taxes
Revisions to the EU’s emissions trading system and energy taxation directive
Developments relating to carbon pricing and border adjustment taxes along with other environmental taxes anticipated over the medium and long term
If it may sometimes feel like the tax burden is only increasing, it’s important to appreciate that the real aim of these changes is to drive environmentally sustainable practices rather than boost public coffers.
As policies bed in and requirements become clearer, businesses should focus on taking an integrated approach that minimises the financial impacts whilst ensuring compliance.
Certainly, it can be challenging for organisations to keep up to date with the continually evolving tax landscape. It is important to do so given the role tax reliefs (the carrots) can play in funding an organisation’s net zero journey and the impact of environmental taxes (the sticks) on pricing.
Remember that there are technology tools available that can help your business keep track of existing and emerging requirements. KPMG has developed various tools and applications, including:
Regulatory Horizon scanner that helps businesses monitor for international tax and regulatory developments
Tax compliance can feel like a headache – but technology can ease the challenge and help organisations stay in control.
