Tax and CSRD : the importance of tax transparency

The CSRD will be part of the EU member states national law by July 2024 (with some exemptions) and will apply as of 2024 financial year (for the reports published in 2025). More information is available in Preparing for the Corporate Sustainability Reporting Directive (CSRD) - Mazars Group.

The CSRD requires reporting not only on information necessary for an understanding of the company's sustainability-related risks and opportunities, but also on information necessary for an understanding of the impact of the company's activities on environmental and social matters. In this way the CSRD takes a double materiality approach.

International tax policy and sustainability

The role of taxation in sustainable development was emphasised by the UN Committee of Experts on International Cooperation in Tax Matters. Tax revenue was recognized as a key source to finance basic public services. Tax policies, therefore, may also have an impact on infrastructural investments (domestic and foreign tax incentives), environmental sustainability (carbon taxes), and health outcomes (taxes on harmful and unhealthy products). Carbon taxes, in return, may affect companies’ business models, including strategic development in the context of costs, supply and value chain.

The OECD guidelines for multinational enterprises highlight taxation as a key topic. Specifically, the guidelines state that enterprises should consider tax governance and compliance as crucial aspects of their oversight and risk management systems. Corporate boards are advised to adopt tax risk management strategies to fully identify and evaluate financial, regulatory, and reputational risks associated with taxation (OECD MNE Guidelines 2011, p. 60). The Global Reporting Initiative GRI 207 tax standard, references these guidelines as well. 

The Platform of Sustainable Finance, in its October 2022 report on Minimum Safeguards related to the EU Taxonomy, notes that the concept of tax compliance has evolved. It now encompasses not only tax evasion but also tax avoidance through aggressive tax planning. This broader understanding demands that tax planning aligns with economic realities and adheres to the spirit of the law to ensure fairness to the countries involved.

What is the scope of CSRD and how does it relate to tax?

Companies subject to the CSRD will have to rely on the European Sustainability Reporting Standards (ESRS), which were developed by the European Financial Reporting Advisory Group (EFRAG) and are the reporting framework for sustainability

under the CSRD. The structure of the ESRS, as shown below, consists of a general part (cross cutting standards) and three substantive parts: environmental, social and governance. You can find more information on ESRS in this publication.

The cross cutting standards in principle apply to all organisations and they include reporting on, for example, a business strategy, a business model or governance. Some companies also have a publicly available tax strategy. In that case it’s important that what’s reported under the ESRS general part is well aligned with other company’s strategic documents such as a tax strategy.

The table below shows the ESRS structure:

Is tax a mandatory part of the CSRD report?

Tax practices and policies can have significant ESG implications and they need to be covered in the CSRD report under the general ESRS if material tax-related impacts, risks or opportunities have been identified following the double materiality assessment.

While tax matters are not typically a central component of CSRD sustainability reporting, they can indirectly impact a company’s sustainability considerations, especially in terms of corporate governance and transparency. Therefore, while tax-related issues may fall under the broader scope of corporate sustainability, they may not necessarily be explicitly addressed in the CSRD report. Tax becomes a mandatory element only if the company deems it material.

Determining whether tax is a material topic that should be included in the CSRD report is not straightforward. To assist with this assessment, we outline a path companies can follow to evaluate their level of CSRD reporting risk regarding tax. The first and most crucial step is to decide whether tax is a material topic for the CSRD report. The guidance on the CSRD materiality assessment you can find here.

What if tax is a material topic?

Tax as separate entity specific disclosure

It is important to emphasise that CSRD makes it mandatory for companies to consider other aspects of the ESG in their organisation, also those that are not covered in the ESRS. Thus, the first step is to conclude if tax is identified as a material topicand as such if it has to be included in the CSRD report in a form of an entity specific disclosure. Since there is no uniform ESRS for tax, guidance on incorporating tax into your CSRD reporting can be found in existing tax frameworks, initiatives, reporting standards, or benchmarks such as the Global Reporting Initiative (GRI) 207 tax standard or the B Team’s framework. Both address tax transparency and responsible tax behaviour. Currently, most companies follow the GRI 207 tax standard.

What if tax is not a material topic?

Tax is relevant but not included as an entity specific disclosure

Companies might determine that tax is not a material topic but may choose to include it in their sustainability reporting. In such cases, tax matters can be addressed under the ESRS G1 (business conduct) or ESRS S3 (affected communities) standards. Companies taking this approach should carefully consider their tax strategy, particularly their stance on tax governance and transparency, as these aspects will be detailed under G1 and S3. Additionally, it is essential to identify which tax functions within the organisation are responsible for managing ESG tax risk—whether it is the board, a tax director, or the tax team.

The ESRS S3 is related to tax when material impacts related to affected communities have been identified through the assessment connected with the company’s own operations and value chain. In particular, it refers to companies’ strategies to minimize taxation in the context of operations in developing countries and is reflected in their cost structure and the revenue model.

Under the current ESRS, tax is not explicitly covered. A company might decide that tax is not a material topic under the CSRD and choose not to include it in their CSRD report, neither in sector-specific standards nor under G1 or S3 of ESRS. Thus, they may not follow either approach mentioned earlier. However, given the evolving sustainability regulatory environment, companies should carefully consider incorporating tax into their general sustainability reporting framework (e.g., sustainability or transparency report). They can follow the GRI 207 tax reporting standard or any other relevant sustainability reporting framework. Reasons for companies to be transparent about their tax practices include:

· their brand value. A sustainable brand will enhance a company’s reputation and secure future earnings through stakeholder loyalty and advocacy, thus increasing brand value;

• to promote confidence and credibility in the tax practices of organisation in tax systems;
• to show the contribution that they make to the countries in which they operate;
• to enable stakeholders to make informed judgments about an organisation’s practices; and
• to help inform public debate and support the development of socially desirable tax policy.

Tax transparency should be viewed as a lever for sustainability change, not merely as a compliance and risk burden. It offers numerous opportunities to accelerate a company’s sustainability transformation and to leverage available incentives and credits to support this transition. Beyond tax transparency and CSRD, other ESG-related tax topics can significantly impact a company's operations and business strategy and should be carefully considered. Among others, those are:

• Carbon Boarder Adjustment Mechanism (CBAM)
• Regulation on products originating from deforestation
• Ban on products made with forced labor
• Corporate Sustainability Due Diligence Directive

What should tax departments do?

There is no definitive right or wrong way to approach tax transparency reporting or to include tax in a company’s sustainability report. However, attention to the CSRD report will necessitate considering and potentially incorporating tax as a vital part of a sustainability commitment.

Ideally, a company’s Chief Sustainability Officer or sustainability team should already have engaged with the tax department or a tax advisor to determine if tax is a material topic for the CSRD. Equally, tax departments should seek to understand how the company’s sustainability policy or transparency report addresses tax matters. This includes assessing the alignment of transfer pricing documentation with the sustainability or transparency report and evaluating the impact of new compliance measures like the Carbon Border Adjustment Mechanism on business strategy.

For a tax department, it is crucial to collaborate with a tax advisor who has deep insights into the overall sustainability reporting landscape. This advisor can optimize data use and help focus on mandatory requirements, including tax. Companies should leverage the extensive data collected for CSRD reporting to investigate how tax is affected and consider other impending tax transparency initiatives in the European Union, such as a public country-by-country reporting.

Ultimately, the CSRD's double materiality approach should encompass tax matters. However, ESG and tax considerations extend beyond this scope. Tax reporting and transparency enhance sustainability awareness for both companies and consumers, provide shareholders with essential information for informed decision-making, and help build corporate reputation. For these reasons, tax transparency should be a high priority for tax departments and the boards.