Navigating tax transparency in the advent of CSRD

The tax transparency environment continues to evolve, driven by global economic challenges and a heightened focus from stakeholders on corporate accountability. Tax has also become central to the broader environmental, social and governance (ESG) movement and is an increasingly important sustainability matter. Tax is seen as a critical element of an organisation’s social contribution, part of the ‘S’ in ESG.

Overall, we see two overarching trends in relation to tax transparency. Firstly, baseline expectations on voluntary tax disclosures continue to be redefined by the introduction of mandatory disclosure regulations across different jurisdictions.

Secondly, an emerging trend is that tax-related disclosures are being integrated into broader sustainability reporting frameworks such as CSRD. This is a clear acknowledgement that tax is seen as a sustainability matter in its own right.

We see no sign of these trends abating. This means that companies will need to navigate a challenging and ever-evolving tax disclosure landscape. 

Tax regulations driving increased tax disclosures

With the recent introduction of several international tax measures, including Pillar Two and public country-by-country reporting (CbCR), businesses are at an important juncture in their tax transparency journey.

Pillar Two

Pillar Two introduces a global minimum effective tax rate (ETR) for in-scope multinational entities (MNEs) with accounting periods beginning on or after 31 December 2023. It will operate via a system where in-scope MNEs with consolidated revenue of €750m or more are subject to a minimum ETR of 15% on their profits in each jurisdiction they operate in. Pillar Two will bring renewed scrutiny on how much taxes are paid and where.

Public Country-by-Country Reporting

Ireland has transposed the EU’s public country-by-country reporting (CbCR) Directive for financial periods commencing on or after 22 June 2024. MNEs with consolidated revenues of €750m in the last two consecutive financial years will be required to publish CbCR data, including a brief description of business activities; number of employees; total revenue (including related party revenue); profit or loss before tax; tax accrued and paid; and the amount of accumulated earnings.

Public CbCR will draw attention to MNEs’ corporate tax payments relative to their footprint in the jurisdictions in which they operate. Never before has there been such an impetus for MNEs to carefully consider the merits of providing supplementary disclosures and narratives to ensure that the CbCR data is not misinterpreted.

CSRD will impact more companies than any other sustainability regulation, bringing approximately 50,000 companies in scope.

CSRD aims to drive accountability and transparency by mandating companies operating in the EU to publicly disclose information on material sustainability topics across ESG pillars. The disclosures must be made in accordance with the European Sustainability Reporting Standards (ESRS).

Tax as a material topic

In determining what is a material topic, CSRD introduces the concept of double materiality. This requires companies to evaluate their impact on the environment and society (impact materiality) and how environmental and social factors affect their future performance (financial materiality).

Some companies will likely conclude that tax is a material topic for them and their stakeholders. This is because the taxes they pay and collect could be seen as having a positive impact on society.

While tax is not covered by a specific ESRS, the European Financial Reporting Advisory Group (EFRAG)—who developed the CSRD standards—has explicitly called out tax as a potential topic for disclosure. They have also suggested that tax disclosures under CSRD can be made by reference to GRI 207.

Adhering to tax minimum safeguard in EU Taxonomy

Companies in the scope of CSRD are also required, as part of their CSRD tax disclosures, to confirm the alignment of their activities with the EU Taxonomy. The EU Taxonomy is a common classification system that helps companies and investors identify environmentally sustainable economic activities to make sustainable investment decisions.

To be Taxonomy-aligned, companies must comply with minimum safeguards, one of which is tax. For an organisation to comply with the tax minimum safeguard, they must:

• comply with both the letter and spirit of the tax laws, including the arm’s length principles; and

• have tax governance and tax compliance as important elements of board oversight and broader risk management systems.

It is therefore important that the principles in a company’s tax strategy clearly align with the minimum safeguards. Tax teams must also evidence the tax governance and risk management procedures they have in place to ensure compliance.

Alignment with transfer pricing disclosures

Under CSRD, companies must disclose information about their business model, strategy and value chain. Large companies already disclose this type of information to tax authorities in their transfer pricing master file and local file. It is therefore important to ensure consistency between the information disclosed in CSRD reports and transfer pricing documentation to avoid any unnecessary scrutiny from tax authorities.

In undertaking our tax transparency analysis for this year’s report, we reviewed the tax disclosures of all 20 companies listed on the main market of the Irish Stock Exchange (Euronext Dublin)¹. To the extent that they were published on their websites, we reviewed companies’ tax strategies, annual reports and sustainability reports. 

In our experience, large companies typically have a tax strategy and a robust tax governance framework. A company may decide not to publish details of its tax strategy or its governance arrangements for many reasons. Therefore, it cannot be assumed that the absence of a published tax strategy, or specific disclosures therein, means that these components aren’t in place. Rather, they are not being made publicly available.

To assess readiness for tax disclosures under CSRD, our benchmarking for this year's report assesses the alignment of companies' disclosures with GRI 207. GRI 207 disclosures are broadly aligned to PwC’s tax transparency framework under which we conducted benchmarking for our prior year tax transparency report.

_{¹ Who were listed on Euronext Dublin in 2022 and remain listed as at 24 July 2023}

Approach to tax

Our review found that a tax strategy, sometimes referred to as a company’s approach to tax or tax policy, remains the primary means by which companies make tax disclosures.

While there is no requirement in Ireland for companies to publish a tax strategy, 50% of companies reviewed voluntarily published a tax strategy.

There was a 29% increase in the number of companies that explain how their tax arrangements align with their commercial activities. Consistency between the management of a company’s tax affairs and the wider business strategy is important, demonstrating that tax is aligned with broader commercial objectives.

This year’s review found that 80% of companies referenced tax in their broader sustainability reports. This represents a 14% increase from last year and is an acknowledgement by companies that tax is an important ESG metric that their stakeholders are interested in.

Tax governance, control and risk management

Our review found that all companies disclose that the board or audit committee is accountable for compliance with the tax strategy. This indicates a strong level of oversight on tax matters.

It is common for the board to delegate the day-to-day management of tax matters to an executive within the organisation. 80% of companies specify that accountability for tax compliance is delegated to the CFO and/or head of tax within the organisation.

This year’s review found that 90% of companies include a statement in their tax strategy describing their risk appetite. This represents a 29% increase from last year.

Stakeholder engagement and management of concerns related to tax

Consistent with prior years, all companies describe their approach to engaging with tax authorities. This includes participating in cooperative compliance frameworks, seeking clearance for all significant transactions, engaging on tax risks and seeking advance pricing agreements.

Country-by-country reporting

Most companies provided some information required by the GRI CbCR disclosures, such as the names and principal activities of the group’s entities in each jurisdiction.

This year, 90% of companies disclosed some information on their tax footprint in Ireland—either in their tax strategy or broader sustainability reports. 20% of companies voluntarily disclosed some level of information on their tax footprint in material jurisdictions. Total tax contribution (TTC) quantifies the total amount of taxes paid by a company, often distinguishing between taxes borne by the company and taxes collected on behalf of the exchequer.

With the impending public CbCR regime focusing on corporation tax borne by a company, some companies may opt to voluntarily disclose information on their TTC to improve understanding and provide visibility of their wider contribution to public finances.

Key actions businesses can take today

1. Engage the board
Increasing investor pressure on tax means tax transparency is now a board-level issue. It is important to have full engagement between the board, the tax function and those responsible for ESG matters. Tax needs to be fully aligned with your organisation’s broader sustainability strategy.

2. Engage with your sustainability teams
It is important that there is full engagement between tax teams and sustainability teams to ensure that impacts, risks and opportunities relating to tax are identified and considered in double materiality assessments for CSRD reporting. Even where tax is not considered material, it is important that tax teams help inform this decision.

3. Prioritise your tax strategy
For those companies not yet making disclosures, the priority should be developing a formal tax strategy. This will be the first document stakeholders look for when assessing the company’s approach to tax and its tax transparency. It can help you control the narrative.

4. Consider what, and to whom, you are reporting
Tax is a broad subject. Understand the material tax matters your stakeholders want to know about and why. Review your current disclosures to see if they align with stakeholders’ expectations and/or regulatory requirements. Once you have decided what disclosures to make, then you will need to consider whether the target audience will be able to understand each disclosure. Including additional information to help explain the disclosure and provide additional context may be beneficial.

5. Establish the optimal reporting framework for the company
There is no optimal level or one-size-fits-all approach to tax transparency. Each company’s perspective differs and will be driven by several factors, including your brand values and stakeholder interests. Decide what reporting framework works best for you. If the company already uses a reporting framework, such as GRI, for its wider sustainability reporting, ensure that your current tax disclosures align with that framework.

6. Establish processes and procedures for tax disclosures
Regardless of what disclosures you make, establish formal procedures and governance to ensure that your company can stand over its qualitative and quantitative disclosures.

We are here to help you

The tax transparency landscape is evolving. Companies need to adapt to keep up with stakeholder expectations on tax disclosures. We can help you define your tax transparency strategy and understand your tax disclosure obligations. We can also provide your own transparency assessment so that you can benchmark how your tax disclosures compare to your peers. Contact us today.