ESG has become a vital component to business, with increasing scrutiny on companies to achieve sustainability-related goals. Join us as we examine how to add value to your ESG agenda through the latest global tax and ESG developments.

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Tax has always been a key driver of business change, with the recent rise in environmental credits and tax incentives a strong example of this. More recently there has also been heightened investor and stakeholder pressure on businesses to engage in practices that are ethical and sustainable. From a governance point of view, this fundamentally means that ESG-certified entities need to be responsible corporate citizens. 

Businesses are now expected to set out clear tax policies that align with their ESG commitments and, importantly, follow them through. Compliance with tax law and the filing of tax returns is a critical component of governance that firms of all sizes already engage in.  

A transparent tax policy can be a strong tool for companies to demonstrate their wider ESG contributions and to build trust amongst both the public and their shareholders. Conversely, having a poor relationship with tax authorities – particularly one which results in negative publicity – can significantly work against an organisation’s dedicated ESG goals.

By being aware of the increasing number of governance rules, you can put your business in a strong position to demonstrate an overarching ESG strategy. 

“In Australia, Tax Risk Governance is an important aspect of what we do. In recent times, the ATO (Australian Taxation Office) started to play a vital role in helping transparency and good corporate governance which is within the ethos of ESG. The aim was to uplift business tax risk from 'back of office' to become a key responsibility of the directors and the board. Together, the directors, management and the board must show that an organisation has an effective, robust tax risk management and governance framework in place. A transparent tax policy can be a strong tool for companies to demonstrate their wider ESG contributions and build public and stakeholder trust.” Himashini
Weeraratne, Head of financial services, Head of ESG tax group, Grant Thornton Australia

"A transparent tax policy can be a strong tool for companies to demonstrate their wider ESG contributions and build public and stakeholder trust.” - Himashini Weeraratne, Head of financial services, Head of ESG tax group, Grant Thornton Australia 

Global governance rules 

Tax governance isn’t a new concept, with various aspects of it having existed for quite some time. However, it’s an area that is continuing to evolve, with changes in legislation having a growing focus on the importance of data, process, controls and governance. 

The OECD’s BEPS programme is a prime example of this. It focuses on new rules designed to counteract perceived corporate tax avoidance by multinational corporations. It looks at where these businesses should be paying tax and how much tax they should be paying. Over 130 individual countries have signed up to implement these rules, and compliance with them has forced businesses to have a renewed focus on their internal processes. 

“It is often quoted that in order to undertake a full pillar two calculation, somewhere in the region of 150 data points per jurisdiction/entity may be required. There’s no way that compliance with that regime is possible without a good handle on data, processes, controls and governance and we are doing lots of work with clients in this area.” Sam Dean, Head of tax risk management and governance, Grant Thornton UK 

Many nations have their own methods of assessing tax governance, with the UK’s ‘Business Risk Review+’ and the Australian Taxation Office’s ‘Justified Trust’ regimes both now in place to make assessments on the level of good quality tax governance, processes, and controls. Achieving poor results not only reflects badly on an organisation’s whole ESG scorecard but can also lead to much greater scrutiny from the tax administration, with all the associated costs that come with that, as details are more likely to be incorrect without good quality processes, controls and governance. 

“We are even seeing tax administrations go down the naming and shaming route for a variety of compliance issues, so, how long before poor tax governance is one of those issues?” explains Sam. “That would have a huge reputational impact, not just on shareholders but customers too who are becoming increasingly discerning about what they buy and who they buy it from.” 

“We are even seeing tax administrations go down the naming and shaming route for a variety of compliance issues, how long before poor tax governance is one of those issues?” - Sam Dean, Head of tax risk management and governance, Grant Thornton UK 

How governance rules affect businesses 

Tax governance is an important consideration for all businesses regardless of their size, particularly considering the day-to-day benefits and efficiencies that come with it. It’s not simply an issue that only large businesses need to consider. 

“In Australia the ATO’s programs started from top 100, top 1,000 and moved on to the next 5,000 program – medium and emerging markets as well as large private groups. They started from SAR (Streamlined Assurance Review), which focused on income tax, and now moved on to CAR (Combined Assurance Review) which focuses on both direct tax as well as indirect tax governance frameworks.” Himashini Weeraratne, Head of financial services, Head of ESG tax group, Grant Thornton Australia 

There’s also an increasing focus on corporate responsibility through initiatives such as the Corporate Criminal Offence in the UK which applies to businesses of all sizes.

This is criminal legislation that has been specifically designed to put responsibility on businesses to do more to prevent the facilitation

of tax evasion with unlimited court-imposed financial penalties for those in breach of the regime.

Penalties like this, when coupled with the potential reputational damage of being involved in such an investigation, display the importance of strong tax governance.  

Preventing the facilitation of tax evasion and increased corporate responsibility more generally continue to be areas of focus for the OECD so further global developments in these areas should be expected over time. 

Implications of poor tax governance 

Failure to put this framework together can result in increased scrutiny from tax authorities. This could include: 

  • A detailed review of business activities.  
  • Intense scrutiny of tax systems, tax processes and tax controls. 
  • The exhausting of an organisation’s time, costs, and resources.  
  • If the correct amount of tax is not paid, a firm could incur penalties. 
  • There could be significant reputational impact, leading to knock-on effects on deals and due diligence. 

Engaging with governance to advance your ESG agenda

Regardless of your jurisdiction or the size of your organisation, there are some basic principles that can put your business in a good position from a tax governance perspective. However, it’s important to remember that these principles are not simply box ticking exercises – there are tangible business benefits from good tax governance. 

A good starting point is having a coherent tax policy or strategy setting out the business’ approach to taxation, documented tax processes and a structured approach to the identification and management of tax issues with a clear escalation route to the Board as required. Also, it’s of key importance that the control framework in place to help mitigate those risks is tested, to ensure it is working as anticipated. Transparency throughout all of this is crucial. 

You can begin by starting a conversation within your organisation. How well are you doing some of these things already? And, importantly, what more could you be doing? ESG and tax are so closely aligned now and understanding how tax can help you achieve your ESG goals will undoubtedly benefit your organisation. 

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