Tax and ESG, two sides of the same coin?

It is a sign of the times we are living in: the ESG issue is increasingly at the centre of discussions around the world.

A three-letter acronym, Environmental - Social - Governance, which originates from a need for change shared by a large part of society and from the drifts of a “progress” that is negatively affecting both the global ecosystem and human relations.

It is easy to understand that the need to “change course” is now universally felt. Just take a look at how many institutions1 are making important contributions to the issue of sustainability. Although up to now there is no unanimously recognised standard for assessing a company's ESG performance, it is becoming increasingly clear that this issue is becoming more and more an important part of the considerations made in the doing business world. A new trend that shifts the attention of a company's investors (as well as the one of its customers and employees) “from the last line of the financial statements” to new values, a new method of evaluation that has its sustainability as focal point. If we consider that many due diligences have already included the target's level of sustainability among their assessment parameters, it is not difficult to understand how the road taken can lead to a virtuous system of companies that only admit ESG-compliant companies into their production chain or into their “basket of investments” (in the case of institutional investors). This is already happening in different countries2.

In addition to the natural connection between the elements linked to climate change and social rights, which are easily identifiable in the intrinsic characteristics of ESG, we would like to focus here on the importance of the “Tax” component in this context. Going beyond the factors being “exogenous” to companies – for example, the recent manoeuvres, commonly known as green tax, aimed at discouraging, through the use of specific taxes, the use of polluting fuels - there are many indicators that make it clear how corporate taxation becomes a crucial element in the ESG system, starting from the assumption that every company contributes, through the payment of taxes, to the common good of society. Hence the thought that the tax strategy applied becomes one of the key factors among the ESG assessment parameters.

It is interesting to point out that the various contributions that the most important institutions have produced so far converge on common points: a fair tax burden and transparency of information linked to the reduction of tax risk.

One example is the OECD/G20, which in December 2021 published the document "Tax Challenges Arising from the Digitalisation of the Economy - Global Anti-Base Erosion Model Rules (Pillar Two)" which indicates the implementation rules for the tax system reform (in agreement with 137 countries) and provides for a minimum global corporate tax rate of 15% to be applied to multinational companies with annual revenues exceeding €750 million in the countries where they operate or to the contribution made as part of the BEPS project on transparency with Country by Country Reporting and DAC6.

Moreover, the working paper 45/2021 prepared by DG TAXUD of the European Commission - which previously had already highlighted how tax policy and fiscal transparency are becoming increasingly important elements both in the definition of ESG criteria and on the issue of Corporate Social Responsibility - introduces the issue of sustainable finance, defining it as the process that leads to taking ESG issues into consideration when making investments, clarifying how, in the EU political context, this theme represents the opportunity to have a finance that is a tool to support economic growth but at the same time is able to work for the benefit of the environment and the community.

Furthermore, on the subject of transparency, GRI 207 introduced in 2019 provides the first global standard for the communication of tax policies, a tool essentially aimed at guiding multinationals in highlighting how much tax they pay and where.

Taking a closer look at the Italian situation, on the subject of tax certainty, Legislative Decree 128/2015 established the “collaborative compliance regime”, which aims to establish a relationship of trust between the administration and the taxpayer by means of a constant and preventive dialogue on factual elements, including the anticipation of control, aimed at a common assessment of situations likely to generate tax risks. This optional regime thus aims at reducing litigation and offers a number of benefits such as penalties reduced by 50%, exemption from providing guarantees for refunds and accelerated tax ruling procedures.

In conclusion, the changes taking place are leading investors, customers, suppliers and, in general, all stakeholders of a company to a new consideration in tax terms of how transparency, contribution and risk are now closely linked to business choices. Moreover, given the increasing importance for companies to be considered ESG compliant, it is clear that the adoption of a tax policy that allows the company to remain virtuous is increasingly a critical factor of great importance.

Our Tax Advisory team is starting to receive requests for assistance and support in the process of adopting internal tax governance models based on cooperative compliance, not necessarily aimed at a cooperative compliance agreement with the Italian Tax Authorities. The best answer is the creation of an “ESG agenda” in the company's tax department with a focus on tax issues which allow promoting transparency, managing low risk appetite and tax integrity (i.e. with the assessment of the effective tax rate), monitoring and assessing whether management is adequately structured to manage the tax policy.

1 By way of example only, GRI - Global Reporting Initiative, TFCD - EU Taxonomy and the Task Force on Climate-related Financial Disclosures, OECD/G20 - Principles of Corporate Governance, PRI - Principles for Responsible Investment.
2 By way of example, the Norway's Sovereign Wealth Fund has recently excluded nine companies that did not meet the ESG criteria identified by the Fund; a group of Danish pension funds have developed a tax code of conduct that identifies the necessary ESG behaviours (in the tax field) that investment partners must adopt; some Canadian pension funds have started to consider the Effective Tax Rate (ETR) as a valuation parameter in the investment portfolio, thus rewarding tax integrity.


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