THIS ARTICLE IS WRITTEN BY JUAN DOSAL, ARIEL HOU and HENDRIK BASTIAANS. Juan ([email protected]), Ariel ([email protected]) and Hendrik ([email protected]) are members of the International Service Practice team of RMS the Netherlands and possess profound knowledge in tax governance.  

On October 22, 2023, the EU Tax Observatory published its Global Tax Evasion Report 2024 (hereafter, “the 2024 Report”).

Overall, the 2024 Report is a valuable contribution to the debate on tax evasion and tax policy. The 2024 Report's findings are likely to have a significant impact on tax policy and practice around the world in the coming years. The EU Tax Observatory was founded by the European Parliament as part of its efforts to combat tax abuse. Hence, the 2024 Report holds significant importance for policymakers throughout the EU.

In the 2024 Report, the EU Tax Observatory highlighted six findings on the dynamic of global tax evasion and international tax competition, followed by six recommendations to reconcile globalization with tax justice. It also acknowledged and highlighted the legal grey zone between tax avoidance and tax evasion. The report emphasizes the importance of reducing tax deficits to generate government revenue and increase the social sustainability of globalization.

The 2024 Report acknowledged that tax avoidance is often perceived as a grey area, where when it is done within the boundaries of the law, is technically legal. The 2024 Report as well emphasised that tax evasion is unequivocally illegal and entails intentionally misrepresenting or concealing information to reduce tax liability. The nuances in these concepts reflect the ongoing debates around tax integrity and the need for clearer tax policies that address both the letter and spirit of the law.

The publication of the 2024 Report is likely to have a significant impact on tax governance in the context of Environmental, Social, and Governance (“ESG”), as the 2024 Report's findings highlight the importance of tax transparency and accountability, and the need for multinational companies to pay their fair share of tax. This confirms the need of international operating companies to design and implement an ESG compliant Tax Governance Framework (“TGF”).

Increased transparency

Next to the more traditional governance topics (such as board, ownership and control, accounting, and business ethics) tax transparency is an important agenda point in governance assessment when considering ESG.

In this regard, multinational companies face the dual challenge of implementing new tax rules (e.g., the Pillar Two global minimum tax rules, EU’s public Country-by-Country Reporting (“pCbCr”), etc.) and new ESG imperatives in the near future, such as the EU’s Corporate Sustainability Reporting Directive (“CSRD”), that requires companies to publish for the fiscal year 2024 their state of governance following the disclosure requirements regulated by the European Sustainability Reporting Standards (“ESRS”).

The objective of these disclosure requirements is to provide an understanding of how the administrative, management, and supervisory bodies are involved in forming, monitoring, promoting, and assessing the corporate culture. It should also provide an understanding of the companies’ ability to mitigate any negative impacts and maximize positive impacts related to business conduct, and to monitor and manage the related risks.

Relationship between ESG and Tax

The impacts of the new tax disclosure requirements, and the role of tax data in ESG assessment by rating agencies will affect the way tax departments operate. So then, it will be necessary for companies to reassess their approach to tax from considering it a cost factor only to an indicator of how they contribute to the community they operate in. A poor result on tax transparency and bottom level of tax contribution in the operating jurisdictions could be perceived by ESG rating agencies as bad governance due to the risk of public exposure to tax controversy. The result could be a scale-down of the ESG rating given for not managing the tax risk in a proper manner. A low rating could result to be detrimental for business partners, and customers and affect actual credit ratings by financial institutions.

The “G” of ESG in the tax field

Considering the above, the most direct linkage between ESG in the tax is with the the "Governance" pillar of ESG, as proper tax governance ensures that a company is transparent in its financial reporting, adheres to international tax standards, and does not engage in aggressive tax avoidance strategies.

Furthermore, strong tax governance promotes corporate accountability, reduces the risk of legal consequences, and ensures alignment with shareholder interests.

Key elements of TGF

The key elements of a robust TGF include policies and procedures for tax planning, risk management, and compliance, as well as mechanisms for monitoring and reporting on tax-related activities. A TGF can also help companies identify areas for improvement in their tax practices and ensure that they are transparent and accountable in their tax-related decisions.

Accountability is both a matter of rules and conduct. Because of that, more and more internal operating companies are becoming aware that the sustainable profitable growth depends on the economic, environmental, and social sustainability of the communities they operate and work in. That is why some of these companies are putting sustainability at the heart of their organization and embed it into both their strategy and day-to-day activities. Therefore, we see that these and other companies are increasingly implementing an ESG-Compliant TGF to manage their tax affairs in a way that is aligned with their ESG goals.

Next Steps

Setting up an effective TGF requires careful consideration. As what was once private becomes public, controls, verifications and governance are even more important.

A fragmented landscape is slowly coming together as the demand for tax-related information increases. In this respect, the following steps could be considered:

  • Review and update "fiscal control frameworks";
  • Leverage leading technology solutions to manage tax audit frameworks and support the record-to-report process to meet multiple disclosure and compliance requirements;
  • Enable closer cooperation between tax and finance teams;
  • Assess impact on stakeholders - include in strategies, consider timing and feedback loop;
  • Choose format, visualizations and language wisely when disclosing tax information, taking into account the audience;
  • Consider local certifications alongside global standards;
  • Provide supporting context for disclosed information.

Our approach

The design and preparation of a TGF requires going through a process of sequential steps.

RSM can play a role in simplifying and guiding this process:

  1. Understanding the existing tax management practices, processes, and challenges within the organization.
  2. Evaluate the strengths and weaknesses of the current tax management practices
  3. Develop scenarios to anticipate future tax-related challenges and opportunities
  4. Determine the feasibility of implementing a TGF based on your current state and scenario planning
  5. Execution of Work Plan.

Why to Act Now

Proactive adaptation is essential. Jurisdictions are implementing significant tax reforms while advancing their tax agendas. Swift action is crucial to establish robust TGF aligned with ESG goals, ensuring compliance and ESG progress.