In today's interconnected world, Environmental, Social, and Governance (ESG) considerations are increasingly influencing business strategies and operations, particularly in the area of mergers and acquisitions (M&A). Companies are acknowledging that strong ESG practices can drive long-term value creation, mitigate risks, and enhance reputation. Integrating ESG factors into pre-merger and post-merger restructuring is crucial to ensure a smooth integration, avoid deal breakers, and align with global sustainability goals and policies.

This article is written by Dick Brinkhof ([email protected]), Hendrik Bastiaans ([email protected]) and Michael Kratz ([email protected]). Dick, Hendrik and Michael are part of RSM Netherlands International Tax Services with a focus on International Tax, Transfer Pricing and ESG.

ESG driven Reorganization and Restructuring

ESG-driven restructuring initiatives are reshaping how businesses operate and manage their supply chains. For instance, decentralizing manufacturing functions by shifting production from Asia closer to end markets in Europe can reduce carbon footprints and enhance resilience against supply chain disruptions (such as the Sinai Canal block and increased insurgency by Piracy and Rebel activity in the Golf of Aden). Furthermore, consolidating manufacturing steps not only improves operational efficiency but also minimizes environmental impact as Europe has an increased standard regarding environment and human rights protection. Therefore, centralized ESG risk management systems in the EU are becoming essential for ensuring compliance with international ESG regulations (such as the CSDDD, EUDR, and CSRD) and mitigating risks across the supply chain.

In addition, adopting carbon-efficient logistics and fleet management practices can significantly reduce emissions (preventing to incurring carbon costs under CBAM and EU ETS). Companies are also centralizing the management of supplier contracts to ensure that suppliers adhere to stringent ESG due diligence standards, promoting sustainable procurement practices and banning the use products manufactured under forced labour practices. These initiatives reflect a growing recognition that ESG considerations are integral to operational efficiency and risk management.

Corporate Tax Implications

International restructurings, initiated by environmental, social and governance (ESG) criteria, involve significant tax considerations, especially with regard to profit taxation. When companies transfer parts of their supply chain and intellectual property to other countries, there is an inherently shifting of profits between jurisdictions. This can lead to complex tax issues, as each transfer potentially represents a taxable event. It is crucial for companies to develop a robust tax framework that not only complies with local and international laws, but also reflects ESG principles. 

Such a framework should start with a thorough assessment of the tax implications of the restructuring, taking into account the tax laws of the countries involved and the potential risks of double taxation or tax avoidance. Transparency and compliance are of paramount importance, and companies should strive for an open dialogue with tax authorities to avoid any disputes. In addition, it is important to align tax strategy with the company's broader ESG objectives, seeking ways to integrate tax responsibility into business operations and contribute to the social goals of the ESG criteria.

Managing the tax implications of international restructuring requires a proactive approach. Companies should not only respond to the tax challenges that arise, but also anticipate possible changes in the tax landscape as a result of ESG initiatives. This may involve adapting to new tax laws that focus on sustainability, or developing strategies that improve tax efficiency while still adhering to ESG principles. By planning ahead and remaining flexible, companies can ensure that their international restructurings are not only tax-efficient, but also contribute to their long-term sustainability and social responsibility goals.

Transfer Pricing Implications

Transfer pricing (TP) is another important area impacted by ESG-driven restructuring. According to Chapter 9 of the OECD Transfer Pricing Guidelines, businesses must ensure that their TP policies reflect the value creation and risk management associated with ESG initiatives. This may involve renegotiating and restructuring existing arrangements to align with ESG objectives, ensuring that the group benefits from these initiatives are appropriately recognized and allocated.

Intragroup compensation payments and remuneration models may need to be adjusted to reflect the created ESG impacts and benefits accurately. For example, if a company's ESG strategy leads to cost savings or enhanced brand value, these benefits should be reflected in the TP policies to ensure fair allocation of profits among the responsible group entities. This alignment not only ensures compliance with international TP guidelines but also supports the company's overall ESG strategy. RSM has recently published thought leadership that provides detailed comments on the impact of ESG initiatives on Group TP Policies. Read more here.

Forward Thinking

To navigate the complexities of tax and transfer pricing in the context of ESG restructuring, companies should develop a comprehensive roadmap for pre-merger and post-merger restructuring. This roadmap should proactively align tax strategies with ESG goals and regulatory requirements, taking into account the evolving global tax reforms and compliance dynamics. Timely action is essential to prevent unnecessary tax restructuring costs or undesirable TP corrections. By integrating ESG considerations into Tax Governance and TP frameworks early on, companies can mitigate risks, optimize their tax positions, and enhance their social corporate reputation. This forward-thinking approach not only ensures regulatory compliance but also drives sustainable business growth and value creation.

RSM is a thought leader in the field of International Tax and International Trade consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.