The European Union (EU) has taken an innovative position in enhancing corporate ESG reporting standards by introducing the Corporate Sustainability Reporting Directive (CSRD) earlier this year. The CSRD is all about disclosing to your consumers and investors how your enterprise policy takes into account important topics that have an internal and external impact on the company and its societal stakeholders. How a company manages its taxes influences the company’s internal finances and also the contribution to the resources at the country level and local levels. When preparing your CSRD reporting Taxes play therefore a key role in different parts of the mandatory disclosure standards1 you need to use for your reporting.  

This article is written by Hendrik Bastiaans ([email protected]) and Dick Brinkhof ([email protected]). Hendrik and Dick are both part of RSM Netherlands International Tax Services Practice with a focus on Green taxes.

When preparing the CSRD reporting companies need to perform a Sustainability Due Diligence. This is the process by which companies identify, prevent, and mitigate actual and potential negative impacts on the environment, society, and people, and account for how they deal with them. Through an “inside-out analysis”, they define the impact made by their activities or their supply chain on the environment and society. “Outside-in” analysis is used to interpret external developments and their impact on company performance. While the CSRD offers some guidance in this regard through mandatory disclosure standards, organizations are responsible for determining whether a particular issue is material or not, and they must justify their decisions. For a deeper understanding of the specifics of how the CSRD works, our updated 2024 CSRD White Paper offers comprehensive insights.2

When you need to call your tax advisor to support your ESG advisor?

When performing sustainability scan or even a due diligence some parts of the exercise require the presence of a tax advisor that can put tax knowledge into a specific ESG context. The CSRD will require that you take a look at Environmental standards. The environmental standards require in E1-6 climate change that a company reports on the impact of scope 1,2 and 3 emissions. When reporting your scope1 emissions you will need to explain how your company takes into account the European Carbon Tax (EU ETS).3 Also, the CSRD requires that you take into consideration extended producer responsibility schemes (EPR), which might be connected to so-called Plastic Taxes.4 In the same environmental standard, there are also multiple references to explain in the CSRD report if the company is engaged in the different sustainable activities that are aligned with the EU Taxonomy5. The EU Taxonomy is a common classification of economic activities significantly contributing to environmental objectives, developed by the EU. The Minimum Safeguards are part of the EU Taxonomy Regulation and have been developed at the request of the European Parliament. They are based on recommendations from the Technical Expert Group to ensure that entities that carry out environmentally sustainable activities also meet certain minimum governance standards. Also, the aim is that entities do not violate social norms, including human rights and labour rights. The Taxonomy Regulation clarifies6 that in the context of the Minimum Safeguards, economic activities are to be considered Taxonomy-aligned if they do not violate the standards for responsible business conduct mentioned in among others the OECD Guidelines for Multinational Enterprises on Responsible Business Conduct.7 These guidelines include a separate chapter XI on taxation, which prescribes that companies should comply with the letter and the spirit of tax laws and regulations under which they operate. The Chapter in the guidelines mentions that about tax governance:  

“In particular, enterprises should comply with both the letter and spirit of the tax laws and regulations of the countries in which they operate. Complying with the spirit of the law means discerning and following the intention of the legislature.”  

Furthermore, the Social Standards require that you report on actual and potential impacts on affected communities by the company’s strategy and business model.8 One of the specific examples mentioned of negative impact on communities is aggressive strategies to minimize taxation, particularly concerning operations in developing countries. When defining aggressive tax strategies a logical step will be to check the arrangements that are reported under the EU Mandatory Disclosure regime for cross-border transactions (DAC6).9 This is a measure that the EU has introduced to increase tax transparency to better understand potentially aggressive tax structures and requires active reporting of tax planning structures that fall in scope.  

On one hand, it appears that ESG and CSRD necessitate a more prudent, or at least less aggressive, approach to tax planning. This naturally raises the question of whether this legislation also encourages paying more tax than strictly necessary. According to Chapter XI, that is not the case. It is written there:  

“It does not require an enterprise to make payment in excess of the amount legally required pursuant to such an interpretation.”

Forward thinking

Questions remain about the content and depth of tax information required to be able to finish your CSRD reporting. To fulfill CSRD reporting requirements in the coming years, it will be crucial to have comprehensive insights into your companies' tax practices and strategies to ensure they are aligned with the reporting standards required under the CSRD.  

In this area, RSM can serve as a valuable conversational partner, offering expertise and guidance to help companies navigate the complexities of ESG-aligned tax reporting. RSM is Thought Leader in the field of Tax and Sustainability consulting. We offer frequent insights through training and sharing of thought leadership that is based on a detailed knowledge of European Green Taxes and practical applications in working with our customers. If you want to know more, please reach out to one of our consultants.