Tax must be considered as part of the Corporate Sustainability Reporting Directive’s double materiality assessment, explains Aidan Lucey
The aim of the EU’s Corporate Sustainability Reporting Directive (CSRD) is to drive accountability and transparency by mandating companies operating in the EU to disclose information on material sustainability topics publicly. Even if companies have reported non-financial data in the past, they will likely need to expand the nature and extent of their disclosures.
For some companies, tax could be considered a material sustainability topic, given the significance of tax contributions to society and heightened investor scrutiny. This means they will need to disclose information on tax publicly, too. Therefore, companies must understand the specific tax disclosures that may be required under CSRD.
CSRD and double materiality
Companies within the scope of CSRD are required to make disclosures on material sustainability topics in accordance with the European Sustainability Reporting Standards (ESRS). The ESRS covers sustainability topics across environmental, social and governance pillars and prescribe specific disclosure requirements.
To determine the sustainability topics to be disclosed, companies must carry out a double materiality assessment. This involves assessing a company’s impact on the environment and society (“impact materiality”) and an assessment of how sustainability topics may affect the future performance of the company (“financial materiality”).
If a sustainability topic is material to a company, but is not addressed by the ESRS, the company must still disclose information about it to enable readers to understand its sustainability-related impacts, risks and opportunities.
Tax as a material topic
Interestingly, the European Financial Reporting Advisory Group (EFRAG), which developed the CSRD standards, explicitly calls out tax as one of the topics on which organisations could make disclosures.
In determining what sustainability topics are material for a business and its stakeholders, companies must consider many factors.
While materiality considerations will differ for every organisation based on their specific sustainability and stakeholder profile, a range of factors could make tax a material consideration. These are outlined below.
Social impact
Tax is not just a cost of doing business, it is also a social responsibility. The taxes paid by an organisation, including those that it collects on behalf of governments, can represent its biggest monetary contribution to society.
Those taxes fund public services, green infrastructure and community projects.
Consequently, tax can be seen as a powerful indicator of a company’s societal impact.
To assess this impact, stakeholders are demanding a greater level of tax transparency. They want to understand a company’s approach to tax, how tax matters are governed, and how much taxes are paid.
Investors
Tax is being factored into investor considerations when assessing the sustainability of a business.
An organisation’s approach to tax can pose significant risks that affect investment returns in the medium and long term.
To address these concerns, investors are taking steps to influence companies to make more comprehensive tax disclosures that will allow them to evaluate not only financial aspects but also governance and reputational risks associated with their approach to tax.
Some investors have released codes of conduct encouraging transparency on tax from investee companies. Others have filed shareholder motions mandating tax disclosures under GRI 207, a specific tax standard released by the Global Reporting Initiative (GRI) to enable companies to disclose tax as part of their sustainability reporting.
Tax disclosures under the CSRD can provide companies with an opportunity to build trust with investors, customers and society. Even where a company concludes that tax is not a material topic in its own right—possibly because other sustainability topics are viewed as higher priorities—tax disclosures could be considered under an existing ESRS.
Tax disclosures required
Where an organisation deems tax a material topic, EFRAG has indicated that GRI 207 could be used as the basis for its tax disclosures. GRI 207 consists of four categories of disclosures:
- Disclosure 207-1: Approach to tax. This requires an organisation to disclose details on its tax strategy, who oversees it, and how it aligns with its broader sustainability strategy.
- Disclosure 207-2: Tax governance, control, and risk management. This requires the disclosure of information about an organisation’s tax governance structure and how tax risks are identified, managed and monitored.
- Disclosure 207-3: Stakeholder engagement and management of concerns related to tax. This disclosure considers how an organisation engages with its stakeholders on tax matters.
- Disclosure 207-4: Country-by-country reporting. This disclosure requires an organisation to report on quantitative data, including its revenue, tax, and business activities on a country-by-country basis.
A double materiality assessment is an essential step towards CSRD compliance. Full engagement between tax departments and sustainability teams will ensure that tax impacts, risks and opportunities are identified and considered in the double materiality assessment.
Aidan Lucey is Tax Leader for CSRD at PwC Ireland
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