ESG and Tax: Top 10 takeaways from the KPMG ASPAC Tax and Legal Summit

The 2023 KPMG Asia Pacific Tax and Legal Summit took place from 23-25 May in Singapore where a delegation of nearly 900 tax professionals convened to explore the developments on the horizon across a number of areas including the OECD BEPS 2.0 initiative, the future of tax administration, the digital future of tax, the environmental, social and governance (“ESG”) agenda, and the tax developments across a number of sectors.

One of the key topics featured at the Summit was navigating ESG and the tax environment where KPMG professionals discussed how tax transparency is now a core pillar of sustainability, leading to a movement of new global standards.

The sessions explored the practical implications of the move to mandatory public country-by-country (CbC) reporting as has been seen in the European Union, Australia and the United States.

The days of tax being just a private compliance issue for tax teams are long gone.

Multinational groups have a global footprint in many countries, which means they potentially are facing the challenge of managing overlapping and inconsistent mandatory public CbC rules.

Outlined below are key takeaways on the ESG and tax transparency breakout sessions.

1. In the short term, organizations will need to undertake a ‘gap analysis’ to comply with new tax transparency legislative frameworks such as public CbC reporting. The long term offers an opportunity to transform a reporting and compliance exercise into a more strategic exercise for organizations to enable enhanced communication with key stakeholders.

2. With the move to public tax transparency reporting, organizations will need to not only be comfortable with the CbC information being made public but be in a position to able to utilize CbC data for multiple purposes including applying BEPS Pillar 2 safe harbors, transfer pricing as well as tax reporting generally. There are also considerations around managing large volumes of tax data and to how to process, analyze and report data in real time and more efficiently with the use of technology.

3. Tax functions are increasingly under pressure to incorporate ESG factors in decision making. Tax functions are moving the focus beyond corporate income tax contributions and working collaboratively with the business to understand the supply chain and how new environmental taxes and incentives impact their supply chains. There is also a need to track environmental taxes and incentives and apply them consistently across the business.

4. Tax transparency is one of the key pillars in ESG to help build trust in the communities in which organizations operate. Having predictable and stable tax policies in the countries in which they operate are viewed as important factors for doing business in particular locations. Organizations that are transparent on their tax affairs are generally seen as socially responsible, which in turn will make it easier to do business in that location.

5. Tax transparency is more than just words in a report – it is backed up by strategy, commitment and action on the organization’s tax and sustainability strategy. It is also an element of the company’s purpose.

6. External stakeholders such as civil society groups and non-governmental organizations (NGOs) are increasingly interested in the tax affairs of large organizations and it is crucial to be able to be transparent and be able to respond to stakeholder questions. Some disclosures in tax transparency reports have been deliberate in responding to external stakeholder feedback and as a result, the reports have been subject to a continuous improvement process over the years.

7. Implementation of tax technology to automate reporting of multiple tax data sets for general tax reporting, compliance, CbC, and BEPS Pillar 2 reporting processes is now high on the agenda for some organizations.

8. Sustainable finance also plays a key role in shaping ESG agendas for customers of financial institutions that meet sustainability objectives. Tax can play a key part in this through lowering the levies, tax charges or incentives that can be passed on to customers in the form of lower cost green financing.

9. Public tax reporting requires organizations to revisit corporate governance processes to ensure strong governance processes and control frameworks are in place to support an organization’s public narrative and the validation of tax data. Re-examining the governance around tax data being disclosed also helps organizations understand what they are paying to enable business decision making but also prepares them for further scrutiny from global regulators. Tax teams should also work with their corporate affairs team on a communication strategy to explain complex tax data publicly to various external stakeholders.

10. Organizations are under pressure to disclose more beyond the mandatory regulatory requirements, with some including detailed BEPS Pillar 2 related voluntary disclosures but also are faced with the challenge of balancing the need to provide more disclosures given existing resources and the need to annually maintain the aspiration of high standard of disclosures in tax transparency reporting.