EU Corporate Sustainability Reporting Involves Tax Information

Companies will need to prepare this year for several global mandatory tax-related disclosures. Among these reporting requirements, many companies in the EU will need to comply with the new Corporate Sustainability Reporting Directive, which entered into force on Jan. 5, 2023.

Who Should Report

This directive aims to set out reporting rules regarding environmental, social, and governance, or ESG, information for companies falling within its scope (see below). Reporting in accordance with the CSRD can include various tax matters, though the European Sustainability Reporting Standards, or ESRS, don’t include tax as a sustainability matter—yet.

For companies that currently have a reporting obligation under the Non-Financial Reporting Directive—listed companies with more than 500 employees, which is approximately 11,700 companies—the first reporting year for the CSRD is 2024. Ultimately, the CSRD will require roughly 49,000 companies (75% of the turnover of all limited liability companies) to report.

Reporting for Tax

In principle, companies aren’t required to report on tax under the CSRD in their sustainability statements, as this isn’t part of the current scope of the standards. However, there is a strong argument to include tax as a sustainability matter in the assessment, and the result of that assessment could then lead to a reporting obligation on tax.

Double materiality. Under the CSRD, companies will need to perform a double materiality assessment, including impact and financial materiality perspectives to determine if a matter is material.

Tax could be included in the long list of sustainability matters to be assessed from an impact or financial perspective or both. If so, the reporting entity is required to include tax-related information in its CSRD report, in accordance with the ESRS.

Based on the ESRS, impact materiality requires the assessment of a company’s material actual or potential impact—positive or negative, over the short, medium, or long term—on people or the environment. Financial materiality, based on the ESRS, would require assessment of the extent to which the matter triggers or may trigger material financial effects on a company’s development (such as cash flows, financial position, or financial performance) in the short, medium, or long term.

Affected communities. Currently, tax is only mentioned briefly in the standard that deals with affected communities—paragraph 8(a) of ESRS S3. If impact on affected communities is considered material—for example, if the company has aggressive strategies to minimize taxation, particularly with respect to operations in developing countries—the company might have a tax reporting obligation via the CSRD.

Environmental taxes. Other tax-related risks such as carbon taxes, plastics taxes, energy taxes, or opportunities such as tax incentives for green investments or research and development activities, could make sustainability matters material from a financial perspective. For example, the sustainability matter “material inflows” could become financially material if there are additional taxes expected on plastic use.

Assurance

Assurance is an opinion from a third party (usually a statutory) auditor on whether the information presented is in line with a particular reporting standard.

Companies within the scope of CSRD are currently required to obtain limited assurance from an external auditor. The EU’s ambition is to move to reasonable assurance at a future date.

Limited assurance is the current level of assurance required for CSRD information. It is sometimes referred to as “negative assurance” as here the auditor states that nothing has come to their attention that causes them to believe that the sustainability information isn’t prepared, in all material respects, in accordance with the reporting criteria.

Reasonable assurance on the other hand requires a “positive assurance” statement that the information reported accords with the reporting standard.

A company could take the position that tax isn’t a sustainability matter therefore can’t be material and so the company doesn’t need to report on it in its sustainability statements. An auditor could challenge this—in practice we already see discussions between auditor and companies subject to CSRD—but the auditor has no ground to request the company to include tax as part of the CSRD disclosures.

Data Management

The introduction of the CSRD comes with its own data management challenges. Various company departments/functions—sustainability officer, finance officer, IT department—must deliver extensive amounts of data, in specific formats, that complies with the reporting requirements.

In practice, end-to-end management of ESG and tax data consists of the following three steps and will also apply to CSRD: data collection, data preparation, and last-mile reporting and filing.

The first two steps are general and also relevant for other types of reporting—for example, public country-by-country reporting, Pillar Two (calculation of effective tax rate), and Carbon Border Adjustment Mechanism reporting.

The last step is focused on country and tax reporting specific requirements.

Tax technology departments can assist with effectively designing and implementing solutions for these steps.

Given the complexity of data sourcing, companies should begin assessing the control environment, data quality, and availability of documentation before or at the start of the first reporting year.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Bernard van Gerrevink is a partner (tax), Vera Moll is a director (sustainability reporting and assurance), and Max Zanderink is a manager (tax) with KPMG.

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