Sustainability and Tax - when is tax material
A crucial factor for experts in sustainability and taxation
Companies are now evaluated based on factors beyond financial success. It is important to consider how taxes impact a business in relation to the environment and society. Taxes can have a significant influence on a company's overall impact on the environment and society. Understanding this impact is crucial for businesses in today's changing landscape.
A thorough, cohesive, and balanced narrative is crucial to demonstrate how the company's tax strategy is in line with its mission, strategic goals, and commitment to generating enduring value.
There's no need for a conflict between what benefits a business and what benefits the communities in which they function. An organization's mission should be aligned with key sustainability issues. This includes considering the effects of a sustainable tax approach on businesses and society. Addressing these issues is important for the organization's overall sustainability goals.
Furthermore, the terms "sustainable" and "value" are inseparable. Maintaining any tax strategy becomes extremely difficult if it doesn't contribute value, and it's even more challenging for a tax strategy to provide value if it isn't aligned with sustainability.
Tax directors are important in making sure that taxes are a key part of their organization's sustainability goals. Including tax in materiality evaluations and sharing with stakeholders is important for better understanding risks, opportunities, and sustainability impacts related to tax. Nonetheless, numerous tax directors are not involved in the process of pinpointing pertinent topics for sustainability reporting.
Tax is rarely discussed in sustainability reports. It is typically grouped with other topics such as compliance, corporate governance, or business ethics. These topics often cover tax-related issues.
An additional explanation might be the insufficient understanding of the relationship between tax and other sustainability matters. Tax is often perceived merely as a financial concern, regulated by intricate laws and revealed in financial reports. Nonetheless, taxes exert a broader influence on society, as they finance public services, bolster economic growth, and foster social well-being.
Sustainability teams should know that stakeholders, like investors, appreciate companies that focus on responsible tax practices and openly share their economic contributions. The UN PRI says more investors are considering tax risks when making investment choices. Moreover, some are starting to view tax matters from an effect standpoint, as a part of influencing sustainability results.
Tax experts and sustainability experts should collaborate to understand the role of tax in sustainability. They should ensure that tax is taken into account when evaluating its significance.
When evaluating tax as a significant subject, it's crucial to take into account the possible effects of the subsequent situations:
- Possible underestimation of tax obligation.
- Signs of irregular management affecting the company's tax strategy.
- Conviction that the company does not pay the correct amount of tax.
- Unsettled or continuing evaluations, audits, or recent agreements with tax agencies.
- Belief that the corporation employs forceful tactics to reduce tax obligations.
- Minimal or non-existent public revelations regarding tax.
- Activities in numerous low-tax regions.
- Examination by the press regarding the firm's tax strategies.
In the realm of sustainability, taxation is a fluid area, necessitating frequent evaluation and contemplation of its substantial effects to guarantee the corporation's adaptation to evolving circumstances and stakeholder apprehensions. Therefore, it's crucial to strategically align it with the company's overarching strategy and goals. This alignment further aids in prioritizing initiatives and efficiently distributing resources.
Numerous South African firms are acknowledging that tax transparency conveys a strong statement about their dedication to the environment and society. They comprehend the beneficial influence transparency has on their image and the corresponding opportunities it offers. Whether tax is addressed in the consolidated annual report, governance or sustainability report, or a separate tax report, the document must be as comprehensive and pertinent as other financial reports. This is accomplished by applying guidelines from internationally harmonized reporting standards, such as the Global Reporting Initiative 207: Tax Standard (GRI 207).
An entity adhering to GRI standards for sustainability reporting should also comply with GRI 207 if tax is deemed a significant issue by stakeholders. The GRI endorses the principle of dual materiality, which takes into account the firm's influence on sustainability matters and how these issues will impact the firm in the future, encompassing its growth, performance, and standing.
In our analysis of 2022 year-end reports, over 60% of the firms in our research employed the GRI standards to some degree for sustainability reporting. However, our results show that only 23 firms leveraged GRI 207 to direct their tax reporting scope. We expect this pattern to grow as more firms acknowledge the external effects of tax on the environment and society, as well as the internal effects on their business structures and plans.
Taxes could be significant for three primary reasons - the information it provides about the company's tax contribution to the community, what the company's governance framework indicates about its risk management, and what its tax approach reveals about its perspective on tax sustainability.
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