Responsible tax - an essential part of the ESG agenda

The implementation of an increasingly transparent and clear tax principles is becoming a crucial element for companies looking to be sustainable. Taxation, in fact, will become an essential element of the Environmental, Social and Governance (ESG) agenda for companies.

Responsible tax management or the level of tax responsibility that companies adopt is increasingly becoming a topic of focus for stakeholders globally, particularly in terms of aggressive or evasive tax strategies that may look to obfuscate the economic contribution that companies provide to society and communities in which they operate.

In response to this growing attention, many companies are implementing solutions aimed at increasing transparency standards. For example, these can include the OECD / G20 Principles of Corporate Governance, the GRI (Global Reporting Initiative) standard for tax disclosure and the International Business Council (IBC) guidelines of the World Economic Forum (Stakeholder Capitalism Metrics).

At the same time, financial and tax professionals must be able to show awareness and in-depth knowledge around responsible tax as this is already a requirement across many financial transactions. In the example of an M&A transaction, an investor's ESG analysis now includes the valuation of the tax framework and the related implications of the parties involved.

Emerging standard for tax transparency GRI 207

Introduced in 2019, based on OECD standards, GRI 207 is the first global standard for comprehensive country-by-country tax disclosure that aims to break down financial information for each tax jurisdiction in which a company operates in order to avoid profit transfer.

The information contained in this standard tries to help companies understanding and communicate their approach to tax strategy and governance by reporting on related income, taxes, and trade activities on a country-by-country basis. This is to encourage companies to be clearer about how much, how, and where they pay taxes.

Every company reporting to GRI standards should use GRI 207 to provide tax information in its sustainability report or integrated report, as well as any organization that has made a public statement in support of the SDGs or the Davos 2020 Manifesto. On the contrary, those companies that fail to demonstrate transparency in tax management will be increasingly viewed as irresponsible and not aligned to global best practices.


Case Study: Italy’s “Cooperative compliance program”

The Institute of Cooperative Compliance, currently in force in Italy aims to promote an enhanced cooperation between the Italian Tax Administration and taxpayers to increase the level of certainty on relevant tax issues and, consequently, to prevent tax litigation.  This is pursued through constant and preventive dialogue with the taxpayer on factual elements including the anticipation of control, aimed at a common assessment of situations that are likely to generate tax risks. It is a voluntary relationship between the taxpayer and the cooperative which results in various benefits including fast-tracking tax provisions, and reduction in tax penalties, amongst others.

The cooperative compliance program provides new ways of ongoing dialogue between the Revenue Agency and companies and offers the opportunity to manage uncertain situations through a preventive approach to resolve potential tax disputes in advance.

Article 6 of Legislative Decree 128/2015 provides for various rewarding effects for companies wishing to join the regime:

  • Shortened preliminary tax ruling procedure in which the Revenue Agency will reply to questions of companies within forty-five days from instance’s receipt or any additional documentation required.
  • Application of penalties reduced by half, and in any case to an extent not exceeding the minimum statutory, with suspension of collection until the final assessment, for the risks communicated in a timely and exhaustive manner, where the Revenue Agency does not agree with the business position.
  • Exemption from presenting guarantees for the direct and indirect taxes refunds throughout the period of fiscal regime.


G20 in Venice - Tax on multinationals and “carbon tax”

Even at the recent G20 meeting in Venice (9-10 July 2021), the weapon identified to restore economic balance and to contain climate change is once again the fiscal one.

The G20 has given the final green light to the minimum tax on multinationals, a proposal that was strongly advocated by President Biden in the USA and supported by OECD members, who already had signed a commitment to do so on 1 July. The system is based on two pillars:

  • To tax multinationals in each country where they operate and make profits.
  • To impose a minimum rate of 15% on generated revenue.

The application of a minimum tax rate will result in approximately USD 150 billion of additional global tax revenue per year, but the OECD has calculated that the additional taxes could even reach USD 240 billion.

In addition, based on a proposal from the International Monetary Fund a position of a minimum price for polluting emissions has been introduced.  It will be a tax on the polluter, a "carbon tax" which must still be defined in detail.

France has suggested a "global floor" which is a global carbon price base which G20 State members could be involved.  

The European Union has already moved in this direction for some time. In the EU, companies that pollute in certain sectors must pay the so-called pollution permits - the ETS - which have become much more expensive in recent times. In view of a reform of the European Commission (reiterated by the Italian Minister Paolo Gentiloni) that could reduce the available amount. In fact, the ETS can be exchanged in a real market, so that the less polluting companies could derive a benefit by selling their permits. The increase in bills announced by ARERA a few days ago is partly due to the increase in the ETS and the higher revenues that the Draghi government has intended to partially reduce arise precisely from the ETS proceeds.

The US, on the other hand, calls for coordination. Not all countries seem to be aligned with the measure of a minimum global price on emissions. At the G20 in Venice, Janet Yellen - the secretary of the American treasury announced that the United States could consider policies that will introduce implicit prices on CO2 emissions, calling for greater coordination between countries' policies to avoid opportunistic behaviour or negative consequences and stressing the importance of agencies such as the G20 to do so.

Carbon tax on imports of more polluting products

On 13 July 2021, the European Commission gave further guidance on the so-called "Green Deal", the package of environmental directives that it intends to adopt to address the issue of the climate emergency. This climate law turns the EU climate targets into legal obligations and as a result, will be the first continent to present a complete "carbon neutral" program.

The European Commission aims to introduce a 'tax' on CO2 products content produced by the highest-emitting sectors to protect European industry from competition with economies that show less stringent climate standards. The mechanism should be operational from 2026 and covers sectors such as iron and steel, cement, electricity, aluminium, and fertilizers.