Enhancing business sustainability through effective tax control frameworks

Sustainability challenges have become critical business imperatives in recent years. Regulators, stakeholders, investors, employees, customers – all expect a much higher degree of compliance and transparency. Businesses have got used to their performance in these areas being monitored and to being held accountable for any weaknesses. 

Although much of the focus on ESG (Environmental, Social and Governance) is often dominated by environmental issues, tax is increasingly being recognised as a fundamental part of the sustainability agenda.  

A company’s approach to taxation matters can be seen as a powerful signal of how it sees itself and its role in wider society. Tax is a key part of the social element to ESG and can help businesses build trust and demonstrate their commitment to society, to good governance and to sustainability in general. 

For example, to reach the necessary levels of the EU’s Corporate Sustainability Reporting Directive (CSRD) and do business in Europe with robust reporting, compliance and internal controls systems, a tax control framework (TCF) is a very important component of good governance to ensure CSRD compliance.  

Although tax reporting is not yet a required element of sustainability reporting, the direction of travel is clear, and many large corporates are already reporting tax-related matters and internal control systems as part of their mandatory reporting obligations. 

This overlap means that much of the information required for tax reporting should already be being gathered for sustainability reporting purposes. In many instances, therefore, businesses have an opportunity to achieve two goals using the same data gathering processes. Financial and tax data such as a breakdown of revenues and taxes by tax year, taxes paid and collected in different countries, sales through third parties, products before tax, etc – should already be collected anyway as part of sustainability reporting efforts. Sustainability reporting should also document the processes, measures and mechanisms of internal control systems to demonstrate the company’s approach to governance. A TCF is itself an internal control framework, so again there is a considerable overlap between the needs of ESG reporting and tax reporting. 

In addition, the tax team in a company will often be ideally placed to coordinate and manage this process. In many businesses, tax is one of only three functions with a full cross-company view and access to all departments (the others being IT and HR). With this in mind, the tax team will have the capabilities and skills to build a single coherent picture of organisational metrics and performance. 

TCF and ESG synergies 

There are considerable linkages between sustainability reporting and tax reporting. Just as a robust sustainability strategy should be aligned with the corporate strategy, it should also be aligned with the tax strategy. This can present some challenges, however. What is beneficial from a tax perspective might not be from an ESG perspective. If a business is investing in a new manufacturing facility, for example, it might qualify for tax incentives. Therefore, investing in the factory is good for tax reporting, but might not be so positive for sustainability and ESG reporting. Management has to evaluate key decisions from a tax, compliance and sustainability perspective and prioritise its objectives in a balanced way. 

These kinds of considerations can be integrated into overall TCF objective setting and during the preparation of TCF tax risk analysis workshops. Incorporating ESG perspectives could help to create not only a sustainable tax function, but also make sure the functions that are in place for tax compliance and control frameworks, also reflect TCF, sustainability and ESG considerations.   

It will inevitably mean more complexity and more stakeholders in the process, but the result will be to ensure the approach to both TCF and ESG is part of the overall strategic direction of the company and strengthen it by their inclusion. 

As expectations and obligations around corporate compliance and sustainability reporting continue to evolve rapidly at a global level, it is good practice – and a more efficient use of resources – for companies to address these issues coherently now, so they can be built into their overarching strategies, rather than to try and retrofit them in future. The implementation of a TCF is beneficial not only from a tax compliance perspective, but also in terms of sustainability ESG compliance. An aligned approach can therefore bring significant efficiency and cost advantages. 

Discover more on how a tax control framework solution can benefit your business by visiting our dedicated TCF homepage, which has a collection of resources to support you on your tax journey.