CSRD implementation: Why tax has to be on the team from the start

PwC’s inaugural Global CSRD Survey shows that almost 40% of companies have already involved their tax departments in CSRD implementation. Another 30% have signalled plans to do so.

Our findings highlight that the crucial intersection between tax and the Corporate Sustainability Reporting Directive (CSRD) is relatively well understood. But they also show that 21% of organisations still have no plans to involve their tax departments in CSRD implementation. 

In our experience, within many companies, there continues to be a disconnect between tax departments and sustainability teams on CSRD. Tax departments are not aware of CSRD or how it could impact their tax strategy, governance and tax risk profile. Sustainability teams mistakenly view tax solely as an item in the financial statements rather than seeing it in a broader sustainability context. 

Based on our observations, tax teams are not always being brought in the right stages of the CSRD implementation process, if at all.

Without close collaboration between tax departments and sustainability teams from the start of CSRD implementation, companies face risk as well as missed opportunities for value creation. 

That’s not all. The CSRD’s extensive disclosure requirements can contribute to exactly the kind of transparent risk assessments that investors expect and, increasingly, demand. This can extend to tax.

Below, we show why tax needs to be considered right across the CSRD lifecycle – from the double materiality assessment through to the transformational change that CSRD will drive within organisations.

1. Include tax as part of the double materiality assessment

For example, tax could be considered as a material sustainability topic for some companies.  This is because the taxes paid and collected by an organisation can represent its most material monetary contribution to society. There’s also heightened investor scrutiny of companies’ tax affairs. Even where tax is not considered material, it is important that tax departments are involved in informing this decision.

More broadly, the financial impact of environmental taxes like the Carbon Border Adjustment Mechanism (CBAM) may need to be disclosed under one of the environmental standards. Tax departments can provide support in quantifying these taxes.

2. Consider tax as part of the EU Taxonomy analysis

As part of this, organisations need to assess whether the tax minimum safeguard has been satisfied. To meet this minimum safeguard, organisations must:

• “comply with the letter and spirit of tax law and regulations of the countries in which they operate” and

• “treat tax governance and tax compliance as important elements of their oversight and broader risk management systems”.

Tax departments are central to this analysis and will be expected to take the lead in demonstrating that the minimum safeguard has been met. Practical steps they can take to achieve this include:

• formulating a tax strategy

• assessing the current state of the Tax Control Framework and

• formalising tax operating procedures and policies. 

3. Use transfer pricing documentation to understand value chain complexity

Tax departments are responsible for managing transfer pricing compliance. In doing so, they amass deep insights into their organisation’s value chain which sustainability teams can and should leverage during CSRD implementation. Information contained in a company’s transfer pricing local and master files can provide a useful starting point for drafting CSRD disclosures on the value chain.

From a risk perspective, it is also important to ensure alignment between CSRD disclosures and the information contained in transfer pricing documentation submitted to tax authorities. Any inconsistency is likely to trigger an enquiry.

4. Think about the tax implications of sustainability-led transformation 

As part of their net-zero transition, many companies seek to reduce their carbon footprint through supply chain transformation. In these situations, it’s essential for tax teams to be consulted early so that the tax implications of any planned changes are taken into account.  These could include the VAT and customs implications of new cross-border transactions,  alterations to existing transfer pricing models and the tax considerations of facility closures.

CSRD goes far broader than tax and will ultimately drive accountability and transparency across an organisation’s broader sustainability initiatives. Compliance with CSRD is critical and while Chief Financial Officers and Chief Sustainability Officers may be taking the lead, it is important that tax departments are recognised as valuable stakeholders in the process and are involved from the outset. This may require tax departments to proactively engage with sustainability teams to outline how and where tax and CSRD intersect.