Organisations are increasing their Environmental, Social and Governance (ESG) efforts in response to public awareness over a wide range of issues such as the impact of climate change, supply chain labour standards, access to finance, corporate governance and board diversity.
Stakeholders are now increasingly demanding that organisations should not only be good stewards of capital but also of natural and social capital and have the necessary governance framework in place to support this. More and more organisations are incorporating ESG elements into their investment decision making process, making ESG increasingly important to manage risks, enhance their reputation and brand value, improve financial performance, comply with regulations and contribute to a more sustainable world.
The importance of transfer pricing in ESG lies in its ability to promote sustainability and socially responsible business practices. By considering the impact of transactions on ESG factors, companies can make decisions that better align with their overall ESG goals and contribute to a more sustainable future. This can help organisations to avoid potential reputational risks, reduce their carbon footprint and improve their relationships with stakeholders.
ESG will, amongst others:
drive monumental change in business models which will result in huge spending,
impact a new or existing brand value,
create the development of new products and processes to improve facility and fleet functionality,
create intellectual property.
ESG will also change an organisation’s facts and value drivers, and will have a significant impact on their supply chain and their strategies. Such changes will give rise to a number of transfer pricing issues that would require a company to potentially revise their transfer pricing setup.
Organisations should prepare transfer pricing policies and documentation to ensure that they are able to demonstrate that their revised transfer prices remain at 'arm's-length'.
Currently, ESG is a very important topic for companies which is expected to have an effect on their business operational model. This may have various transfer pricing implications due to value creation, new functions, assets and risks. Therefore, it is important that as companies adopt ESG initiatives, they also consider the potential impact these initiatives may have on their transfer pricing positions. By implementing transfer pricing policies, gathering and maintaining accurate data and documentation, companies can best manage the impact of transfer pricing on their ESG initiatives and avoid costly disputes with tax authorities.
