Tax and ESG - The ‘Governance’ perspective

07/03/22

Pauline Lum
Tax Director

Jennifer Shalini
Senior Associate

Increasing stakeholder pressure on tax transparency and ESG considerations have driven many companies to reassess their internal governance structure and management. In the last part of this series, we will examine the importance of tax governance within a company, through the evolution of tax requirements and their impact on the role of tax in sustainability commitments.

Triggers of change: The tax evolution

With the borderless marketplace of today’s digital age, businesses are increasingly transforming their models to stay relevant and competitive. This has resulted in changes in the regulatory landscape to adapt to the shifts in the business environment. Complexities triggered by real time transactions in the digital space have also accelerated the need for accurate data and timely exchange of information.

The Organisation for Economic Co-operation and Development (OECD) has spearheaded best practices and policies to address these challenges. For instance, actions to be adopted to combat “base erosion profit shifting (BEPS)” in the taxation of a modern digital economy via a proposed two-pillar solution. Pillar 1 seeks to shift digital taxes to the countries in which sales take place and Pillar 2 looks to establish a minimum global tax rate.

Tax transparency has increasingly been embedded within national policies and reporting requirements to encourage cooperative compliance amongst taxpayers. Local initiatives to enhance tax governance include Bursa Malaysia’s Tax Governance Guide, Malaysia’s Medium Term Revenue Strategy (MTRS) and Fiscal Responsibility Act (proposed to be tabled in 2022). Globally we see this in the UK’s requirement for large taxpayers to publish their tax strategies and risk management measures, Australia’s justified trust programme, and Singapore’s pilot programme to develop a governance framework for income tax.

Additionally, with stakeholder expectations rising for effective tax governance measures centred around strategy and risk management, more companies are reassessing their tax risk frameworks. Tax governance cuts across all functions within an organisation, especially as business decisions on enterprise-wide ESG strategies come with tax impacts. However, alignment on the approach to managing those expectations has not been available until now.

Sustainability reporting for tax

ESG has become a key focus area for organisations, especially with the shift from profit optimisation to value creation as explored in our previous blog. With increasing expectations on businesses to demonstrate leadership in addressing climate and social issues, disclosures on tax risk management and Total Tax Contributions (TTC) will help companies share their sustainability journey in their stakeholder communications.

There are several guidelines and frameworks for sustainability (not exhaustive) that include reporting guidance for tax, such as:

Global sustainability reporting standards e.g. Global Reporting Initiative (GRI), Task Force on Climate-Related Financial Disclosures (TCFD) and Sustainability Accounting Standards Board (SASB)
Sustainability-themed indices e.g. FTSE4Good Bursa Malaysia Index (FTSE4Good), Dow Jones Sustainability Index (DJSI) and MSCI ESG Rating
World Economic Forum International Business Council (WEF IBC) common metrics
United Nations Sustainable Development Goals (UN SDGs)
Local regulatory developments driven by institutions such as Bank Negara Malaysia (BNM), and Bursa Malaysia
Tax Governance Guide issued by Bursa Malaysia in October 2021

How does GRI 207 compare to other indices and metrics?

With the growing stakeholder appetite for sustainable funds, financial institutions are relying on sustainability metrics/indices in their assessment of potential investee companies. Hence, companies are adopting sustainable ESG practices and disclosing measurable outcomes (where possible) to qualify for these indices, of which taxation is a component. Whilst the concept of tax transparency has been around for some time, guidance on disclosure has been country-specific, and different ratings providers would have their own proprietary scoring conventions to assess performance.

However, with effect from 1 January 2021, the first global standard for Tax disclosure, i.e. GRI 207 was implemented based on four pillars outlined below. Mapping this to commonly used indices and metrics, we find similar tax disclosures are reflected across the different sustainability dimensions. This proves to be rewarding from both the cooperative compliance and sustainability reporting perspectives.

Reporting Standards: GRI 207	Indices: FTSE4Good	Indices: DJSI	Metrics: WEF IBC
207 - 1: Approach to Tax	✅ Policy and Strategy: Tax Transparency, Tax Compliance and Fairness	✅ Tax Policy/ Principles/ Strategy: Availability of Tax policy or strategy (in the public domain) that addresses sensitive or high-risk Tax issues such as responsible Taxation and transparency
207 - 2: Tax Governance, Control and Risk Management
207 - 3: Stakeholder Engagement and Management of concerns related to Tax	✅ Governance and Control Mechanisms: Board and Audit Committee's oversight of Tax policies
207 - 4: Country-by-Country Reporting (CbCR)	✅ Quantitative Reporting: Disclosure of Corporate Tax paid globally (could include country by country breakdown)	✅ Tax Reporting: Availability of public reporting on key Tax information for regions or countries of operation	✅ Total Tax Paid, Additional Tax remitted, Total Tax paid by country for significant locations

Companies that adopt GRI 207 could simultaneously meet the necessary tax requirements for cooperative compliance and other sustainability indices/metrics without having to invest much additional time, money or effort. In Malaysia, we note that more companies are:

Subscribing to sustainability indices such as the FTSE4Good, to further validate their commitments as well as to attract more sustainable financing opportunities
Starting to embed key tax governance aspects within their overarching governance structure for comprehensive compliance with local governance and sustainability-focused requirements (e.g. Securities Commission's Malaysian Code on Corporate Governance 2021, Bursa Malaysia's Tax Governance Guide and BNM’s Climate Change and Principle-based Taxonomy)
Committing to the adoption of the UN’s Sustainable Development Goals (SDGs), which have been incorporated into our 12th Malaysia Plan. For instance, tax as a lever to help reduce inequalities within societies (SDG 10) and to encourage sustainable actions through the use of environmental taxes (SDGs 12 to 15)

Food for thought: What’s next?

Given the current trends, tax is no longer viewed as a box-checking exercise but rather a key priority within the overall sustainability agenda. Hence, as companies embark on and progress in their ESG journey, they should consider how tax can be effectively integrated within their sustainability framework from an E, S and G perspective. This is to ensure a comprehensive and cohesive sustainability strategy and response that is aligned to the values and requirements of their stakeholders. Some questions that you may want to consider:

Does my company adopt GRI?
Are my investors reviewing their portfolios and do I fulfil their ESG requirements?
Does the Tax strategy align with the enterprise-wide ESG strategy?