What is ESG Tax Reporting?
The onset of ESG is transforming the way companies perceive taxation. Tax is no longer a matter of basic compliance but is permeating corporate governance policies. ESG measures a broad range of corporate behaviour, including how a company is run, managed, financed, and what policies, including tax planning policies, it has in place.
While some jurisdictions are more stringent in implementing hard laws on ESG, not all countries are following suit. There exists a plethora of voluntary standards and reporting systems which are available to companies with a forward-looking, ESG-centric gaze.
This article provides a brief overview of mandatory-to-be and voluntary ESG Tax reporting requirements in Malta.
In order to prevent aggressive tax planning and base erosion and profit shifting (BEPS), tax authorities require comprehensive information on (large?) multinational enterprise (MNE) group structures enabling the tax authorities to determine whether companies have engaged in any practices contributing to the artificial shifting of income into low tax or no tax jurisdictions.
In order to achieve this objective, BEPS Action 13 proposes a three-tiered approach to transfer pricing documentation, which includes a Country-by-Country Report (CbCr)1. The CbCr requires aggregate tax-related information in relation to the global allocation of the income derived, taxes paid, and other indicators of the location of economic activity in tax jurisdictions where the MNE group operates. If the reporting entity is not situated in Malta, Maltese entities constituent of MNEs whose turnover is equal to or exceeds EUR 750 million, even if it is not require to prepare the CbCr, must file a notification with the Maltese Commissioner for Revenue informing of the identity and the tax residence of the reporting party. Such reporting is mandatory and must be filed with the Maltese tax authority no later than the last day for filing of the Maltese constituent entity's tax return. Failure to do so results in statutory penalties.
The increased transparency for the tax administrations facilitated by CbCr aims to increase fair taxation and forms a fundamental part of the governance and tax transparency branch of ESG.
Going forward, CbCr will no longer be available solely to tax authorities. Large MNEs will have to publicly disclose certain tax information in the public register and on their websites. The Public CbCr Directive had to be adopted into EU Member States national legislations by June 22, 2023, with the rules applying, at the latest, from the first day of the financial year starting on or after June 22, 2024. The Directive's transposition is mandatory for EU member states, and it is foreseeable that Malta will do so in the very near future.
Voluntary Reporting Standards
While much of the ESG-related reporting on tax matters remains voluntary in Malta, implementing some of the available standards will contribute to increased transparency for the stakeholders and the public. So far, companies remain free to choose among the wide variety of the available voluntary reporting standards. Below a number of such standards are briefly explained.
GRI (Global Reporting Initiative) is an independent, international organisation that helps businesses and other organisations take responsibility for their impacts, by providing them with the global common language to communicate those impacts2.
GRI Standard 207 (the Standard) sets out reporting requirements that can be used by organisations of any size, type, sector or geographic location to report on their impact related to the topic of tax3.
The Standard covers three disclosures:
- Disclosure 207-1 Approach to tax
- Disclosure 207-2 Tax governance, control, and risk management
- Disclosure 207-3 Stakeholder engagement and management of concerns related to tax
Disclosure 207-1 contains the description of the approach to tax, including:
- whether the organisation has a tax strategy and, if so, a link to this strategy if publicly available;
- the governance body or executive-level position within the organisation that formally reviews and approves the tax strategy, and the frequency of this review;
- the approach to regulatory compliance;
- how the approach to tbrb ax is linked to the business and sustainable development strategies of the organisation.
Disclosure 207-2 asks to report on the organisation's tax governance, control and risk management, including:
- A description of the tax governance and control framework,
- the governance body or executive-level position within the organisation accountable for compliance with the tax strategy;
- how the approach to tax is embedded within the organisation;
- the approach to tax risks, including how risks are identified, managed, and monitored;
- how compliance with the tax governance and control framework is evaluated.
- A description of the mechanisms for reporting concerns about unethical or unlawful behaviour and the organisation's integrity in relation to tax;
- A description of the assurance process for disclosures on tax and, if applicable, a reference to the assurance report, statement, or opinion.
Disclosure 207-3 covers the following information on stakeholder engagement and management of concerns related to tax:
- The approach to engagement with tax authorities;
- The approach to public policy advocacy on tax;
- The processes for collecting and considering the views and concerns of stakeholders, including external stakeholders.
The B Team is a global non-profit initiative advocating for economics systems change and new corporate norms – to protect the natural environment and secure a safe and sustainable future4. The B-Team developed a set of Responsible Tax Principles that raise the bar on how companies approach tax and transparency and help forge a new consensus around what responsible practice looks like. The principles articulate best practices in seven key areas from corporate governance to relationships with authorities to transparency5:
- Accountability & Governance
- Business Structure
- Relationships with Tax Authorities
- Seeking & Accepting Tax Incentives
- Supporting Effective Tax Systems
The Dow Jones Sustainability Index
The Dow Jones Sustainability Index (DJSI) is a benchmarking resource comprising global sustainability leaders as identified by S&P Global through the Corporate Sustainability Assessment. It represents the top 10% of the largest 2,500 companies in the S&P Global BMI based on long-term economic, environmental and social criteria, thus evaluating company sustainability performance6. DJSI offers a long-running global sustainability benchmarking solution worldwide, and has become the key reference point in sustainability investing for investors and companies alike.
KPMG's Tax Transparency Report
KPMG's ESG Tax and Legal network has a working group dedicated to tax transparency, governance and Tax Transparency Reporting. This type of reporting is most suitable for MNEs, Corporates and Financial Services institutions with an objective to create a market-leading tax transparency framework. While it is tailored to each client's specific needs, it typically includes information and analysis of tax contributions, including taxes paid and taxes collected, and is in line with GRI 207 and other standards such as the B-Team and DJSI. As such, the report is a best-in-class and may serve as an example for the specific industry with the right balance between level of disclosure and compliance with sustainability standards.
1. The Council of the European Union adopted EU Council Directive 2016/881/EU extending the cooperation between EU tax authorities to automatic exchange of Country-by-Country Reports.
4. The B Team
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.