Indirect tax as a crucial part of ESG

In the recently conducted Conference of Parties 2021, global communities negotiated on methods to control climate change. At this conference, India pledged that it would achieve the goal of net-zero emissions by 2070.

Looking at tax reporting through an ESG lens can help businesses build trust and demonstrate their commitment to sustainability. A company’s approach to tax is no longer just a question of compliance – it’s a critical element of a business’s social contribution, part of the “S” in ESG.

Gathering, verifying, and understanding this information, and then deciding which parts to include in disclosures, takes time and effort. Businesses that fail to start this process early will find themselves at a disadvantage. Businesses seeking to build a narrative connecting tax practices to values should consider the following:

Self-introspection

Boards, management, and taxation leads need to understand their company’s tax position not just from a shareholder’s point of view, but also from the perspective of investors.

An aligned plan of action

Tax departments need to engage the entire business to align tax strategy with its broader corporate strategy. The ESG revolution will change how businesses operate since almost each business decision has a tax impact.

Timelines

Tax disclosures are often read by people who are not clued into the complexities of tax and compliance, so taking the time to develop and communicate suitable disclosures can prevent misunderstandings.

Benchmarks and vision

Business leaders should think about how they measure up to their peers and factor that into how they develop their tax reporting. Only a few businesses will want to be leaders in tax reporting, but even fewer will want to be left behind.

ESG transformations carry significant implications for a company’s indirect taxes. For example, investments in a wide array of new equipment, technologies etc., may trigger sales and excise tax implications. Several states exempt incremental new investments in renewable energy projects, including solar, battery storage, and EV infrastructure. In Wisconsin, for example, renewable energy systems are exempt from sales tax, and in Colorado, clean fuel vehicle property is exempt from sales tax.

A considered approach to tax transparency and tax governance has an important role to play in understanding ESG issues, building trust, and realigning these factors with stakeholders. Businesses that fail to connect the ESG tax-related considerations may find themselves dealing with unexpected tax costs, and business risks in awkward and unpleasant situations.

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