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Tax’s role in ESG performance – part 1. Out of sight doesn’t mean out of mind…

Stevi Frooninckx
Loctax brand

ESG objectives are now firmly embedded in the corporate agenda, and how companies handle tax plays an increasingly important role in hitting those objectives. But without much existing guidance, and so many pitfalls to avoid, where do tax teams fit in? In this three-part series we discuss the role of tax in companies’ wider ESG picture, and how the right technology investments can unlock its true potential.

First up – the ‘E’ – environment. What should tax teams be on the lookout for here?

Many different taxes already exist to reduce behaviour that is harmful to the planet's health. Pollution, energy, transportation and resource taxes are among those which ensure companies do the right thing for our environment. These taxes are growing in number. They are also predominantly domestic. But just because most environmental taxes are locally enforced does not make them just a local issue.

Many multinationals aiming for the highest levels of compliance include environmental responsibility at the heart of their wider sustainability goals. Yet because environmental taxes are seen as local (as they are dealt with by local finance teams, or even operations teams), they’re often not on the radar of the global in-house tax team. This can be a problem. Environmental taxes result in material liabilities and are often compliance-heavy, sometimes requiring multiple filings during a year. Any mistake at the local level can quickly become a thorn in the side of a global company.

Lack of visibility over local environmental taxes can open companies up to financial, reputational and even criminal risks. Even if dealt with exclusively by local teams, taxes are taxes and they contribute to the total footprint of a multinational. In-house tax teams should at least be aware of local environmental levies’ existence, understand the impact on their company, and capture the key insights and learnings they provide.

This can be easier said than done for multinationals, who often lack the tools required to view and dissect tax information in one trusted repository. They don’t have the evidence of a tax issue in a local market – and if they did, they wouldn’t be able to discern it properly. Partly this is because teams are still reliant on siloed spreadsheets to try and gain comprehensive overview and control over their global environmental tax footprint, and to achieve a general readiness for the introduction of new environmental taxes as they come. To tackle issues like these, improved workflow tools are so crucial.

To be able to extract key data, documents and KPIs from environmental tax processes, structured and automated workflows can be installed to source the required information. The upside of using workflow tools is that tasks can be set out in a structured manner for different companies, while collaborating with different stakeholders, and at the same time keeping a comprehensive workflow overview (your inbox will thank you).

Local compliance processes can still be run by local teams, but improved workflow capability means that the global in-house tax team gets validation that the required returns have been filed, and a reliable view of their total footprint. If sourced data coming from the workflows can be linked to a structured repository, the data can flow through in visual intelligence, analytics and forecasting. And it can even provide a re-usable framework that prepares a company for any new obligations further down the line.

Out of sight should never mean out of mind for a company’s tax obligations, especially on something as crucial as our environment. To avoid risk, and stay on top of future requirements, companies should be equipping their tax teams with the technology they need.

Why not meet us to find out more on this topic? The Loctax team is in London from Tuesday October 4th for the Sustainability & ESG in Taxation event. And in part 2 of the series, we take a look at tax’s relevance to the ‘S’ of ESG – social. Stay tuned.

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