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ESG at TP Minds International

You may have read the blog I wrote recently on digital reporting for ESG. I mentioned that ESG has been at the forefront of many discussions in the world of finance and tax recently, and this was no different at the 2023 TP Minds conference in London. It was clear that the question is no longer what tax teams are going to do about ESG, it’s about when they are going to do it. 

Grant Thornton hosted a working group on ‘Integrating ESG & Sustainability into Your Tax and Transfer Pricing Operations’ which provided some great insights from a variety of businesses across the world. There were some interesting discussions on how ESG was affecting tax departments and what they were doing about it. 

First off we discussed ‘E’ for Environmental.  

This covered environmental taxes, reliefs and incentives, to name a few including discussions around taxes for carbon and plastic which are currently in place. 

So, what does this mean for your TP operations? Well, firstly you will need to confirm which entity bears the cost and therefore incurs the relevant taxes, if applicable. This then opens up the question as to what happens to transfer prices when the cost of raw materials increases or are not available? This could result in changes to supply chain. If this happens, the company will still have to focus on the environmental impact, will the change result in greater environmental damage, if for example materials have to be transported further? The E in ESG adds another element when choosing your suppliers and logistics chains. 

Next we have ‘S’ for Social.  

This will include your tax contributions, your employee-wellbeing and stakeholder perspectives. These will pose a lot of questions. Such as; how you prove your TP policies ensure you pay the right amount of taxes in every country? How do you respond to the transparency agenda? How do you ensure you pay your people the right salaries? 

Finally, we have ‘G’ for Governance.  

For the TP team this will incorporate new obligations and tax risks. This may be the most obvious with regards to how it impacts the TP operations. It will question how to document your ESG TP policies, which could ultimately be driven by the ever-changing regulatory requirements. 

As you can see many questions were asked at the TP Minds conference, but not many had a clear consensus when it came to answers. This is a trend surrounding most ESG discussions. 

A solution to a lot of these questions is technology. An attendee within the conference working group said:  “Everyone says we must do something about technology, but we don’t know what to do about technology”. We’re at a pivotal stage where in 18 months’ time ESG disclosures will be mandated for many large companies, and all of the above mentioned questions will be brought to the surface, demanding answers. These questions will no longer be asked in small working groups amongst peers, they’ll soon be asked by regulators and stakeholders. It is important for businesses, now more than ever, that these answers are clear, concise, readily available and don’t take months to resolve. This can be addressed by automating process through the implementation of technology. 

Now is the time for businesses to investigate and invest in technology that can improve their processes. This will lower the risk profile by creating visibility over the operation of a TP policy, resulting in fewer and less arduous questions from tax authorities and stakeholders. It is important to improve visibility over your processes, and to review them regularly to ensure they are working for you and are fit for purpose. 

Introducing automation technology into your TP processes will reduce risk, increase efficiencies and allow you to spend your precious time on more high-value business needs. So where can TP add value to ESG? Now is a great time to review your operations as a whole and ask the right questions of the board and other relevant stakeholders. Who are your suppliers? What countries do you operate in? What governance measures will be introduced to limit risk to the business? If this goes wrong, what is the cost to the business? 

As with many new regulations ESG has resulted in us asking more questions than we have answers to. I would encourage businesses to take this opportunity to improve existing processes and review operations to ensure your TP process is ready to deliver the transparency and reporting that is required for ESG. With scrutiny inevitable from stakeholders when we see the introduction of digital ESG reports, you need to start preparing now so that when the time comes, you can answer the questions asked easily and efficiently.