Sustainability and the tax function: defining ESG

July 5, 2022


In recent years the public debate about corporate social responsibility (CSR) and taxation has seen an upsurge with the public, including civil society organizations and authorities (including the EU institutions) steering businesses towards more regulation and transparency regarding their environmental, social and governance (ESG) tax matters. Where the debate started with requests for voluntary tax transparency, the field of play is now clearly moving towards mandatory reporting requirements. Multinational enterprises (MNEs) and business associations are starting ESG initiatives so as to be an integral part of the debate rather than just accepting new regulations when they are issued. The EU has taken a frontrunner role, for example when it comes to mandatory disclosure of aggressive tax planning arrangements and public country-by-country reporting. That said, for most MNEs around the world, tax transparency reporting is still voluntary. Institutional investors and a wide range of rating agencies and standard setters have also entered the arena and they all seem to converge to a certain equilibrium: MNEs should be expected to report on their environmental impact, taxes paid and tax governance.

International standards

International taxation is rapidly changing in many ways. Historically, tax was often perceived as a cost item for multinational enterprises (MNEs). Nowadays, following increasing pressure from various stakeholders and the public debate, tax governance and tax transparency are gaining traction to allow companies to demonstrate that they are contributing to society rather than saving costs. The public debate on tax ethics and corporate governance has gained momentum and the long-accepted difference between tax evasion and tax avoidance can no longer be reconciled with the dividing line between what is morally acceptable and unacceptable behavior. The approach of MNEs to taxation has significantly changed and we are seeing tax governance codes, tax codes of conduct and tax sustainability standards being developed by stakeholders and observed by our clients. Transparency on tax contribution has become an integral part of tax sustainability and there are multiple standards governing financial reporting and sustainability reporting.

The international standards are often referred to on MNEs’ websites and in their published reports. Examples of international standards include (non-exhaustively): GRI 207: Tax, the B Team Responsible Tax Principles, the Dow Jones Sustainability Index and the World Economic Forum’s (WEF) International Business Council (IBC) metrics (Prosperity Pillar). In the Netherlands, the Confederation of Netherlands Industry and Employers (VNO-NCW) published a tax governance code on May 18, 2022, the Dutch Association of Tax Advisors has recently published its own tax governance code and the Dutch Association of Investors for Sustainable Development (VBDO) publishes a tax transparency benchmark annually.

Most of these initiatives pertain to the United Nations’ 17 Sustainable Development Goals (SDGs), which were published in 2015. These are generally considered as the worldwide standard for sustainable development. Sustainable development is “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” (Brundtland report). The Global Reporting Initiative (GRI) directly links its reporting standard GRI 207 to SDG 1 (No Poverty), 10 (Reduced Inequalities) and 17 (Partnerships for the Goals). Tax issues have a clear impact on an MNE’s reputation and branding, which is why tax sustainability and ESG are inextricably linked and priorities on the leadership agenda.

Many of the sustainability standards require MNEs to publish information regarding their tax strategy on their website. Some standards already recommend or require that MNEs publish details on their tax contribution, generally on a country-by-country basis. Publication is voluntary in principle, but a requirement arises if the MNE is seeking compliance with a particular standard. We also see MNEs that publish tax contribution data on a regional basis. Reporting of corporate income tax data is typically required under these standards, but other taxes and contributions can also be reported, e.g. wage taxes, product/consumer taxes, property taxes, environmental taxes or payments to government bodies, such as license fees. Other information can also be published, e.g. wage costs. Ultimately it is about the contribution of the MNE to society and how this is being achieved.

Our team has tax policy experts that can help clients navigate the different tax sustainability and transparency initiatives, and can assist them in their Tax Impact Reporting. KPMG has developed an approach that results in higher rankings in transparency benchmarks and that is much appreciated by many stakeholders. Furthermore, our team has experience with broader sustainability projects and reporting, highlighting tax aspects such as regulatory requirements in various jurisdictions, environmental and energy taxation, plastic taxes, carbon taxes and emissions trading.


In the context of the E in ESG, which stands for Environmental, we see a widescale introduction of environmental taxes. More and more countries are designing new tax legislation in order to influence behavior, with the aim of reducing pollution and encourage renewables. To illustrate, as of April 1, 2022, the UK introduced a new plastic packaging tax, which is due on any plastic packaging components consisting of less than 30% recycled content. Also, Spain has published legislation with regard to a Spanish plastic tax on non-reusable plastic packaging, which will come into effect in 2023. We expect more countries to follow suit. The challenge for multinationals is to stay in control, to determine the impact and to embed the new taxes in their financial and business processes. This is due, in particular, to the fact that the legal frameworks differ from per country. For example, the UK plastic tax has a threshold of 30%, but this threshold does not feature in the Spanish legislation. The focus is not only on packaging; carbon is also being singled out. We see carbon developments driven by the European plan to make Europe more sustainable, the EU Green Deal/Fit for 55, but also legislative changes in countries outside Europe, such as a carbon tax in South Africa. It is important to be aware of these environmental developments so as to stay in control, be compliant and be able to take timely action.

Tax governance

Many MNEs have taken their first steps towards tax transparency by publishing a group tax policy or strategy that typically includes a list of tax principles and details the MNE’s approach to tax matters. This can take the form of a wide range of information about the MNE’s (i) tax governance and accountability arrangements, (ii) management of tax risks, (iii) implementation of the tax policy/strategy, (iv) review and tests of tax risk controls, (v) tax risk appetite and approach to tax risks, (vi) approach to tax planning, use of tax incentives, presence in tax havens, (vii) transfer pricing model, and (viii) relationship with tax authorities and other stakeholders. It is important that these principles should be clear and practical enough to be used by a company’s tax function, its external advisors and its external stakeholders, including tax authorities, so that they can form clear expectations of a company’s approach to tax.

The pressure from a wide range of stakeholders is increasing to report voluntarily on tax matters. MNEs that are just starting out on their tax transparency journey will need to consider stakeholder expectations, relevant standards, regulators and the tax transparency disclosures of their peers. There will be requirements to comply with specific legislation and decisions to be made about the level of voluntary compliance with standards. Many refer to the Global Reporting Initiative’s tax standard GRI 207, which is generally regarded as a comprehensive approach toward tax reporting. Following this GRI standard can be seen as an opportunity and a starting point for exploring an MNE’s approach to tax transparency and as a stepping stone for constructive dialogue with all stakeholders, including civil society, rating agencies and customers. The tax function can significantly contribute to an MNE’s transparency and sustainability journey, ensuring that the current tax governance is fit for purpose and provides for a clear policy toward tax transparency. KPMG has developed an ESG tax methodology and tools that can help illustrate what this journey looks like for a business – KPMG Tax Impact Reporting.

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