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      The context

      Tax transparency is here to stay. As anyone involved in the tax arena will be aware, there has been a paradigm shift in the global tax landscape which has resulted in public and political pressure for action to tackle perceived harmful tax practices, particularly by corporate entities.

      Information reported under existing ‘non-public’ CbCR requirements is meant to help tax authorities gain a better understanding of the corporate tax profile of an MNE business and structure. However, one other key motivation of institutions such as the EU in their work around tax transparency, is to ensure public accountability and transparency, and promote a more informed public debate around the level of compliance of certain MNEs. Therefore, in parallel with ‘non-public’ CbCR, the EU is also introducing ‘public’ CbCR rules.

      The EU CbC report will require information on all members of the group (i.e. including non-EU members) within seven key areas: brief description of activities, number of employees, net turnover (including related party turnover), profit or loss before tax, tax accrued and paid, and finally the amount of accumulated earnings. The information must be broken down for each EU Member State where the group is active and also for each jurisdiction deemed non-cooperative by the EU or that has been on the EU’s “grey” list for a minimum of two years. Information concerning all other jurisdictions may be reported on an aggregated level.

      Whilst the EU requirements focus on quantitative disclosures, proposed reporting requirements in Australia lean towards the Global Reporting Initiative 2071 and require a description of the group’s approach to tax, in addition to quantitative tax information.

      The entry into force of mandatory public country-by-country reporting in the EU, the ambitious plans in Australia and the FASB income tax disclosure proposal in the U.S. are creating momentum for companies to dedicate time and resources to collecting relevant data and consider going beyond the minimum standards and disclosures set by regulators2 .

      In addition to these targeted tax-related disclosures, information on a group’s tax position will also be relevant in the context of the EU Corporate Sustainability Reporting Directive (CSRD). Under CSRD, companies operating in the EU will need to prepare extensive sustainability reports as part of their management reports. The CSRD is intended to ensure that companies report reliable and comparable sustainability information necessary for stakeholders to evaluate companies’ non-financial performance, with the main goal of improving transparency for all stakeholders. For tax, this will likely represent a step beyond the quantitative data required under EU public CbCR and towards a focus on qualitative information.

      With this in mind, this article aims to highlight where tax sits in the context of the new EU sustainability reporting requirements under the CSRD.

      Jump to: Key facts on the CSRD | What does this mean for tax? | Other sustainability reporting initiatives | What does this mean for CTOs? | Key takeaways

      Key facts about the Corporate Sustainability Reporting Directive (CSRD)

      What is the Corporate Sustainability Reporting Directive (CSRD)?

      The Corporate Sustainability Reporting Directive (CSRD) requires all large companies (including those that are not listed3) and all listed companies (except listed micro-enterprises4) to disclose information on what they see as the risks and opportunities arising from social and environmental issues, and on the impact of their activities on people and the environment.

      The new disclosure requirements also apply to third-country companies if they have a significant presence in the EU5. Qualifying EU subsidiaries and branches of non-EU companies will be responsible for publishing the sustainability report of the third-country undertaking, in accordance with standards to be adopted by 30 June 2024 by the Commission through delegated acts.

      The CSRD is meant to build on and expand the current Non-Financial Reporting Directive (NFRD). The enhanced level of disclosure is considered to help stakeholders, such as investors, civil society and consumers, to evaluate the sustainability performance of companies. Disclosures will be required in a harmonized, machine-readable format, which will assist stakeholders in comparing the performance of in-scope companies.

      The CSRD is part of the European Green Deal, which aims to transform the EU into a modern, resource-efficient and competitive economy.

      The CSRD also makes it mandatory for companies to have an audit of the sustainability information that they report. The initial standard will be limited assurance, but there is an expectation that reasonable assurance (more stringent) will be required in future.
      The first companies will have to apply the new rules for the first time in the 2024 financial year, for reports published in 2025.

      What type of information will be required?

      The disclosures will be included in a dedicated section of the entity’s management report and will include information on:

      • the entity’s business model, strategy and policies in relation to sustainability;
      • any time-bound targets that the entity has set in relation to sustainability matters (e.g. greenhouse gas emission reduction targets);
      • the role of the administrative, management and supervisory bodies with regard to sustainability, as well as any incentive schemes linked to sustainability matters offered to members of those bodies;
      • any due diligence processes implemented by the entity around sustainability matters; and,
      • the main risks to the entity related to sustainability matters.

      Information on the entity’s value chain will also be required if appropriate.

      The Directive requires reporting both on the impacts of its activities on people and the environment, and on how sustainability matters affect the entity. That is referred to as the “double materiality” standard, in which the risks to the undertaking (how sustainability issues affect the entity – financial materiality) and the impacts of the undertaking on society and the environment (impact materiality) each represent one materiality perspective.

      What are the European Sustainability Reporting Standards (ESRS)?

      Companies subject to the CSRD will have to report according to the European Sustainability Reporting Standards (ESRS), which cover all sustainability matters from a double materiality perspective.

      Draft standards were developed by the EFRAG6 – an independent body that brings together various stakeholders. The standards were finalized and adopted by the European Commission on July 31, 2023, in the form of delegated acts, which have been submitted to the European Parliament and Council for scrutiny. The scrutiny period runs for two months, extendable by a further two months. The European Parliament or the Council may reject the delegated act, but they may not amend it7.

      The first batch of standards includes 12 sector agnostic standards comprising 82 disclosure requirements, which include general principles and disclosures (cross-cutting standards) as well as information related to the environmental (ESRS E1-E5), social (ESRS S1-S4), and governance (ESRS G1) impacts of the entity.

      Disclosures are subject to the double materiality test, with the exception of those required under ESRS 2: General Disclosures, which includes mandatory disclosure requirements.

      Additional standards will be developed for SMEs and for non-EU groups, as well as 40 sector specific standards. Where a topical ESRS is not available for a specific topic, the ESRSs mention the possibility for entities to use the GRI Standards to report on material topics. This approach was confirmed in an August 2023 joint statement from EFRAG and GRI on the interoperability between ESRS and the GRI Standards, which specifically notes that “The ESRS allow entities to use the GRI Standards to report on additional material topics covered in GRI Standards that are not covered by the ESRS, such as tax.”

      What is the EU Taxonomy?

      The EU Taxonomy is a common classification of economic activities significantly contributing to environmental objectives, developed by the EU.

      Under CSRD, in addition to the ESG items that meet the double materiality standard and that will be reported based on the ESRS, companies are also required to report the percentage of their current revenues coming from activities aligned with the EU Taxonomy and the percentage of their future revenues (capital expenditure) coming from activities aligned with the EU Taxonomy.

      What are the Minimum Safeguards?

      The Minimum Safeguards are part of the EU Taxonomy Regulation and have been developed at the request of the European Parliament and based on recommendations from the Technical Expert Group to ensure that entities that carry out environmentally sustainable activities also meet certain minimum governance standards and do not violate social norms, including human rights and labor rights.

      In other words, the Minimum Safeguards are meant to ensure that activities that are labelled as Taxonomy-aligned (i.e. sustainable) are not only “green” but meet a broader set of criteria around: human & workers’ rights, corrupt practices & bribery, taxation and fair competition.

      The Taxonomy Regulation clarifies that in the context of the Minimum Safeguards, economic activities are to be considered as Taxonomy-aligned if they do not violate the standards for responsible business conduct mentioned in:

      • The OECD Guidelines for Multinational Enterprises,
      • The UN Guiding Principles on Business and Human Rights (UNGPs), including the Declaration of the International Labour Organisation on Fundamental Principles and Rights at Work; and,
      • The International Bill of Human Rights.

      Currently, the only source of interpretation on the application of the Minimum Safeguards is available in the Final Report on Minimum Safeguards published by the Platform of Sustainable Finance in October 2022. The report provides useful practical information on applying the Minimum Safeguards and is being used as a source of interpretation in the context of compliance with CSRD as well, to which it specifically refers.

      However, the report only represents the view of the members and observers of the Platform on Sustainable Finance and is not an official European Commission document. Its contents are therefore useful in setting guiding principles but are not binding.

      Questions therefore remain with regard to the content and depth of tax information required in order to obtain the ‘Taxonomy-aligned’ label.

      What does this all mean for tax?

      Where tax meets the double materiality test and is therefore considered a material topic, the reporting entity is required to include tax-related information in the CSRD report, in accordance with the ESRSs.


      Where a topical ESRS is not available to prescribe specific disclosures, the ESRS provide for the possibility for entity-specific disclosures to be based on available and relevant frameworks, initiatives, reporting standards and benchmarks, including technical material issued by the International Sustainability Standards Board or the Global Reporting Initiative8.

      With regard to reporting on tax, this implies that the GRI 207 Tax reporting standard can be used to transparently report on tax. In short, GRI 207 includes disclosures on the management approach to tax (e.g. tax strategy, approach to regulatory compliance), tax governance, control and risk management (including a description on the tax governance and control framework) and stakeholder engagement and management of concerns related to tax.

      It is important to keep in mind that tax-related impacts, risks (e.g. carbon taxes, plastics taxes) or opportunities (tax incentives for green investments or R&D activities) may also be relevant to the assessment of other material topics.

      For example, according to the paragraph 8(a) of ESRS S3 on affected communities, companies must disclose “whether and how actual and potential impacts on affected communities [...] (i) originate from or are connected to the undertaking’s strategy and business models, and (ii) inform and contribute to adapting the undertaking’s strategy and business model” . In addition, paragraph AR.5 of the same standard provides examples of impacts on affected communities that could originate from the company's strategy or business model, such as “impacts [...] related to the undertaking’s value proposition [...], its value chain [...], or its cost structure and the revenue model (such as, aggressive strategies to minimize taxation, particularly with respect to operations in developing countries)”.

      As mentioned above, the Minimum Safeguards require alignment with the OECD’s Guidelines for Multinational Enterprises. The OECD MNE Guidelines include a separate chapter on Taxation, which prescribe that companies should comply with the letter and the spirit of tax laws and regulations in which they operate.

      Companies should treat tax governance and tax compliance as important elements of their oversight and broader risk management systems – in particular, corporate boards should adopt tax risk management strategies to ensure that the financial, regulatory and reputational risks associated with taxation are fully identified and evaluated.

      Furthermore, the OECD MNE Guidelines also refer explicitly to compliance with transfer pricing through the “arm’s length principle”.

      Given the lack of strict implementation and interpretation guidance from the EU’s institutions and the Member States, it will be up to each reporting entity to determine the extent to which they include tax-related items in their CSRD reports. However, both the GRI 207 and the OECD MNE Guidelines refer to qualitative issues such as those related to the existence of an appropriate tax control framework and adequate tax governance. Reporting entities seeking to prepare for and ensure compliance with CSRD will therefore want to look beyond the quantitative tax-related disclosures that are required under e.g. EU public country-by-country rules and prepare narrative explanations on their approach to tax and tax governance.

      What other sustainability reporting initiatives should I be aware of?

      In addition to the CSRD, two other initiatives are relevant in the context of the EU’s sustainability reporting framework

      1. The Sustainable Finance Disclosure Reporting (SFDR), which sets out disclosures relating to financial market participants and their products.
      2. The Corporate Sustainability Due Diligence Directive (CSDDD), which requires due diligence on certain aspects of an organization’s value chain.

      1. SFDR

      The SFDR requires the disclosure of social and environmental aspects by participants in EU financial markets both at entity level (e.g. asset managers) as well as financial product level (e.g. funds). Disclosures under SFDR relate to three key concepts: a) sustainable investment, b) sustainability risk, and c) sustainability factors.

      With respect to financial products, disclosures will be required for products that:

      • have a sustainable investment as their objective (Article 9) – activities aligned with the EU Taxonomy, and
      • those which promote environmental or social characteristics (Article 8) – may partially pursue ‘sustainable investment’ as objective (the so-called 'light green' products). 

      Sustainable investment means an investment in an economic activity that contributes to an environmental objective and where the investee companies follow good governance practices, “in particular with respect to sound management structures, employee relations, remuneration of staff, and tax compliance”.

      With respect to financial products, disclosures will be required for products that:

      • have a sustainable investment as their objective (Article 9) – activities aligned with the EU Taxonomy, and
      • those which promote environmental or social characteristics (Article 8) – may partially pursue ‘sustainable investment’ as objective (the so-called 'light green' products).

      The SFDR also introduces the concepts of:

      • sustainability risks, defined as environmental, social or governance events or a condition that, if it occurs, could cause an actual or a potential material negative impact on the value of the investment – which could include tax-related risks, and
      • principal adverse impacts of investment decisions on sustainability factors, which includes testing against the OECD MNE Guidelines.

       Furthermore, proposed amendments to the SFDR Delegated Regulation would require a new, specific indicator on earnings accumulated by investee companies above a certain size in non-cooperative tax jurisdictions (which is not an existing ESRS disclosure). This indicator is considered relevant when assessing the social adverse impacts of investment decisions. It may be the case that further tax-related indicators will be added in future. 

      corporate-sustainability-reporting-directive-svg

      Source: Factsheet: How does the eu taxonomy fit within the sustainable finance framework? (europa.eu)

      2. CSDDD

      The Corporate Sustainability Due Diligence Directive (CSDDD) proposal aims to “foster sustainable and responsible corporate behavior and to anchor human rights and environmental considerations in companies’ operations and corporate governance9”. This will be achieved by requiring businesses to address adverse impacts of their actions, including in their value chains inside and outside Europe.

      There are similarities between the CSDDD proposal and the EU Taxonomy as relates specifically to reporting on compliance with the Minimum Safeguards. The European Commission sees the two as being complementary and the proposal aims to reinforce the UNGPs and OECD MNE Guidelines by introducing human rights and environmental due diligence obligations on selected companies.

      What does this mean for CTOs?

      A KPMG survey of nearly 300 chief tax officers (‘CTOs’) across major industries revealed that 56 percent of CTOs are more interested in being perceived as a good corporate citizen than reducing the tax burden. The 2023 CTO Outlook also notes strong evidence of shifting attitudes toward taxation and information sharing. While about half of CTOs (51 percent) say their approach toward tax transparency in the past five years was to be fully compliant, today an almost equal number seeks to be fully transparent (49 percent).

      Increasing tax transparency can also help CTOs defend their organizations in a difficult enforcement environment, gain some goodwill, and get fairer treatment equal to domestic competitors in the market. Reframing political discussions to focus on societal benefits of company activities beyond collecting tax can help show external stakeholders the value the organization adds to the ecosystem and economy.

      CTOs responding to the KPMG survey said that ESG-related risks – ranging from enhanced environmental reporting requirements to increased tax transparency – are the tax risks that pose the single greatest threat to their organizations’ growth over the next three years. When it comes to ESG, tax is both a driver of sustainability and a key measure of it. More tax data collection will be required to meet calls for transparency about downstream impacts of the business on society and the environment.

      Steps that tax departments can take to address ESG-related risks and opportunities and prepare for enhanced disclosures under CSRD include:

      • Enhancing their tax control framework, including drafting a tax risk management policy.
      • Seeking to work more closely with business units to ensure ongoing compliance with ESG-driven tax credits and grant terms.
      • Defining their tax principles and publishing a global tax strategy document, or updating/refreshing your principles and strategy.
      • Increasing transparency regarding the tax strategy, governance, or global tax payments.
      • Evaluating the supply chain against potential ESG-related tax risks and opportunities.

      Given the key role that tax plays in ESG, tax department will see a step up in their involvement in ESG strategies, in particular in exploring ESG risks and opportunities.

      Key takeaways

      Existing and upcoming public tax disclosure requirements are only the first stop for the tax transparency train. While current requirements focus on quantitative information, the CSRD will add an extra layer of  complexity by focusing on qualitative indicators, including the existence of a robust tax control framework and well-defined tax principles and strategies, as well as opportunities arising from ESG-driven tax credits and grants and the ESG-related tax risks and opportunities across the supply chain.

      As the influence of corporate citizenship and ESG themes on tax departments increases, CTOs will be looking to step up their involvement in ESG strategies. KPMG professionals are here to help CTOs take steps to help their organizations tackle ESG-related challenges. 

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      Maja Maksimovic
      Maja Maksimović

      Partner, Head of Tax

      KPMG in Croatia

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