Until recently, legally required public tax disclosures for US multinational corporations have been the proverbial faraway train coming down the tax tracks. They haven’t been as pressing as this year’s tax filings or the fascinating progress of the OECD two-pillar project, even with EU public country-by-country reporting (PCbCR) for corporate income taxes now on the books. (And Romania, in particular, is moving quickly).
But since the Council of the EU adopted the Corporate Sustainability Reporting Directive on Nov. 28, suddenly the train—potentially carrying a much broader set of reporting requirements—got a whole lot closer to the station, with CSRD reporting being due in some cases for Fiscal Year 2024.
Even tax people following CSRD may be surprised to learn that there’s an issue, because nothing in it specifically requires tax reporting. However, the interaction of another EU instrument, the EU taxonomy together with the OECD Guidelines for Multinational Enterprises, have made this a current and major issue that could go well beyond the boundaries of PCbCR.
You may wonder: What does the CSRD have to do with a US (and non-EU) headquartered business? What do CSRD and the EU taxonomy on environmental sustainability have to do with tax? And what do OECD guidelines have to do with an EU directive? The answer is that they’re all coming together to make many US and other non-EU multinationals subject to a potentially significant novel type of tax reporting.
Let’s start with CSRD. This doesn’t require tax reporting as such. The proposal was raised as the CSRD was under consideration but then was dropped. It builds on an earlier directive on non-financial reporting, and it focuses on a wide range of business activities and whether they’re unsustainable against a number of environmental, social, and governance metrics.
This requires reporting on policies, targets, and action plans, including when such items haven’t yet been adopted. This might involve discussing potentially sensitive business model and value chain transformation—although there are some exceptions relating to IP and know-how. And this report is subject to mandatory assurance by the statutory auditor or another assurance provider if the relevant EU member state allows it.
“Hang on,” you say. “Does that really apply to US businesses?” The answer is yes. In general terms, either each US-owned EU sub that meets certain not-particularly-high thresholds will have to file, or the US parent can file.
A US head of tax may say, “I get the obligation on the company. But what does that have to do with the tax department?” That’s where the EU taxonomy comes in. Businesses must now report how much of their revenue, capital expenditure, and operational expenditure are related to activities aligned with the criteria.
“OK, but that’s still about ESG sustainability,” you say. “Where does tax come in?” Well, there’s one more step. In October 2022, the Platform of Sustainable Finance issued a final report on minimum safeguards. While not an official EU document, it casts valuable light on the standards that will have to be met under the EU taxonomy minimum safeguards of Article 18 of the EU taxonomy.
Again, the EU taxonomy itself doesn’t have much to say about tax, but it does reference the OECD guidelines for multinationals. The final report makes clear that the minimum safeguards includes tax, and that applying the guidelines means the tax provisions are a factor in assessing alignment with the EU taxonomy.
Here is the crucial passage, with emphasis on key phrases added:
“The topic of tax compliance as an element of MS stands out, in that it is [not] considered … by CSRD. Nevertheless, the identification of procedures that are relevant and adequate for establishing compliance with the MS can follow the analytical process proposed for human rights and corruption, by considering OECD MNE Guidelines, which holds two key [tax] expectations for undertakings:
“(a) Undertakings should comply with the letter and the spirit of tax laws and regulations of the countries in which they operate. Complying with the spirit of the law is defined as “discerning and following the intention of the legislature”, which in turn is supposed to guide the determination of the tax amount legally required. (OECD MNE Guidelines, XI.1.)
“The first expectation is focused on the end-goal or performance of undertaking, for example avoiding and addressing negative impacts on society. The second [on governance] focuses on the means to achieve that end, for example policies and processes to embed tax compliance throughout an undertaking.”
For most lawyers and other tax specialists, the idea of the “spirit of the law” is a troubling one because it’s so amorphous. When the Organization for Economic Cooperation and Development introduced this provision in 2011, it raised a number of questions. Does the “intention of the legislature” mean only at the time of enactment or could it be modified over time? Could the “spirit” of the law supplant the “letter” of the law or plain reading of the language? There were never any satisfactory answers to these questions. At one level, it didn’t matter, because the guidelines for multinationals could lead to a report being issued but not to sanctions or penalties.
However, this combination of CSRD, the EU taxonomy, and the clarity of the minimum safeguards has changed that. It seems likely that, to report alignment with the EU taxonomy, US-owned groups will have to assess (and convince their auditors) whether they’ve complied with the spirit of the tax law and to report non-alignment if they have not. They might want to have in place internal procedures to ensure that they do. But in such a subjective area, how are they to get this comfort? And if they do report non-alignment, wouldn’t that surely draw scrutiny, even while there are there no immediate penalties?
This train is no longer a mile away. Compliance with the “spirit of the [tax] law”—particularly together with EU PCbCR, is a significant and evolving change. And there could be more to come. A draft of the EU sustainability reporting standards says companies should identify all additional appropriate topics that are material, using available best practice (such as Global Reporting Initiative sector standards, which could include PCbCR under GRI standard 207-4). As a final example, a February 2022 final report on a social taxonomy explicitly mentions transparent and non-aggressive tax planning as a governance topic linked to sustainability.
Things are changing fast. CSRD is already final—as is EU PCbCR—so businesses will need to adapt quickly, setting up new processes and procedures. Put differently, to meet these new challenges, we’ll have to move rapidly through the five stages of grief to the final one of acceptance . It truly is a brave new world.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Will Morris is PwC’s Deputy Global Tax Policy Leader and Chair Emeritus of the Taxation and Fiscal Committee of Business at OECD (BIAC).
Andy Wiggins is based in the UK and is PwC’s Global Tax Accounting Services leader and has responsibility for ETax Reporting within the UK.
Matt Timmons is a partner in PwC’s global legal business solutions business, leading a ESG Legal team in the UK. He is also a member of PwC’s EU CSRD Competency Center.
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