Responsible Tax Matters: Special edition

Read our special edition and prepare for an eventful 2024 within sustainability and ESG in tax.

Special edition

Insights covered in this edition

In this special edition, we are wrapping up some of the major trends from 2023 which have followed us into 2024. We have witnessed significant decisions shaping outcomes across the globe and abbreviations that we explored in 2023 such as CBAM, CbCR, GRI, CSRD, representing impactful initiatives within the sustainability and ESG landscape. These initiatives continues their relevance in 2024. With the latest developments in mind, we are looking at how these powerful abbreviations are shaping the future of tax.

It is widely known that the European Union (EU) intends for Europe to be the first climate-neutral continent by 2050, which is to be achieved through the European Green Deal, which includes the Fit for 55 Package and the RePowerEU Plan. One of the legislative proposals within the EU’s Fit for 55 Package that has attracted the most attention (and controversy) is the implementation of the EU’s Carbon Border Adjustment Mechanism (CBAM), which has already gone into action.

The EU Green Deal Industrial Plan also comes in part as a response to the US' Inflation Reduction Act (IRA), and what the EU perceives as a risk of losing its green technology competitive edge due to the targeted tax incentives and benefits included in the IRA. President Biden himself described the IRA as "the most aggressive action ever […] to confront the climate crisis and increase our energy security". The EU Green Deal Industrial Plan aims to "create a more supportive environment for the scaling up of the EU's manufacturing capacity for the net-zero technologies and products required to meet Europe's ambitious climate targets". The plan includes revising state aid rules and generally easing access to tax breaks for sustainable companies.

The overarching ambition of easing access to tax breaks for sustainable companies, redirecting cash toward clean-technology industries and revising state aid rules is based on four pillars:

1) A predictable, coherent and simplified regulatory environment, which supports the quick deployment of net-zero manufacturing capacities,

2) Faster access to sufficient national and EU funding to speed up investment and financing for clean tech production in Europe,

3) Enhancing green and digital skills by ensuring that the European workforce is skilled in the technologies required by the green transition,

4) Open trade for resilient supply chains, based on cooperation with the EU's partners to ensure diversified and reliable access to critical inputs and fair international competition

This package seeks to increase EU domestic capability in clean energy technology and industries at a time of increasing competition for these globally.

As part of the EU Green Deal, there are already hundreds of EU and EU member state funding opportunities worth more than EUR 1 trillion. Some of these funding programmes include:

Horizon Europe, the EU's biggest research & innovation programme with a budget of EUR 95.5 billion, aimed at tackling climate change.
InvestEU, supporting projects for energy and transport infrastructure.
Modernisation Fund, mostly funded through revenues from the EU's Emissions Trading System (EU ETS), aimed at supporting investments in the generation and use of energy from renewable energy.
Innovation Fund, supporting investments in clean energy and industry through calls for large and small-scale projects.
And more…

So, while the Industrial Plan still needs to be passed and translated into local law, companies can already apply for various funding opportunities and tax incentives in the EU, and in the US. To better understand how these developments could affect your company, and to figure out how to leverage these opportunities, do not hesitate to reach out to us and our global network of experts in grants and incentives. To fully take advantage of the substantial opportunities that are (and will be) provided by the US Act, the European Green Deal and the Green Deal Industrial Plan to accelerate net zero plans and promote clean energy technology, businesses must understand the complex developments across these two key markets and how they interact with each other, eligibility requirements and partnering opportunities.

Previously we have discussed the Australian public CbCR law, which we expected had been approved by the Australian Parliament in June 2023 and entered into force on 1 July 2023. This new law would have ushered the world to new heights of mandated tax transparency, in one fell swoop.

On 23 June 2023 the Australian government announced a 12-month delay in the implementation of public country-by-country (CbC) reporting to 1 July 2024.

The delayed start date is intended to better align with the commencement of the EU’s public CbC reporting directive and to allow more time for consultation.

Of particular note is the removal of the additional data requirements proposed in the original public CbC legislative draft, which were in excess of requirements for other global tax transparency regimes.

Some businesses are hoping that the Australian government will, at least, align the data requirements with those of the OECD template, and at best with the EU template. At the moment the data requirements are almost in alignment with the GRI-standards 207.

In addition, some are lobbying for either a minimum or maximum threshold for non-Australian headquartered MNEs with a presence in Australia (in the style of the EU directive), and to aggregate some jurisdictions in a “Rest of the World” line – again as in the EU directive.

It is not known at this stage where the final text of the law will land on these issues, and the government will face pressure from investors, NGOs, activists, and possibly some of the transparency leaders to stay the course. Businesses are therefore facing another year of uncertainty and need to prepare for upcoming requirements: test their data gathering processes, internal governance approach, risk assess how their data will be understood by readers – all while collecting data and starting to report on Pillar 2.

Whatever the data requirements end up being, the best way for companies to simplify their tax disclosure process and potentially manage different reporting templates and requirements, is to have control of their tax data at the most granular level, therefore being able to build any type of report from the bottom up painlessly.

While the situation is different in Australia, Denmark transposed the EU Public CbCR Directive into local law in early June, keeping to the June 2024 timeline (unlike Romania, lest we forget), and confirming that companies will have to both publish their report on their website and submit it to the Danish company registry (Erhvervsstyrelsen) for it to be centrally published. The Danish bill also allows companies to omit certain sensitive information for a maximum period of five years.

In our first edition of Responsible Tax Matters 2024, we will take a deeper dive into the regulation for CbCr.

A year ago, we reported on the FASB’s agreement to issue a proposal for increased income tax disclosures and included it again in our latest edition of 2023 while the decision went from attempt to actual update.

The Financial Accounting Standards Board (FASB) came to a unanimous decision about updating the income tax Accounting Standard, which has been described as ushering in a new era for the tax transparency of US based groups. FASB is the designated accounting standard-setter recognized by the SEC that develops US Generally Accepted Accounting Practices. The standard will apply to financial statements using US GAAP for reporting periods starting on 15 December 2024 or later for public companies and from 15 December 2025 for private companies.

On Dec. 14, 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.”

This requires entities to disclose more detailed information in their reconciliation of their statutory tax rate to their effective tax rate.

Entities which meet the definition of Public Business Entities (PBE) are required to provide details in a numerical, tabular format, while all other entities will do so through enhanced qualitative disclosures.

The new ASU 740-30 standard introduces slightly more transparency around the taxation of US based groups by requiring financial statements using US GAAP to include details about income taxes paid at federal and state level as well as specifying the amount of taxes paid to foreign jurisdictions. Additionally, groups will be required to specify tax payments for individual jurisdictions making up more than five percent of the net tax payments of the group.

PBEs will be required to adopt the new requirements in annual reporting periods beginning after 15 December 2024 and interim periods beginning after 15 December 2025.

All other entities must adopt the final standard in annual reporting periods beginning after 15 December 2025 and interim periods beginning after 15 December 2026.

On Dec. 14, 2023, the Financial Accounting Standards Board (FASB) issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures.” This requires entities to disclose more detailed information in their reconciliation of their statutory tax rate to their effective tax rate. Entities, which meets the definition of Public Business Entities (PBE) are required to provide details in a numerical, tabular format, while all other entities will do so through enhanced qualitative disclosures.

Fortune telling will always be tricky because the world can change. Hoewever, within tax transparency, some topics are more likely to be on the agenda in 2024. Therefore, we will give our view on the agenda for Tax Transparency in 2024:

1) The Corporate Sustainability Reporting Directive (CSRD) will point out to many groups that tax is a material topic, and therefore the groups will be obliged to report on their tax along with the other CSRD topics.

2) Groups in Denmark will develop specific reports on tax, where they will be able to show tax contributions and explain tax within their industry.

3) Validation on CbCr disclosures will receive very much attention due to a massive impact they will have on e.g. the new ruleset on Public CbCr and Pillar 2.

4) Focus within companies regarding a durable Tax Control Framework.