Multinational enterprises (MNEs) are continuing to focus on responsible governance as part of their ESG policies. An important aspect of ESG strategies is tax viz. transfer pricing. It has increasingly required MNEs, and their tax departments, to publicize their global tax policies and approach to transfer pricing.
Tax departments of MNEs now need to work alongside business teams to align the collective tax and business strategies of a group. Furthermore, tax departments must regularly engage with governmental bodies to indicate their commitment towards sustainability.
Transfer pricing lies at the heart of ESG strategies from a tax department’s viewpoint. In our previous article, “Tax and the ESG phenomenon”, we discussed how governments use tax policies to incentivize MNEs that make ESG-friendly strategies. Whereas global agencies such as Organization for Economic Co-operation and Development (“OECD”) and Global Reporting Initiative (“GRI”) are regularly releasing frameworks to make the global industry more ESG compliant.
For instance, OECD has released a report on co-operative tax compliance, to act as a guide for companies to make a robust tax control framework. Similarly, the GRI has released Standard 207 as part of their collection on economic reporting (GRI 207). GRI 207 intends to assist companies in planning their activities pertaining to tax, tax governance, and tax controls. The report also provides a section on managing income and tax on a CbC level.
Furthermore, ESG ratings play a pivotal role in understanding as to how a company manages its ESG strategies. Even in this regard, the tax departments are required to focus on the role of tax components in gaining a higher ESG rating. One of the, if not the most important factors for gaining a higher ESG rating through tax is transfer pricing. It is understood that rating agencies will necessarily look at a company’s transfer pricing policy to determine its overall ESG ratings in the future.
An increasing number of Fortune 500 companies have already adopted a tax strategy in the context of ESG. These companies specifically mention transfer pricing in these strategies, given its integral role in reflecting an ESG strategy’s overall impact.
With the increasing need for MNEs to include their tax and transfer pricing strategy in their broader ESG strategies, it is important for tax departments to begin this discussion. Contact our team of specialists at TPA Global to devise your transfer pricing plan with respect to ESG strategies.
Author: Ameya Dadhich, Trainee