EU’s Corporate Sustainability Directive: Implications for Tax and Transfer Pricing

May 12, 20230

On 5 January 2023, the Corporate Sustainability Reporting Directive (CSRD) entered into force. The European Commission has been working towards the CSRD as part of its EU Green Deal mission. The CSRD will increase the number of companies that will have to report on non-financial key performance indicators. It will also diversify the information that needs to be reported. With the introduction of CSRD, companies will have little time to prepare as the first set of implementing standards require large companies to start reporting in early 2024 for the financial year of 2023.

The directive will apply to the following list of companies:

  • All companies listed on the EU-regulated markets. However, listed SMEs can “opt-out” of it until 2028. Whereas the ones who do not opt-out will have until 1st January 2026 to comply with the reporting requirements;
  • A “large undertaking” that is either an EU company or an EU subsidiary of a non-EU company that fulfills two of the following three criteria:
    1. A net turnover of €40 million;
    2. A balance sheet total of €20 million;
    3. 250 employees on average over the financial year.
  • All insurance undertakings and credit institutions;
  • Non-European companies with a net turnover of more than €150 million in the EU at a consolidated level and which have at least one large undertaking/subsidiary or branch with a net turnover of more than €40 million in the EU.

With the introduction of CSRD reporting, companies will be mandated to provide additional disclosures and sustainability information. While it doesn’t require tax reporting as such, it focuses on a range of business activities and their impact on a number of environmental, social, and governance metrics. This resultantly will have a pertinent impact on the taxation policies of companies affected by the CSRD. Sustainability and value creation are increasingly interlinked, given that companies will need to provide significant amounts of data under CSRD reporting. Therefore, companies will be required to alter their transfer pricing models to reflect the sustainability aspects.

It is incumbent upon companies to review their supply chains in respect of governmental as well as personal ESG initiatives. This may result in the relocation of production activities from existing jurisdictions to new ones. The result of such restructuring will certainly impact their transfer pricing models. In fact, insofar as CSRD reporting is concerned, not only transfer pricing but an assessment of the impact of other taxes will also be necessary.

Tax, specifically transfer pricing, and sustainability-driven changes are intertwined with one another. Therefore, it is necessary to consider a company’s operating model when transitioning into a more sustainable supply chain.

To help you drive this change, please contact our team of professionals at TPA, who can assist you in formulating a transfer pricing policy that will align with a sustainable supply chain in terms of global ESG initiatives, including CSRD.

Author: Ameya Dadhich, Trainee, TPA Global

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