The Intersection of Tax and ESG: Benefits and Challenges

Environmental, Social, and Governance (ESG) considerations boast a rich heritage and have evolved through a series of disclosure frameworks.

Since the embrace of the concise acronym "ESG," this intricate concept has garnered remarkable momentum, emerging as a prominent and timely topic within the corporate scene.

ESG, entails integration of social, environmental and governance considerations into companies’ strategies to create sustained long-term value.

The Environmental "E" aspect of ESG encompasses numerous considerations, including but not limited to climate change, Greenhouse Gas (GHG) emissions, natural resource depletion, waste and pollution, deforestation, hazardous materials, and biodiversity.

The Social "S” relates to factors such as the protection and promotion of human rights, ensuring the well-being and safety of employees, contributing towards taxes, and assessing the impact of a business on local communities.

On the other hand, the Governance "G" is about how a company manages its affairs and deals with issues such as political contributions, tax planning, executive compensation, transparency, board independence, and renewal of leadership.

There is a growing consensus that tax and ESG convergence would yield positive outcomes for companies and tax revenue authorities at large.

As we dive into this matter, it is imperative to explore some of the benefits that companies and revenue authorities can accrue by integrating tax with ESG.

It is not unusual for companies to focus on profits by prioritizing their financial objectives over environmental and social goals.

However, corporates can be encouraged to make greener investments such as energy efficient technologies through tax incentives and credits.

This will indeed help them demonstrate a responsible corporate behaviour and commitment to address climate change and environmental challenges thus enhancing their reputation.

A good example is where Parliament could enhance the law to grant capital allowances to companies operating in the renewable energy and manufacturing sectors, while factoring the high costs associated with enhancing energy efficiency.

This would provide a financial incentive for companies to reduce their reliance on fossil fuels and move to low-carbon economy.

Further, taxation can play a vital role in compelling businesses to promote and adopt sustainable supply chains.

Implementation of reliefs in diverse forms of taxation, such as Customs, Excise, and Value-Added Tax (VAT), have the ability to foster sustainable procurement and supply chain practices.

For instance, customs duty could be reduced or eliminated for environmentally friendly products; imports and excise duties could be lowered for low-carbon alternatives to fossil fuels, and certain "green" supplies granted VAT exemptions.

Such incentives will undoubtably contribute to decarbonization efforts and foster the development of sustainable supply chains. An additional example of efforts to address adverse environmental and social impacts can be observed in the imposition of excise duty on the importation of second-hand motor vehicles that exceed a ten-year age limit from the year of their production.

Simultaneously, the introduction of tax incentives designed to promote the adoption of electric vehicles will further contribute to these efforts.

Integrating ESG and tax principles will also build stakeholders and investors’ confidence. When companies adopt a transparent tax planning, they send a strong signal to stakeholders that they take sustainability seriously.

By showcasing a steadfast dedication to tax transparency, companies not only exhibit their capacity to proactively address potential risks but also cultivate trust among their stakeholders and bolster their reputation as conscientious and socially responsible entities.

Taking the above benefits into account, it is pertinent to appreciate some of the challenges that could arise when aligning tax with ESG objectives. The primary challenge is the absence of universally accepted metrics to evaluate the effectiveness and advancement of ESG and tax initiatives. This predicament could be mitigated through collaborative efforts by regulatory bodies and industry stakeholders to create standardized metrics to monitor ESG and tax performance.

Additionally, lack of transparency and complexity in navigating ESG, and tax regulations is another hinderance to the integration. This can be solved through regular training and engagement with specialized tax and ESG experts to create awareness and alleviate confusion.

Lastly, governments should consider offering grants and funds to enterprises that prioritize sustainable investments to drive the ESG agenda. With the Tanzania Finance bill of 2023 in the horizon, an intriguing question looms large: Will the government seize the opportunity to integrate tax policies that embrace ESG principles?

In conclusion, there is a clear convergence between ESG and tax, and it is essential for tax and ESG stakeholders to evaluate their roles and understanding of ESG-related tax regulations and their impact on business operations.

This proactive approach will enable them to mitigate risks and cultivate a "regulation-ready" business. Moreover, a coordinated tax strategy that aligns with the business strategy will enhance supply chain resilience and confer a competitive edge.

In addition, these initiatives can generate broader societal benefits by addressing environmental and social concerns.

Seif Adam is a tax associate with KPMG in Tanzania.  (seifadam@kpmg.co.tz), The views and opinions are those of the author and do not necessarily represent the views and opinions of KPMG