As part of European regulatory efforts to promote sustainable growth (EU Commission, Sustainable Finance Action Plan of 08.03.2018, COM (2018) 97 final), the EU has issued two key regulations: the Disclosure Regulation (EU) 2019/2088 and the Taxonomy Regulation (EU) 2020/852.
As of yet, both regulations have been regarded as core components for the implementation of a broad-based sustainability initiative (European Green Deal), which focuses on the financial market, among other things. The aim of the "New Sustainable Finance Strategy" is to bring about transformation to a sustainable financial system. The key elements of this strategy include compulsory reporting according to "ESG" criteria (Environmental, Social, Governance) and a uniform classification system (EU taxonomy). By increasing transparency – also in the area of taxation – the financial sector is to be made more accountable for achieving environmental and social sustainability goals; greenwashing is to be prevented and financial resources can be channelled into sustainable investments.
Taxation also plays a central role in the implementation of the Green Deal. In order for Europe to become the first climate-neutral continent by 2050, the EU is also calling for better alignment of national tax systems with the issued climate targets. This is reflected in numerous legislative initiatives on fiscal policy. In 2019 the Global Reporting Initiative (GRI) published the GRI 207 standard, which sets international requirements for sustainability reporting under tax law.
The EU's climate-neutrality targets are challenging and need to be put into practice. The transformation process has already begun and will continue to rapidly develop. In order for Germany to meet the EU's targets, the German government has intensified its climate protection targets and aims to achieve greenhouse gas neutrality by 2045.
The complexity of this transformation process must be understood from the perspective of companies from all sectors. It affects not only tax measures, such as energy and electricity tax or other excise and traffic taxes (e.g. aviation tax, tax on alcohol), but also the steady increase in the cost of CO2 emissions through the national emissions trading system introduced on January 1, 2021, which was introduced to supplement the European emissions trading system.
The focus of taxation is directly linked to national and international CO2 trade, energy and environmental management systems, investment decisions in climate-neutral technologies, CO2 benchmark assessment and carbon footprint reporting.
Many new topics have been added and continue to evolve: e-mobility projects, the use of hydrogen, the expected reshaping of the electricity price components and the EEG levy, compensation regulations to prevent carbon leakage in national certificate trading, and the linking of climate protection measures by companies (e.g., recognising electromobility in the biofuel quota), to name just a few examples.
At European level, the CSR Directive Implementation Act (CSR-RUG) obliges large public-interest entities in Germany since 2017 to comply with non-financial reporting obligations regarding environmental, employee and social matters, respect for human rights and the fight against corruption and bribery (CSR reports). All companies that prepare their sustainability reporting based on the GRI can apply the GRI 207: Tax 2019 standard as of January 1, 2021.
GRI has developed a comprehensive framework for sustainability reporting that is used worldwide. The reporting structure and guidelines set out the principles and indicators that companies can use to measure and report their economic, environmental and social performance.
As part of this standard, taxes have been identified as an element of taking sustainable action by market participants and defined in GRI 207 as mandatory, standard information that must be disclosed. Taxes have an influence on the economic and fiscal policy of a state. The distribution of tax revenue is something that should not be underestimated for the socioeconomic sense of justice among the population and therefore contributes to the stability and democracy of a state.
An underlying principle is that taxes should be distributed fairly. This idea is also taken up by the BEPS and Pillar 2 initiatives. In addition to numerous qualitative tax reporting components, the GRI 207 standard therefore also contains quantitative elements which must be disclosed, e.g., from the country-by-country reporting. The information to be disclosed is of great interest to the respective governments, as it provides information on their most important source of income. Inadequate tax revenue can jeopardise a state's ongoing sustainability efforts, such as environmental protection, infrastructure, education and other social measures.
GRI 207 requires companies to report in the following regulatory areas:
At WTS, we take a holistic approach towards ESG criteria. In doing so, we think far beyond the sphere of taxation. We have in-depth experience in the implementation of projects to reduce the carbon footprint, taking into account CO2-pricing, energy and electricity taxes, and energy regulation requirements. Working closely with the Advisory and Digital divisions, we offer a comprehensive consulting portfolio in the context of ESG criteria and the associated services.
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