A tax strategy for the road to net zero

Written by: Deloitte Posted: 15/07/2021

BL64_Jo huxtable deloitteJo Huxtable, Partner, Tax, at Deloitte, on the implications of climate change action – published in the Future View supplement included with the May-July 2021 issue of Businesslife

Climate change is the defining issue of our time. Government policies, demand from customers, employees and consumers, investor pressure and technology are all converging to drive decarbonisation. 

Against this backdrop, the role of business is shifting, as society is increasingly demanding that business acts as a force for good. 

Corporates will play a key role in responding to climate change. Numerous organisations have made public commitments to reduce greenhouse gas emissions. 

Progress towards these goals needs a plan. The way any company acts today in response to climate change will almost certainly have an impact on its degree of advantage tomorrow. 

Why does this matter for the tax strategy of a company?

Organisations are increasingly focusing on purpose, with ever-greater focus on environmental, social and governance (ESG) principles. 

This places the response to climate change and the road to net zero at the core of business strategy, and boards need to consider how their tax strategy can contribute positively to these changing business priorities and wider social purpose. 

For many organisations, climate change will have a profound impact on business operations. As with any business transformation, there will be tax consequences as a result of business model and supply chain change. 

Many of the policy levers used by governments on the road to net zero will be in the tax sphere, ranging from grants and incentives to carbon taxes. 

For example, the EU’s Green Deal contains an investment plan to stimulate public and private investment, as well as tax measures such as reforms to the Energy Tax Directive and a proposed Carbon Border Adjustment Mechanism. 

In the UK, the 2021 Budget provided funding to support the energy transition. And the OECD has recently highlighted that energy and carbon taxes have a key role to play in the transition to a socially inclusive zero-carbon economy. 

In addition, policymakers are starting to consider whether tax and regulatory policy are taking account of climate commitments.

Boards and tax leaders need to be ready to respond and potentially contribute to the policy environment, ensure that tax is integrated into business decision-making, and have the right skills and resources to react to the emerging business opportunities and challenges. 

Achieving net zero goals means the tax strategy needs to find a new balance 

As the response to climate change becomes embedded in organisations, the tax strategy will evolve. 

We are already seeing a greater emphasis on tax policy, business advisory and risk management within tax teams in response to broader political, economic and social developments. 

Climate change is another driver, and accelerator, of change. Boards will need to ensure that their in-house tax teams are equipped with the right technology, skills and resource model to allow them to deliver the tax strategy for the road to net zero.

FV_Deloitte_tax illo.So what are the questions that Channel Islands boards and business leaders should be asking?

• How do we monitor and track tax policy developments – both measures expected to be introduced in the short and long term?
• Are material environmental tax costs and incentive savings factored into business decisions at the outset?
• What are the tax impacts of changes to the value chain, reorganisation of supply chains and business model?
• How will the tax expertise within the business change in future – for example, to manage increased indirect taxes and the transfer pricing of new intellectual property?
• Are executive and workforce remuneration policies and pension plans aligned with the organisation’s climate strategy?
• What are the areas where the business should consider tax policy engagement? 
• What information is reported for tax transparency purposes?
• How do we balance good corporate governance and tax efficiency with decreasing the carbon footprint? 

This final question is one that has been discussed at length during the past year across the Channel Islands. At a time when there has been increased focus on where companies carry on their activities and demonstrate substance, often focused on the place where the board of directors meets and makes decisions, the global pandemic has necessitated new ways of working. 

Many boards are realising the benefits of creating more diversity by including subject matter experts located in different jurisdictions. Video conferencing has enabled people to participate at meetings without the need to board a plane. 

However, these new ways of working can have tax consequences that need to be carefully considered.

So, what does the future hold? It is still early days as many businesses engage with their people and start to formulate the future of work.

But one thing is clear: notwithstanding the benefits and efficiencies that can be obtained from remote working, when complex or strategic issues need to be discussed there is often still no substitute for face-to-face meetings. 

In addition, tax rules on residence, permanent establishments and transfer pricing, to name but a few, can look closely at the contribution of the relevant people and where this takes place. 

As a result of these new ways of working, we may see more key decision-makers based in Jersey or Guernsey remotely consulting with subject matter experts, and others, to help inform their decisions.

The result could be a win-win: reduced carbon footprint through less unnecessary travel and increased diversity of thought and expertise captured in board decision-making.

Deloitte is committed to playing a leading role in building trust in business, driving more inclusive and sustainable growth, and enhancing skills, education and inclusion for all.

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