The road to net zero: 3 reasons tax should contribute to big business decisions | Deloitte UK has been saved
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The transition towards a net zero future is underway and many of the policy levers used by governments on the road to net zero will be in the tax sphere.
Energy and extractives companies are facing a push-pull combination of new environmental taxes and incentives designed to tackle climate change, and are increasingly focusing on Environmental, Social and Governance (ESG) objectives, including in respect of their tax behaviours and contributions.
Amid this disruption and opportunity, tax teams closely integrated with their organisations confer significant advantages. By keeping up to speed on the fast-changing and complex policy landscape, tax teams can prepare their businesses for fiscal change and incentives, manage reputational risk as scrutiny increases, and play a pivotal role in business decision making.
As organisations transition to a low-carbon business model, tax teams can bring a vital long-term view. For many organisations, the road to net zero will require significant changes. Great tax leaders know that tax isn't just tax anymore. It's how you add value by integrating and collaborating with departments across your organisation and connect to your company's overall business goals.
In our last blog we discussed how tax leaders can be business partners supporting the investments and changes to the value chain that are required as business transitions towards net zero. In this article we cover three other important areas why tax should be central to business decision making in this area.
Monitoring and assessing tax changes across multiple jurisdictions, including those that sit outside an energy and extractives company's traditional monitoring framework, will be critical to the success of any tax team's ability to provide this long-term view.
Having this horizon scanning capability gives tax functions three reasons to claim a seat at the table and frame business decisions on the road to net zero:
1. Identify and prepare for incentives
Tax functions need to be capable of providing their business with a longer-term view that includes potential tax incentives available to support the transition to net zero. This may include R&D tax, patent box and tax depreciation. For some companies, the areas of tax team involvement with the R&D, technical and development teams can also extend into grant opportunities and work to understand the likely availability and timing of grants as part of an integrated grants and incentives programme.
The potential benefits of such an approach can be significant. The EU Innovation Fund, for example, will provide around EUR 10 billion of support over 2020-2030 for the commercial demonstration of innovative low-carbon technologies, with regular calls for proposals during the lifetime of the fund.
Integrating grants into projects from the start can significantly boost the chances of success and ensure that grant timing demands can be met. Tax teams can collaborate with project teams, encouraging them to develop a multi-year strategy to align their programme of work to make it as attractive as possible to grant providers, and to ensure that all potential sources of grant funding are identified and accessed.
The grant application process is often complicated, time consuming and highly competitive. A coordinated grant and incentives programme, with input from the tax team, will improve the chances of success and help to ensure that the time and effort spent in these areas is focussed appropriately and that applications only proceed when feasibility studies have confirmed that the projects closely match the grant application criteria.
2. Navigate an increasingly complex environmental tax landscape
Businesses working across multiple jurisdictions must navigate an increasingly complex environmental tax landscape. New taxes are being introduced e.g. the EU’s proposed carbon border adjustment mechanism, and taxes operate in different ways in different countries. Businesses also need to consider related regulations and market mechanisms (e.g. emissions ‘cap and trade’ schemes), which sometimes operate in a similar way to taxes. Tax teams therefore have a key role to play in identifying potential environmental tax costs which are likely to impact the business.
The taxation of carbon, whether through the taxation of emissions, energy produced, or some other proxy, is likely to play a central role in incentivising businesses and individuals to decarbonise their operations. More than 40 governments worldwide have now adopted a price on carbon with further regimes at sub-national level, either through taxes on fossil fuels or through cap and trade programmes (according to the World Bank).
Tax measures form part of the EU’s Green Deal to support its ambitions of being climate neutral by 2050. Updates are expected to the Energy Tax Directive and the European Commission notes that taxes play a key role in providing price signals and incentives for sustainable practices.
Energy markets and technologies have changed significantly since the Energy Tax Directive was adopted in 2003, and so changes are needed to reflect the position and support the EU’s wider climate ambitions. The EU is also considering a Carbon Border Adjustment Mechanism (CBAM) to reduce carbon leakage as a result of production being transferred from the EU to other countries where emissions reductions rules are less strict. This would need to comply with World Trade Organisation rules and complement internal EU carbon pricing. The Commission is expected to introduce proposals for both measures in Q2 2021.
These changes will lead to new tax compliance, accounting, systems, process, risk management, commercial, litigation, and reputational issues for tax teams to manag
3. Manage increasing external tax disclosures
ESG considerations need to run throughout a business’ tax strategy. A changing tax and incentive landscape, combined with business model and supply chain changes arising as a result of the energy transition, means many choices for tax teams.
Those choices are being made amidst growing legislative requirements and stakeholder expectations around tax governance. The European Union is thinking aloud about requiring the publication of country by country data and a raft of measures from the Global Reporting Initiative, World Economic Forum and others seek to encourage increased reporting of tax information.
Increasingly, stakeholders expect businesses to go beyond existing requirements and volunteer more information about their approach to the management of tax (i.e. their behaviours) and its outcomes (i.e. the taxes they pay and influence). This is likely to lead to greater scrutiny of tax decisions, resulting in tax teams having to manage both tax technical and reputational risks. Communicating about a complex subject such as tax is essential but difficult, particularly in the absence of common standards. Having appropriate governance, decision-making mechanisms and appropriate board oversight in place is therefore more important than ever.
The momentum behind the transition from the carbon economy towards net zero is gathering pace. Much more change is to come. Tax teams 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 challenge
This article is part of our series "Tax and the road to net zero", which explores why tax leaders need to be thinking about net zero.
Other posts in the series will explore the tax implications and impact on the value chain of:
Roman heads up Energy & Resources Tax at Deloitte in the UK. Roman has over 20 years of experience advising companies in the oil & gas, utilities and commodity trading sectors in the UK and internationally on M&A and tax structuring matters. He spent a year on secondment at Shell before returning to Deloitte becoming partner in 2006. He represents Deloitte at external industry bodies and events and is a frequent media commentator. He was previously UK & global head of renewable energy.
Tax teams 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.