Introduction. The start of a new era.
Tax Law, despite being bound to a general purpose of collecting revenue for the State, cannot avoid following social and economic movements. Thus, in addition of assuming extra-fiscal goals – such as the environmental ones -, it should assume a configuration adjustable to new structural challenges that are being developed. Among these, Sustainability is taking on primary importance, as well as the legal boundaries it is assuming through normative developments at international level, especially in the European Union.
Indeed, it is very clear today that all economic players are adapting to the Environmental, Social and Governance (ESG) demands, adapting their activity to totally different conditions compared to those existing at the beginning of the century, when the concerns were essentially financial and focused on profit. Nowadays, concepts such as circularity or the need to reach environmental and humanitarian goals are more and more frequent, generating a change in the business activity – see the increasing relation between the accomplishment of ESG goals and the executives’ variable remuneration – that involves the concern with economic development and life conditions of both those who are under the business scope as well as the citizens in general.
Tax Law must pay special attention to this matter. Whether by way of taxation or by determining tax benefits, lawmakers must be absolutely aware that in the most varied areas of Law they must assume goals that were previously beyond their scope. The paths go through the possibility of new taxes, increase of the existing ones, but also through reform of the existing tax benefits, either by creating new ones in new areas, or by increasing or reducing the existing ones.
It is quite clear that these new times of concern about climate changes, defence of biodiversity, mitigation of greenhouse gas emissions, but also defence of human rights, inclusion, and defence of equality are assuming a line of legal evolution and emergence of new rights and legal obligations. All these aspects require not only a strict legal regulation at the levels directly involved, but rather a more general movement involving several legal areas, with natural emphasis on Tax Law. This inter-disciplinary vision is clearly visible from the solutions found in the Corporate Sustainability Reporting Directive which places financial and sustainability related information on equal footing, demonstrating the importance, which will be further developed, of the Governance element and the consequences that it has in different Law areas, such as Tax Law which should be included in a special way of good business conduct. Thus, Tax Law will be present in this area not only in the determination of material Tax Law solutions, but also in the aspect of the growing obligations of compliance and cooperation with the Public Administration and of compliance with corporate tax codes of conduct.
A complex answer as to the “E” and the “S”.
Despite the aforementioned developments, it is important to bear in mind the role of Tax Law in environmental and humanitarian matters. And in this regard, the first option involving Tax Law involves a fundamental decision: to go beyond a strict and immediate response to taxation and the collection of State revenue. Indeed, by analysing reality, and especially in the European Union, it is clear the desire to extend the scope of taxation to areas such as the taxation of plastic, or the reinforcement of existing obligations, in a strict line of polluter-pays (of taxes).
The answer to current needs must be broader and more complex. It must be based on taxing those who pollute, but also rewarding those who take a positive attitude towards ESG, in a logic of sticks and carrots. Thus, tax lawmakers should collect their revenues according to the society’s needs, but they should also encourage environmentally and socially responsible behaviours. It must add to a negative or a positive side, in a general response adjusted to sustainability, acting not only in the consumption and property taxes but also in the levies to be paid to the Central and Local Administration.
Thus, it will be necessary to move towards a reform of green taxation that supports fiscal consolidation through environmental and energy taxation and sustainable growth by rewarding positive environmental externalities in a determination of truly unique schemes. It will be necessary to move towards tax incentives – following the Green Tax Reform Project in 2014 initiated by the Commission – for environmentally responsible behaviours, such as those related to the reduction of carbon emissions and compensations, but on the other hand to rethink the taxation of carbon and plastic.
On a strictly social level, companies will begin to increasingly assume policies of humanitarian aid and to combat social inequalities, starting with new forms of tax provision for charitable giving, applying tax rules to new forms of labour organisation and encouraging the activity of foundations pursuing a relevant social purpose.
The key element in these two aspects is the ability to closely follow the evolutions that are taking place. Basically, the relationship between facts and law is complex and continuous, requiring great flexibility and attention to the necessary tax neutrality of the solutions.
The novelty of the “G”
Besides these two aspects whose evolution has been intense, a new element, Governance, has to be included in compliance, either by the model of governance of sustainability, but also by the governance of the company itself, which has to comply with criteria of good business conduct. Thus, the way how the management is structured, the relationships between the employees of the company, its strategy of remunerations, but also the policy of protection of whistle-blowers, the mechanisms of identification of financial infringements or corruption situations, as well as the training of employees on a responsible business conduct, come under special scrutiny.
From a tax perspective, the existence of tools to build a tax reputation will be of particular importance. On the Government’s side, the quantification of these objectives is even more relevant when it is known that the level of tax revenue collection is closely related to the amount of public investments made – generating a perception of tax justice -, but also due to its relevance in determining a certain form of compliance with obligations before society (among which are those of paying taxes and collaborating with the tax authorities). It seems clear that the taxpayers’ collaborative relationship with the Administration is expanding and becoming more robust and finding new fields of intervention, leaving behind a simple corporate and social responsibility aspect.
In concrete terms, companies must comply with the preparation of tax compliance reports (in material and formal terms), but also with the preparation and compliance with tax codes of conduct. These should be based on the UN Sustainable Development Goals, the OECD Due Diligence Guidance for Responsible Business Conduct, the standards of the International Business Council of the World Economic Forum, the GRI (Global Reporting Initiative) guidelines and within the European Union the Code of Conduct for Business Taxation. However, there is no general model to be implemented regarding the previously mentioned determinations. In conclusion, companies will have to draft their own fiscal codes of conduct, requiring the support of specialised technicians who are familiar with international regulations and the specific circumstances of the company and who are able to find a solution that builds company credibility and balance in their determinations.
Diogo Feio
February 2023