The social element of ESG principles typically provides a perspective that focuses on the human aspects of business, such as human rights, labor standards, social justice, pay equity, product safety, community engagement, and diversity, equity, and inclusion. Organizations that want to demonstrate a commitment to their people and the community (in addition to profit) can use the lens of tax to help meet those goals. Monetary incentives like tax credits and nonmonetary mechanisms in the form of tax governance and transparency provide an opportunity for organizations to better share their purpose and build trust with key stakeholder groups. Using tax as a way to bring sustainable value to various stakeholders is becoming more common as ESG policies take into account tax policy, tax regulatory requirements, and tax reporting frameworks.
Tax policy
U.S. tax law includes numerous tax credits and other benefits that are meant to steer businesses toward engaging in more environmentally or socially beneficial behavior. Some of the tax provisions that fit into the social policy mold have existed for decades, while others are a product of recent legislation. Following are some examples:
- Inflation Reduction Act of 2022. Includes energy tax credit provisions that incentivize activities supporting certain social policies such as paying workers a fair living wage, training the future workforce, and investing in low-income communities.
- Coronavirus Aid, Relief, and Economic Security Act of 2020. Provides tax incentives, like the employee retention credit, to help businesses stay afloat and protect the jobs and pay of those still in the workforce.
- Tax Cuts and Jobs Act of 2017. Provides tax benefits for qualified opportunity zones designed to spur investment in economically distressed communities.
- Other federal tax incentives. Long-standing tax incentives support certain social policies including the deduction for charitable contributions, the work opportunity tax credit, and affordable housing incentives.
- State tax incentives. Incentivize certain behavior that supports social policies, such as tax credits for placing certain business activities in underserved communities.
Crowe observation
Organizations that take advantage of tax benefits that support social policies can create a win for their employees, the community, and their businesses.
Regulatory requirements and reporting frameworks
As more regulations and reporting frameworks related to ESG surface, tax is being included as a component. From a regulatory and rating agency perspective, disclosing tax payments, effective tax rates, and good tax governance practices provide a lower risk profile for potential investors. Outside of capital markets, reporting frameworks also support certain public and political interests that are focused on companies being good corporate citizens that pay their fair share in taxes.
Regulatory examples
- Dodd-Frank Act of 2010 (Section 1504). Section 1504 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 requires the Securities and Exchange Commission (SEC) to implement rules to require SEC-registered resource extraction issuers to disclose payments made to the U.S. government or foreign governments for the commercial development of oil, natural gas, or minerals. The required disclosures include income taxes paid on corporate profits, income, and production. The SEC rules implementing Section 1504 were finalized in 2020.
- European Union (EU) country-by-country reporting directive (2021/2101). Will require certain multinational enterprises operating in the EU to make public certain tax information related to its operations.
Reporting framework examples
Being more transparent regarding tax payments and tax practices can provide reassurance to community stakeholders and can communicate that organizations are not just a part of, but are also contributing to, the overall benefit of society.
Crowe observation
Read about the importance of tax transparency and governance in “ESG: The “G” of tax.”
Looking ahead
Tax credits and incentives can be used to encourage organizations to engage in certain behaviors that policymakers have determined are beneficial for society. By fostering businesses directly investing in society in ways that are consistent with government policymakers’ social policies, the government is essentially cut out of the equation. Rather than companies paying taxes to the government and the government redirecting tax revenue collected to support social policies (which will cost taxpayers more time and money), dollars spent in alignment with tax incentives have a direct positive impact on communities and support social policies.
Stakeholders continue to monitor how an organization approaches its treatment of taxation as a way to assess both the risk and sustainability of the organization. Given the increasing number of tax incentives available and the increase in tax reporting requirements, now is the perfect time for business leaders to better understand their tax obligations and processes while applying a “social” lens, so they are able to truly tell the story of their organization’s positive contributions to society.
