The Weapon of Choice …?! – ESG & Transfer Pricing

There is no doubt that Environmental, Social and Governance (ESG) topics are constituting the most severe challenges for humankind and our entire planet in the decades to come. ESG-related problems are simultaneously global and local, extraordinarily complex, exceedingly difficult to tackle, and addressing them may trigger unexpected or undesired side effects that subsequently need to be dealt with. Nonetheless, ignoring these problems is no option either! In 1987, the Brundtland Report

https://digitallibrary.un.org/record/139811?v=pdf

had laid the foundation for the slow and stepwise movement towards today’s sustainable development initiatives and policies.

Not surprisingly, in tax and transfer pricing ESG has also become a current topic. And it seems obvious that the pricing of intercompany transactions in line with the arm’s length principle can directly be linked to the Governance feature of ESG, and fair and equitable development opportunities for all countries.

Moreover, in a tax transparency context, the GRI 207 Standard

https://www.globalreporting.org/standards/standards-development/topic-standard-for-tax/

came into effect in 2021, while the EU Commission had introduced the public Country-by-Country Reporting Directive 2021/2101

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32021L2101

(see also:? https://www.zew.de/publikationen/leveling-the-playing-field-a-qualitative-and-quantitative-examination-of-the-eu-directive-on-public-country-by-country-reporting )

and, more recently the Corporate Sustainability Reporting Directive (CSRD):

https://finance.ec.europa.eu/capital-markets-union-and-financial-markets/company-reporting-and-auditing/company-reporting/corporate-sustainability-reporting_en

As the ESG subject area is extremely broad and diverse, buzzwords are (unfortunately) ready at hand. And with everyone being (more or less) affected and/or having an opinion on ESG, it seems sometimes hard to see whether, to what extent and how effective and efficient tax or transfer pricing measures can actually be identified and implemented to contribute to relevant solutions in addressing ESG issues.

If we consider ESG in a transfer pricing context, i.e., beyond the Governance aspect mentioned above, a number of questions arise:

• Can ESG and/or related initiatives in an MNE group be considered as a shareholder activity, a service provided or an intangible in its own right, enhancing the company’s reputation and value of the corporate brand?
• How can ESG costs be identified, where are these costs borne and by whom?
• Who is benefiting from ESG and/or related initiatives in an MNE group?
• What might characterize ESG as an intangible or, alternatively, a comparability factor?
• What guidance is provided by the OECD on ESG in tax & transfer pricing?
• Do current OECD TP Guidelines provide adequate guidance for corporate taxpayers and tax administrations to manage ESG topics in transfer pricing?
• What is the position of tax authorities in countries towards ESG, in terms of tax-deductible expenses (if, for example, received as a service charge or a royalty, or a product price element in tangible goods transactions) or taxable income collection from services or intangibles provided by affiliated companies in an MNE group?

Together with Nathalie Allen (EY), Paolo Valerio Brabantini (Fincantieri) and excellently moderated by Mark Feldman (EY), I had the pleasure to discuss these and other questions on our panel – thanks to an invitation from Michele Costa (Informa Connect). We could have easily continued our discussion beyond the allotted time … ??

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PS: Is ESG a topic for Henkel?

At Henkel, sustainable product development is an integral part of the Corporate Strategy, as shown by this recent example from our Adhesive Technologies business unit:

https://www.henkel.com/press-and-media/press-releases-and-kits/2024-05-13-the-whole-package-henkel-presents-sustainable-product-innovations-at-drupa-1959264

Moreover, the Sustainability Report covers the key ecological and social developments of Henkel group in fiscal 2023. The contents of this report reflect the Henkel-relevant and material challenges of sustainable development. As early as in 1992, Henkel published its first Environment Report, which the company has consistently developed and refined into today‘s Sustainability Report. This report has now been published annually for more than 30 years. Together with the Henkel Annual Report, it makes up an integrated corporate reporting concept:

https://www.henkel.com/sustainability/sustainability-report