(Is) Taxing the purpose ?

With the definition of purpose and responsibilities of businesses evolving across the globe, tax policy will be a critical component in acting as an enabler or a disruptor or these business initiatives. Management theory has for long realized the value of "stakeholders" and the wider definition of "purpose" of business. Tax policy needs to follow suit. As responsible businesses assume the role of sustainability champions across the globe, tax considerations need close consideration. The UAE has taken a lead in this regard by saying that the fundamental basis of calculating taxable income of a business will be based on the Financial Statements prepared based on acceptable and recognized Accounting Standards.

The challenges businesses may be facing in aligning sustainability initiatives with tax considerations are complex and have legal, financial, and ethical aspects to consider. Here are some possible solutions and considerations:

1. Engage with Tax Authorities: To address the issue of whether sustainability expenses should be considered as shareholder costs, engage in a dialogue with tax authorities in different jurisdictions. Explain the strategic importance of sustainability in today's business landscape and how it aligns with the changing nature of "purpose" for businesses. Seek their guidance and potentially negotiate specific rulings or agreements for these expenses.

2. Transfer Pricing Guidelines: Review the OECD Transfer Pricing Guidelines to understand their stance on allocating and recharging sustainability expenses within multinational enterprises. The guidelines may not have specific provisions for sustainability expenses, but they do emphasize arm's length principles, which means that expenses should be allocated in a manner consistent with what unrelated parties would do in a similar situation.

3. Document the Business Case: Ensure that you have a robust business case for sustainability initiatives, outlining how they create long-term value and benefit the business. This documentation can be vital when discussing the legitimacy of these expenses with tax authorities.

4. Allocate Expenses Fairly: When recharging costs to intra-group entities, consider using allocation keys that reflect how the sustainability initiatives benefit each entity. For example, you can allocate costs based on revenue generated, number of employees, or carbon emissions reductions attributable to each entity.

5. Global Best Practices: Look for examples of how tax jurisdictions in different countries treat sustainability expenses. While there may not be explicit guidelines in many cases, some jurisdictions might be more favorable to recognizing sustainability costs as legitimate business expenses, especially if they align with government policies promoting sustainability.

6. Local Compliance: Adapt your approach to local compliance requirements and regulations in each country. Some countries might have specific incentives or deductions for sustainability initiatives, and you should take advantage of these when applicable.

7. Engage with Industry Peers: Collaborate with other multinational enterprises and industry associations to share best practices and lobby for a more standardized approach to recognizing sustainability expenses.

Remember that the perception of sustainability in business is evolving, and there's a growing recognition of its importance. Make a compelling case for how sustainability initiatives contribute to the long-term success of the business, and work towards gaining the necessary support from both your internal teams and external stakeholders, including tax authorities.