The Critical Role of Tax in ESG Reporting: A Guide for UAE Businesses
For years, corporate reporting has been dominated by a single narrative: financial performance. Today, that narrative is expanding dramatically. Investors, customers, employees, and regulators are no longer just asking “How much profit did you make?” They are asking, “How did you make it?” This question is the driving force behind the global rise of Environmental, Social, and Governance (ESG) reporting. ESG provides a framework for evaluating a company’s performance on a broader set of metrics that go beyond the bottom line to encompass its impact on the planet, its people, and its principles.
- The Critical Role of Tax in ESG Reporting: A Guide for UAE Businesses
- Part 1: Deconstructing ESG - Locating Tax within the Framework
- Part 2: The Core of the Issue - The Global Push for Tax Transparency
- Part 3: Practical Steps to Integrating Tax into Your ESG Report
- Part 4: The Technology Backbone for Transparent Reporting
- Integrating Tax into Your ESG Story: How EAS Can Guide You
- Frequently Asked Questions (FAQs) on Tax and ESG
- Ready to Tell Your Tax Story?
Within this new paradigm, tax has undergone a profound transformation. Once relegated to the back pages of the annual report and discussed only in terms of its impact on earnings per share, tax is now taking center stage as a critical ESG issue. It is a powerful indicator of a company’s social contribution and a key test of its corporate governance. A company’s approach to its tax obligations is no longer a private financial matter; it is a public statement about its character and its role in society. For businesses in the UAE, understanding and articulating the link between tax and ESG is not just a matter of global best practice—it is a strategic necessity for building trust, managing risk, and creating sustainable value in a world that demands transparency.
Key Takeaways on Tax and ESG
- Tax is a Core ESG Metric: A company’s tax strategy and payments are a key indicator of its performance under the ‘Social’ and ‘Governance’ pillars of ESG.
- The ‘S’ in ESG: Social Contribution: Paying taxes is one of the most significant ways a company contributes to the societies in which it operates, funding essential public services.
- The ‘G’ in ESG: Governance and Ethics: A transparent and responsible tax strategy is a hallmark of strong corporate governance. An aggressive or opaque approach is a major governance red flag.
- Transparency is the New Norm: Stakeholders are demanding to know not just how much tax is paid, but where it is paid and how a company manages its tax affairs.
- “Total Tax Contribution” (TTC): Companies are moving towards disclosing their TTC, which includes all taxes paid and collected (not just Corporate Tax), to provide a complete picture.
- It Starts with Strategy: A formal, board-approved tax strategy document is the foundation of a credible ESG narrative on tax.
Part 1: Deconstructing ESG – Locating Tax within the Framework
To understand the role of tax, it’s essential to see how it connects to each pillar of the ESG framework.
Environmental Pillar (E)
The link here is primarily through environmental taxes and incentives. While the UAE does not currently have a broad-based carbon tax, this is a growing global trend. For ESG reporting, companies can discuss:
- Excise Taxes Paid: Reporting on excise taxes paid on carbonated drinks or tobacco products, which are designed to discourage consumption for health and environmental reasons.
- Tax Incentives for Green Investments: If a company benefits from any tax reliefs related to investments in renewable energy, waste reduction, or sustainable practices, this is a powerful ESG data point.
Social Pillar (S)
This is where the connection becomes powerful. A company’s tax payments are a direct contribution to the social fabric.
- Funding Public Services: The Corporate Tax and VAT a company pays contribute directly to government revenues used for public infrastructure, education, healthcare, and security. This is the ultimate “social good.”
- The “Fair Share” Narrative: There is a strong public and investor sentiment that companies should pay their “fair share” of tax in the jurisdictions where they generate value. A tax strategy that aggressively shifts profits to low-tax jurisdictions is viewed negatively from a social perspective.
- Employment Taxes: While the UAE doesn’t have personal income tax, other contributions related to employees (e.g., pension contributions for nationals) are part of the company’s social impact.
Governance Pillar (G)
This is the most direct and critical link. An organisation’s approach to tax is a direct reflection of its governance quality.
- Tax Strategy and Risk Management: A well-governed company has a formal, board-approved tax strategy. It defines the company’s appetite for tax risk and the principles that guide its tax planning. The absence of such a document is a governance failure.
- Board Oversight: Good governance requires that the board of directors has oversight of tax matters and understands the company’s tax profile and its most significant tax risks.
- Transparency and Disclosure: The willingness to be transparent about tax policies and payments is a key indicator of ethical governance. Hiding behind complex, opaque structures is a major red flag for investors. This is where our external audit services can provide assurance to stakeholders.
Part 2: The Core of the Issue – The Global Push for Tax Transparency
The days when a company’s tax affairs were a black box are over. A global movement, driven by organizations like the OECD and fueled by public demand, has pushed tax transparency to the top of the corporate agenda.
This movement is about answering a simple question: Where do multinational companies make their profits, and where do they pay their taxes?
Initiatives like the OECD’s Base Erosion and Profit Shifting (BEPS) project, which introduced Country-by-Country Reporting (CbCR), have forced large multinationals to report this information to tax authorities. Now, the push is to make this information public.
The Total Tax Contribution (TTC) Framework
To tell a complete story, leading companies are voluntarily reporting their “Total Tax Contribution.” This goes beyond just Corporate Tax to include all the taxes a company pays and collects.
| Tax Category | Definition | Examples |
|---|---|---|
| Taxes Borne | Taxes that are a direct cost to the company, impacting its P&L. | Corporate Tax, Customs Duties, Irrecoverable VAT, Property Taxes, Employer Social Security. |
| Taxes Collected | Taxes the company collects on behalf of the government from its customers and employees. | VAT, Excise Tax, Employee Payroll Taxes (in other countries). |
By reporting the TTC, a company provides a holistic view of its economic contribution, which is a much more powerful narrative than just reporting a single corporate tax number.
Part 3: Practical Steps to Integrating Tax into Your ESG Report
For a UAE business looking to enhance its ESG reporting, here is a practical roadmap for integrating tax.
Step 1: Develop and Document Your Tax Strategy
This is the foundation. Work with your leadership team and advisors to create a formal Tax Strategy Document. It should be approved by the board and clearly state:
- The company’s commitment to compliance.
- The approach to tax planning and the level of risk the company is prepared to accept.
- The governance framework for managing tax.
- The company’s approach to engaging with tax authorities.
Our business consultancy services can facilitate the development of this critical governance document.
Step 2: Calculate Your Total Tax Contribution (TTC)
Work with your finance team to gather the data for all taxes paid and collected during the year. This requires a well-organized accounting system where different tax types are clearly segregated.
Step 3: Draft Your ESG Narrative on Tax
In your ESG or sustainability report, create a dedicated section for “Tax Contribution and Governance.” This section should:
- Publish Your Tax Strategy: Be transparent about your principles.
- Present Your TTC Data: Show the numbers in a clear table, perhaps with a geographical breakdown.
- Provide Context: Explain what the numbers mean. Connect your tax payments to your role in supporting the UAE economy.
- Describe Your Governance: Explain how the board oversees tax and how you manage tax risks. An internal audit of tax processes can be a strong proof point here.
Part 4: The Technology Backbone for Transparent Reporting
Credible ESG reporting is impossible without credible data. Your ability to accurately calculate your TTC and provide assurance on your tax governance depends entirely on the quality of your financial systems.
A modern accounting platform like Zoho Books is essential. It provides:
- Detailed Tracking: The ability to track different tax liabilities (VAT, Customs, Corporate Tax) separately and accurately.
- Data Integrity: A single source of truth for all financial data, ensuring that the numbers in your ESG report reconcile with your audited financial statements.
- Reporting Capabilities: The tools to generate the detailed reports needed to calculate your TTC and provide data for your ESG narrative. Our expertise in accounting system implementation ensures your system is set up for this from day one.
Integrating Tax into Your ESG Story: How EAS Can Guide You
Excellence Accounting Services (EAS) is uniquely positioned to help you navigate the intersection of tax and ESG. We provide the strategic advice and technical support to build a credible and compelling tax transparency narrative.
- ESG Tax Strategy Development: We help you articulate and document a board-level tax strategy that aligns with your company’s values and your stakeholders’ expectations.
- Total Tax Contribution Reporting: Our experts can work with your finance team to develop a methodology for calculating your TTC and prepare the disclosures for your ESG report. This is a key part of our modern financial reporting services.
- Strategic CFO Services: Our outsourced CFO services provide the high-level governance and strategic oversight to ensure tax is fully integrated into your corporate responsibility framework.
- Governance and Controls: We help you design and implement a robust tax control framework, giving your board and investors confidence that tax risks are being managed effectively.
- Holistic Tax Advisory: We provide comprehensive advice on Corporate Tax and VAT, ensuring your underlying compliance is solid before you begin your transparency journey.
Frequently Asked Questions (FAQs) on Tax and ESG
While comprehensive ESG reporting itself is becoming mandatory for listed companies, the specific disclosure of a detailed tax strategy is currently a voluntary best practice. However, it is rapidly becoming a key expectation from international investors and rating agencies, making it a competitive necessity.
On the contrary, transparency often reduces risk. A clear, well-reasoned tax strategy that is publicly available demonstrates good governance and shows the FTA that you are managing your tax affairs proactively. It builds trust and can lead to a more collaborative relationship with the tax authorities.
Your story is about transparency and Total Tax Contribution. You can explain *why* you are in a free zone (e.g., as a logistics hub creating jobs). Then, you can report your TTC, which will still be significant. It will include customs duties paid, VAT collected on mainland sales, and any other fees and levies, proving you still make a substantial economic contribution.
The definition of shareholder value is changing. While a low tax rate is good, a tax rate that is *sustainably* low and based on a responsible strategy is much better. An artificially low rate achieved through aggressive, high-risk schemes can be wiped out by one tax audit, leading to massive penalties and reputational damage that destroy shareholder value.
Legitimate tax planning uses established laws and incentives as they were intended (e.g., claiming capital allowances, setting up in a free zone for genuine commercial reasons). Aggressive avoidance often involves creating complex, artificial structures with little commercial substance, designed solely to exploit loopholes and shift profits away from where the real economic activity occurs. Investors view the latter as a major governance risk.
The principles are scalable. An SME may not need a 20-page report, but having a simple, one-page documented tax policy, and being able to explain your tax payments to your bank or a potential buyer, is a sign of a well-managed business. It builds credibility and prepares you for future growth.
Your transfer pricing policy is a core part of your ESG story. A responsible, well-documented policy based on the arm’s length principle demonstrates that you are committed to aligning your profits and taxes with where your economic activity actually takes place. This is a powerful counter-narrative to accusations of profit shifting.
It should be a collaborative effort, typically led by the CFO or Head of Tax, working closely with the Head of Sustainability or Corporate Affairs. The board of directors, particularly the audit committee, should review and approve the final disclosures.
Not necessarily. While the quantum of tax paid is important, the governance behind it is equally crucial. A company that pays a lot of tax but has a chaotic, high-risk approach with frequent disputes may score lower on governance than a company that pays less tax but has a transparent, well-managed, and sustainable tax strategy.
Many leading multinational corporations, particularly in Europe, have been pioneers in this area. Looking at the sustainability or annual reports of companies like Vodafone, Shell, or Unilever can provide excellent examples of how to structure a tax transparency section, even if their tax profiles are more complex than a typical UAE business.
Conclusion: Tax as a Language of Trust
In the new era of corporate responsibility, tax has become a language of trust. The way a company manages and communicates its tax affairs speaks volumes about its integrity, its ethics, and its commitment to the society it serves. For businesses in the UAE, the journey towards tax transparency is an opportunity to build a deeper, more resilient relationship with all stakeholders. By embracing a proactive approach, documenting a clear strategy, and reporting honestly on their contribution, companies can transform their tax function from a compliance obligation into a powerful testament to their role as a responsible corporate citizen.
