Tax — An Important Part of the ESG Agenda — Christy Tan

JULY 6 — The economic disruption caused by climate change, the social effects of an aging population and the demand for greater transparency are some of the current global issues facing businesses that are as critical as the pandemic we have experienced over the past two years.

So what is ESG? The term ESG refers to three main pillars of environment, social and governance, all of which have become increasingly important in evaluating companies. As ESG considerations become increasingly central to doing business, tax plays an important role in every component of ESG.

Taxation and the “E” in ESG

Generally, the environmental factor in ESG includes risks related to climate change, carbon emissions, energy efficiency, pollution, water and waste management, use of natural resources, energy and clean technologies. Examples of how fiscal aspects can integrate with the environmental factor to minimize an organization’s negative impact on nature are carbon pricing mechanisms, carbon taxes and green tax incentives.

When tabling the 12th Malaysian Plan, 2021-2025, Prime Minister Datuk Seri Ismail Sabri Yaakob pledged to make Malaysia a carbon neutral country by 2050. On October 29, 2021, the Minister of Finance announced in the Malaysia’s 2022 budget proposals to develop a sustainable economy, including the launch of the Voluntary Carbon Market (VCM), the provision of a matching fund to help small and medium enterprises reduce their carbon footprint and the expansion tax incentives for green technologies.

Under the Bursa Malaysia (Bursa) umbrella, the VCM is a carbon credit trading platform between owners of green assets and other entities transitioning to low-carbon practices. There is a fixed cap on permitted greenhouse gas (GHG) emissions for each company, and low-carbon emitters can sell their excess credits to companies that exceed the cap. To establish a VCM capable of serving a wide variety of market players based on established rules or international best practices, Bursa signed a Memorandum of Understanding with Verra on May 12, 2022. Verra as an organization nonprofit is a leading international standards body that operates the Verified Carbon Standard program, the largest GHG crediting program in the world.

To align with Malaysia’s ambitious net zero targets, the introduction of carbon taxes should be considered. Typically, the carbon tax, which is set at a fixed price per tonne of GHG emissions above permitted levels, is levied on industrial facilities. Such a tax would encourage businesses to adopt newer, cleaner technologies at an accelerated pace.

In terms of green tax incentives, programs such as Green Tax Investment Allowance (GITA) and Green Income Tax Exemption (GITE) aim to encourage the purchase and use of green technologies and green technology services and systems. These incentives focus on renewable energy such as solar, hydropower, etc. and have been expanded to include rainwater harvesting system projects. To be eligible for the GITA/GITE incentives, applications must be received by MIDA from January 1, 2022 to December 31, 2023.

companies that do not link the ESG agenda with tax considerations may find themselves facing unexpected costs. — Photo by Sayuti Zainudin

Taxation and the “S” in ESG

On ESG social metrics, among others, labor practices, working relationships and conditions, workplace diversity and inclusion agenda, human rights, health, employee safety and well-being, economic contributions to communities and talent management. Organizations should be aware of the tax aspects of social metrics to promote fairness in society, for example socially responsible tax practices and contributions to public funds through the payment of taxes.

Generally, cash contributions made to government, state government, and local authorities are eligible for a tax deduction of 100% of an organization’s overall income. Whereas a tax deduction is available for cash contributions made to any organization, institution and fund approved by the Inland Revenue Board (IRB), limited to 10% of the organization’s total income. A tax deduction is also available for cash or in-kind contributions made to projects of national interest approved by the Ministry of Finance (MOF), for example the Covid-19 Relief Fund subject to the same restriction. The list of approved organisations, institutions and funds can be obtained via the IRB website at https://www.hasil.gov.my/en/quick-links/services/donation/.

For in-kind contributions made to community projects/charities approved by the MOF to combat the Covid-19 pandemic, a tax deduction may be claimed from the company’s gross income equal to the amount of the contribution made from February 1 2020 through December 31, 2022. Contributors must submit an application to MOF for approval.

Taxation and the “G” in ESG

For governance, this component of ESG typically includes board diversity, compensation, composition, renewal and independence, business ethics, accountability for responsible risk tolerance, reporting and whistleblowing strategy, policies and systems. The tax aspects of the governance component focus on the processes of decision-making, reporting and ethical behavior, in particular tax transparency, tax strategy aligned with ESG policy and monitoring and evaluation of supply chains for tax compliance. Most importantly, organizations must be able to provide reliable tax information required for ESG ratings.

As part of the precondition for companies to participate in public procurement, the Minister of Finance also announced in the Malaysian Budget 2022 that a Tax Compliance Certificate will be issued by the IRB. Additionally, the IRB launched a Corporate Tax Governance Framework (TCGF) on 1 March 2022 as part of the IRB’s initiative to adopt a fair and efficient cooperative tax compliance process. Subsequently, the IRB issued a press release on April 15, 2022 announcing the release of the TCGF and accompanying guidelines.

There are six key principles of a strong TCGF, ​​namely establishing a tax strategy; test; complete application; distribution of responsibilities; governance documentation and assurance provided. Currently, participation in the TCGF program is on a voluntary basis and the proposed time from the date of participant acceptance to the conclusion of the IRB assessment is estimated to be 8-12 months. While participating in the TCGF program, participants will benefit from reduced scrutiny of compliance activities, accelerated tax refunds, assignment of a dedicated tax agent, and priority consideration.

In conclusion, companies that do not link the ESG agenda with tax considerations may find themselves facing unexpected costs. ESG can be a source of risk, but ESG can also be a source of opportunity by leveraging tax measures as an important tool for companies to determine and meet ESG standards. Therefore, if a company wishes to ensure that its ESG credentials are good, it is important to clearly articulate the adoption of a tax policy aligned with its ESG program. Ultimately, ESG is a shared responsibility. Companies must act today for future generations tomorrow!

*This article is written by Ms. Christy Tan (Management Consultant) of Tricor Taxand Sdn Bhd, an entity of the Tricor Group which is the leading business development specialist in Asia, with global knowledge and local expertise in the areas of business, corporate, investor, human resources. resources and payroll, and corporate trust and debt services. The Tricor group operates in 21 countries/territories and through a network of 47 offices. The opinions expressed here are the personal opinion of the author and she can be contacted at [email protected].

** This is the personal opinion of the author or publication and does not necessarily represent the views of Malaysian courier.

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