New climate legislation is straining tax departments

Working in a corporate tax department is about to get even more complicated, if you can believe it. Some climate related-initiatives in the US and the EU, such as the Inflation Reduction Act, the Infrastructure Investment and Jobs Act, and the NextGenerationEU fund, create opportunities for companies to win grants and receive tax breaks. Other climate legislation, like the EU’s Carbon Border Adjustment Mechanism, levies heavy penalties on companies that fail to comply. Tax departments play a vital role in helping multinationals juggle both. But, as EY experts pointed out during a recent roundtable discussion, it’s getting hard for them to keep up.

Companies need broader strategies in response to climate initiatives. The broad scope of climate and ESG regulations is forcing companies, especially multinationals operating in multiple jurisdictions, to take a much more holistic approach to strategy, said Katy Frankel, Americas tax leader and partner at EY.

There’s “such a greater global entity-level perspective necessary to comply with climate-related requirements,” she said. It’s “causing multinationals to do a global evaluation of their supply chain, their reporting structures, their operational processes, literally across the board,” Frankel continued, in order to improve their tax treatment while staying in compliance.

But the complexity and shifting nature of the legislative landscape makes it more difficult for companies to make long-term decisions, such as which jurisdiction they should build new plants in, said Ilona van den Eijnde, senior manager of global trade and sustainability services at EY. “It’s difficult for businesses to validate [such] decisions going forward because the rules are changing so much,” she said.

Tax departments are feeling the strain. Tax plays a vital role in both complying with climate regulations and benefiting from climate initiatives. But at some companies, EY experts said, tax departments are under strain.

The welter of climate legislation is itself burdening clients’ tax departments, Frankel said, which are already “short in resources, both human and monetary.” Clients, she said, are assessing which aspects of tax they should keep in house and which they should outsource or co-source.

Tax functions at multinationals also are having trouble accessing the entity-level data needed for compliance. “Most companies do not have their financial and operational information set up on an entity level basis” but by segment, department, or region, Frankel said. “And so tax departments are finding the systems to not be dynamic enough to get them the jurisdictional and even entity-level information that’s being required.”

In some companies, she said, tax is “often still considered a back-office function rather than a key operational player.” That can cause problems when, for example, tax needs support from IT, but other departments’ requests are prioritized. “We’re seeing that start to change, but that’s still a really big concern at tax departments right now,” she said.