Taxation – An important part of the ESG agenda

JULY 6 — Economic disruptions caused by climate change, social effects of an aging population and demand for greater transparency are among the current global issues facing businesses which are as critical as the pandemic we have experienced over the last two years.

So, what is ESG? The term ESG refers to three broad pillars of Environmental, Social and Governance, all of which have become increasingly important to assess businesses. As ESG considerations are becoming more central in the way business is conducted, tax plays a significant role in each component of ESG.

Tax & the ‘E’ in ESG

Generally, the environmental factor in ESG includes climate change risks, carbon emissions, energy efficiency, pollution, water and waste management, use of natural resources, clean energy and technologies. Examples of how tax aspects can fit within the environmental factor to minimise an organisation’s adverse impact on nature are carbon pricing mechanisms, carbon taxes and green tax incentives.

During the tabling of the 12th Malaysia Plan, 2021-2025, Prime Minister Datuk Seri Ismail Sabri Yaakob has expressed commitment to make Malaysia to be a carbon neutral country as early as 2050. On October 29, 2021, the Minister of Finance announced in the 2022 Malaysian Budget proposals aimed at developing a sustainable economy, including the launch of the Voluntary Carbon Market (VCM), the provision of matching fund facility to help Small and Medium Enterprises in reducing their carbon footprint and the expansion of green technology tax incentives.

Under the advocacy of Bursa Malaysia (Bursa), the VCM is a platform for carbon credit trading between green assets owners and other entities transitioning towards low-carbon practices. There is a fixed cap on the Greenhouse Gas (GHG) emissions permitted for each business and low carbon emitters may sell their excess credits to companies that exceed the cap. To set up a VCM that is able to serve a wide-variety of participants in the market based on established rules or international best practices, Bursa signed a memorandum of understanding with Verra on May 12, 2022. Verra as a non-profit organisation is a leading international standard setter that manages the Verified Carbon Standard Programme, the world’s largest GHG crediting programme.

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

With respect to green tax incentives, schemes such as the Green Tax Investment Allowance (GITA) and Green Income Tax Exemption (GITE) seek to encourage the purchase and use of green technology as well as green technology services and systems. These incentives focus on renewable energy such as solar, hydro, etc. and was expanded to include rainwater harvesting system projects. To be eligible for the GITA/GITE incentives, applications have to be received by MIDA from January 1, 2022 to December 31, 2023.

Tax & the ‘S’ in ESG

On the social metric of the ESG, amongst others includes labour practices, relations and working conditions, workplace diversity and inclusion agenda, human rights, employee health, safety and wellbeing, economic contributions to communities and talent management. Organisations must be aware of the tax aspects within the social metric to promote fairness in the society, for instance socially responsible tax practices and contributions to public funds through tax payments.

Generally, cash contributions made to the Government, State Government and local authorities are eligible for 100 per cent tax deduction from an organisation’s aggregate income. Whereas a tax deduction is available for cash contributions made to any organisation, institution and fund approved by the Inland Revenue Board (IRB), limited to 10 per cent of the organisation’s aggregate income. A tax deduction is also available for cash or in-kind contributions made to the projects of national interest approved by the Minister of Finance (MOF), e.g. the Covid-19 Relief Fund subject to the same restriction. The list of approved organisation, institution and fund can be obtained via the IRB website at

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

Tax & the ‘G’ in ESG

For governance, this component in ESG commonly includes board diversity, compensation, composition, renewal and independence, business ethics, accountability for responsible risk tolerance, strategy, policies and reporting and whistleblower schemes. The tax aspects within the governance component focuses on the processes for decision making, reporting and ethical behaviour, particularly tax transparency, tax strategy aligned to ESG policy and monitoring and assessing supply chains for tax compliance. More importantly, organisations need to be able to provide reliable tax information that is required for ESG ratings.

As part of the pre-requisite for companies to participate in government procurement, it is also announced by the Minister of Finance in the 2022 Malaysian Budget that a Tax Compliance Certificate be issued by the IRB. Additionally, the IRB launched a Tax Corporate Governance Framework (TCGF) on March 1, 2022 as part of the IRB’s initiative towards adopting a co-operative tax compliance process that is both fair and effective. Subsequently, the IRB issued a media release on April 15, 2022 announcing the publication of the TCGF and accompanying guidelines.

There are six key principles of a strong TCGF, namely establishment of a tax strategy; testing; comprehensive application; assignment of responsibilities; documentation of governance and assurance provided. Currently, participation in the TCGF Programme is on a voluntary basis and the proposed timeframe from the date of acceptance of the participant to the conclusion of assessment by the IRB is estimated to take 8-12 months. Upon participation in the TCGF Programme, participants will benefit from reduced scrutiny of compliance activities, expedited tax refunds, assignment of a dedicated tax officer and accorded priority consideration.

In conclusion, businesses that fail to connect the ESG agenda with tax related considerations may find themselves dealing with unexpected costs. ESG can be a source of risk but ESG can also be a source of opportunity by drawing upon tax measures as the important tool for businesses to determine and meet ESG standards. Therefore, if a business wishes to ensure that its ESG credentials are good, it is important to clearly articulate the adoption of a tax policy which is aligned with its ESG agenda. Ultimately, ESG is a shared responsibility. Businesses must take action today for future generations tomorrow!

Source: Malay Mail

About the author:

Christy Tan
Managing Consultant of Tricor Taxand Sdn Bhd

For more information, please contact:

Celine See
Tricor Services (Malaysia) Sdn Bhd
Director, Business Development

Tel: +6 03 2783 9191
Email: [email protected]

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