As a part of the European Green Deal, which came into force on 5 January 2023, the European Union (EU) adopted the Corporate Sustainability Reporting Directive (CSRD). The CSRD significantly expands the environmental, social and governance (ESG) reporting requirements for companies from 2024, and has implications for tax models and transfer pricing practices.

Introduction to ESG

ESG reporting aims to create a culture of transparency that provides stakeholders with access to the information they need to assess risks, make decisions, and better understand the effect of businesses on people and the planet. It enables investors, boards and other stakeholders to evaluate an organisation on a variety of sustainability factors rather than on financial profits and losses alone.


Reporting transparency, board composition, executive remuneration, employee renumeration, ethics and corruption, lobbying, tax structures, management structure, etc.


Climate change, scope 1, 2 & 3 emissions, water usage, biodiversity, energy usage, waste management, supply chain management, natural resource usage, etc.


DE&I, wage gaps, health and safety, human rights, child labour, consumer protectoin, data privacy, employee wellbeing, community relations, etc.

ESG Framework

By embedding an ESG framework within their core business strategy, organisations can mitigate risks, create new opportunities and generate value for all stakeholders. To comply with the CSRD, organisations must publish sustainability reports disclosing the information and metrics outlined in the European Sustainability Reporting Standards (ESRS).

By mid-2024, Ireland must transpose the CSRD into law and begin enforcing reporting requirements.

Timeline for reporting requirements:

  • Organisations with more than 500 employees: 01 January 2024
  • Organisation with more than 250 employees: 01 January 2025
  • Organisations with less than 250 employees: January 2026 (with a possible ‘opt out’ for small and medium-sized enterprises until 2028).

ESG and Tax

The ESRS are largely aligned with the Global Reporting Initiative, the voluntary international standards that formally incorporated tax models into sustainability reports. However, under the ESRS, all organisations will now be required to include tax reporting within their annual sustainability reports.

Organisations should disclose information about their tax governance, revenue from third-party sales, intra-group transactions with other jurisdictions, number of employees, tangible assets and corporate taxes paid on a country-by-country basis.

Tax is a key source of government revenue. It is central to the fiscal policy and macroeconomic stability of countries. Disclosing tax structures is a critical component of establishing good governance practices. A reputation for strong, transparent governance and a record of tax compliance indicates to stakeholders that the group is a “good” corporate citizen.

Sustainability reports will be publicly available, and companies will be expected to explain any negative or incomplete information. Otherwise, they could incur reputational damage as well as fines and penalties. Potential red flags that may require an explanation include, having recorded a high profit in a jurisdiction with a low headcount or having paid limited tax in a jurisdiction where high profits were recorded.

Under the ESRS, companies will also have to disclose data about their value chain - the full range of activities required within a business model to create a product or service - as well as provide information about how ESG practices influence value creation within a company or a wider group. Implementing ESG frameworks will therefore have implications on transfer pricing practices, and sustainability reports will need to include information on transfer pricing.

ESG and Transfer Pricing

Transfer pricing refers to the setting of prices of transactions involving the transfer of goods, services, capital or intangible assets between entities which are part of the same group. Under transfer pricing rules, organisations are expected to apply the “arm’s length principle” to transactions with related parties, i.e. the pricing that would have been applied if the parties were independent of each other and open market forces determined the outcome (price or margin).

The transfer pricing legislation has and will likely continue to become increasingly complex. Multinational corporations are facing greater scrutiny of their tax affairs, and the OECD’s Base Erosion and Profit Shifting (BEPS) agenda has also significantly impacted transfer pricing policies.

Many groups may not have considered the effect that ESG might have on transfer pricing models. However, policy efforts such as the ESRS aim to increase transparency around the effects of ESG on financial performance, so groups need to evaluate both their business operations and tax models to take ESG into account. They may also need to make changes to intercompany arrangements in order to achieve their sustainability objectives.

The OECD Transfer Pricing Guidelines have not yet provided best practice for integrating ESG into transfer pricing models, especially when it comes to comparability analysis which forms the foundation of the arm’s length principle.  In the future, to find reasonable comparisons to apply the most appropriate transfer pricing method, groups will likely be required to assess each entity’s ESG strategy and reporting outcomes. Currently, however, the understanding of the interplay between transfer pricing and ESG - and the development of policies and practices related to this interaction - is still at a nascent stage.

As a result of on-going conversations around sustainability and transfer pricing, companies should assess both the opportunities created by, and potential challenges that may arise from, the interaction between ESG frameworks and transfer pricing models.

The Impact of ESG on Transfer Pricing

Identifying and mitigating any risks brought about by changes to either the value chain or tax model, is vital to ensuring that a group’s ESG strategy fits across all group entities. Below, we’ve detailed some of the effects that the new ESG landscape may have on transfer pricing positions, especially for areas that may require immediate attention before companies produce their first sustainability report.

Snapshot of TP impact and potential challenges

Snapshot of transfer pricing impact

Intercompany Services

Taking a holistic approach and having a group ESG effort creates the opportunity to gain a unique advantage over competitors. However, organisations need to develop a clear framework that outlines who in the group sets the ESG agenda as well as the cost model for implementing ESG strategy.

Groups may have to make additional investments so that their transfer pricing models comply with new ESG frameworks. They will need to determine who bears the cost and controls the risks associated with implementing this framework. For instance, if the head office develops and implements a group-wide ESG framework, it would be providing a valuable service benefitting other group entities, and would therefore need to be appropriately remunerated.

Before implementing an ESG framework, groups need to clearly identify the beneficiaries of these intra-group services as well as any new intangible benefits resulting from them. Any entity that benefits from the framework should bear a portion of the cost. Separate considerations would need to be given as to whether any of these activities would constitute shareholder activities, i.e. activities performed solely because of ownership interest and not benefitting the group entities themselves.


Implementing an ESG framework could require a change in the key functions and risk profile within the group’s supply chain and, accordingly, may result in new or repositioned value creation roles within the group.

As transfer pricing models have often been designed to help groups enhance cost and tax efficiencies, existing supply chains may not be agile enough to make optimal use of the green incentives now offered by a number of governments. The transfer of functions and risks may lead to reallocation of profit centres among group entities. Such profit-reallocation needs to be at arm’s length from the perspective of each restructured entity, depending on their functional profile, risk profile and the benefits derived.

Groups will have to determine the best methodology for valuing and allocating any restructuring costs and efforts that result from aligning with and implementing ESG frameworks.

Intellectual Property (“IP”)

As businesses work to develop innovative solutions to challenges around sustainability and invest in ESG-driven R&D, they are likely to develop new technologies and concepts that form the basis for valuable IP, which would help the group generate royalty-related revenues.

As investing in sustainability also affects the group’s reputation, implementing an ESG framework can contribute to IP and company value, such as sustainability-linked marketing IP including brand and trademarks. Groups should also understand and account for the differences in B2C and B2B trading and the value added when adapting a more sustainable business model. For instance, the relative importance of reputation differs between B2C and B2B customers and should be factored into any transfer pricing analysis.

Intra-Group Financing

Given the increasing interest in ESG from a variety of external stakeholders, investees need to demonstrate sustainable business practices to retain public goodwill and attract funding. At the same time, investors need to demonstrate that they are making sustainable investments into organisations with strong ESG ratings.

The ESG framework also brings a huge change in financing infrastructure, where financial institutions are issuing sustainability-linked bonds (“green bonds”) and credit rating agencies have begun incorporating ESG metrics into their assessments when assigning credit ratings. A comparison of interest rates between Green bonds and traditional bonds - a spread referred to as ‘Greenium’ - suggests that investors are factoring in sustainability performance targets and ESG KPIs when determining interest rates.

Groups should consider whether their current business models will enable them to access the growing suite of green financing opportunities into the future.

Identifying arm’s length interest rates for impact-linked financial structures will be challenging. Similarly, pricing the changes in interest with a downwards or upwards adjustment as a result of hitting or missing an ESG target is uncharted territory, and companies will need to navigate it carefully.


It is increasingly important that groups move towards adopting sustainable business models and follow good governance while doing so. These practices include transparency around reporting the progress of ESG initiatives as well as compliance with reporting requirements. Transfer pricing regulations also endorse enhanced tax transparency by improving access to information regarding global allocation of income.

Begin Your Sustainability Review Now

The new reporting requirements under the CSRD compel companies to carefully consider their current ESG strategy and transfer pricing models. To ensure that they are using the most appropriate transfer pricing model, groups need to perform a self-review to:

  • Understand the effect that achieving their sustainability agenda will have on their existing business models, and
  • Understand the effect that their existing business models could have on achieving their sustainability agenda.

Businesses should self-review the sustainability of their practices to determine whether they need to make changes to their operating models and global functions in order to meet their ESG goals. Such changes could include sustainability-driven restructuring, supply chain changes to reduce carbon footprint, a relocation of production activities from jurisdictions with unfair labour laws and low transparency and a replacement of certain non-renewable raw materials in production.

The CSRD mandates that all organisations audit the sustainability information that they report. As with any other type of financial services report, sustainability reports need to contain complete and accurate information. Businesses should disclose the risks and opportunities posed by their ESG framework, and doing so requires taking into account business models and related transfer pricing practices.

How Grant Thornton Can Help

The Irish Transfer Pricing team has extensive experience across all industries. We deliver sector-specific, relevant and sustainable transfer pricing solutions that meet both increasingly stringent legislation and our client’s business needs.

Our team works closely with the global Grant Thornton network of transfer pricing specialists to deliver consistent, pragmatic and effective solutions and advice that transcend international borders. If you have questions about how ESG frameworks and sustainability reporting requirements will affect your transfer pricing policies, contact a member of our transfer pricing team today.