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Global taxation and green supply chains

November 9, 2024

This article has been written by Taranpreet Singh pursuing a SEBI Grade A Legal Officers’ Test Prep course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Table of Contents

Introduction

In today’s time, two major issues that need to be addressed in the context of global business are climate change and global taxation. As the climate situation keeps worsening globally, businesses are increasingly under pressure to adapt green practices. Global taxation also keeps on evolving to address both traditional and emerging fiscal challenges. This article explores how global taxation connects with the green supply chain and will examine current practices, challenges, and potential solutions in these evolving landscapes.

What is global taxation

Taxes on the international transactions and policies governing these taxes are collectively known as global taxation. Earlier, the global tax system was primarily focused on revenue generation, economic stability, and prevention of tax evasion, but over time, due to changing trends in globalisation, the world has forced significant changes in global taxation policy with a prime motive, which is to battle against all forms of harmful tax practices. Today we are recognising a broader role of tax policy in addressing environmental issues and promoting sustainability.

Key aspects of global taxation

Corporate taxation

Multinationals often participate in complex tax planning schemes to reduce their corporate income taxes. Base erosion and profit shifting (BEPS) is a project started by the Organisation for Economic Co-operation and Development (OECD) to limit profit shifting by multinational companies using tax planning strategies that exploit gaps in International Tax Rules. To be able for countries not to have a tax system where the poor are expected to erroneously pay more, these practices must be reined in.

Tax havens

Tax havens are the countries or regions having minimal or no tax rates, which attract corporations seeking to reduce their tax burdens. One of the solutions for the Tax Haven issue could be the creation of a world-wide book of records of financial wealth where all the bonds and holdings of the persons are accounted for. This global financial book of record can work as a central depository that would be coordinated by the nations and international organisations, which could allow national tax administration to fight tax evasion and levy taxes on capital-income flows and wealth stocks.

Digital economy: The rise of the digital economy has made it difficult to implement taxes as per traditional taxing systems; many new aspects have been introduced in the digital economy. To address the revenue shifts associated with the digital platforms, the Digital Services Tax (DST) was proposed by the OECD in 2021.

What is green supply chain

The green supply chain is a supply chain management strategy that aims to minimise environmental impact and maximise sustainability. It involves integrating environmental considerations into all aspects of supply chain operations, from sourcing and manufacturing to distribution and end-of-life management.

One important element of the green supply chain is the use of sustainable materials. This means choosing materials that are renewable, recyclable, or biodegradable, and avoiding materials that are toxic or harmful to the environment. Sustainable materials can help to reduce the environmental impact of product manufacturing and transportation.

Another important element of the green supply chain is energy efficiency. This means using energy-efficient technologies and practices in all aspects of supply chain operations. Energy efficiency can help to reduce greenhouse gas emissions and other environmental impacts.

The green supply chain also involves reducing waste and emissions. This can be done through a variety of means, such as using lean manufacturing techniques, recycling materials, and reducing packaging. By reducing waste and emissions, the green supply chain can help to protect the environment and reduce costs.

The green supply chain involves engaging with stakeholders to promote sustainability. This means working with suppliers, customers, and other stakeholders to identify and implement sustainable practices. By engaging with stakeholders, the green supply chain can help to create a more sustainable supply chain ecosystem.

The green supply chain is an important way to improve the environmental performance of businesses and reduce the impact of supply chain activities on the environment. By adopting green supply chain practices, businesses can help to create a more sustainable future.

Here are some additional benefits of the green supply chain:

Improved brand image and reputation.
Increased customer loyalty.
Reduced regulatory compliance costs.
Enhanced employee morale.
Improved operational efficiency.

Overall, the green supply chain is a win-win for businesses and the environment. By adopting green supply chain practices, businesses can improve their environmental performance, reduce costs, and gain a competitive advantage.

Key components of green supply chains

Sustainable sourcing: In the green supply chain, the thought process while sourcing materials is to source materials that are or can be recycled easily or are produced with minimal environmental impact.
Energy efficiency: When it comes to energy efficiency, in fact, lately all corporations are attempting or have gone zero-carbon emission. Thus, a significant part of this involves cutting energy usage throughout the supply chain. This can be done if we start using energy-efficient technologies and practices that in turn decrease the load over on electricity consumption, which is also helpful for us.
Waste management: One of the major contributing factors for deteriorating nature is the factory waste being dumped in the environment. Companies have started to implement circular economy principles to extend the life cycle of products and materials.
Green logistics: Green operations relate to all aspects related to product manufacture/remanufacture, usage, handling, logistics, and waste management once the design has been finalised. Companies have started to optimise transportation and logistics to reduce carbon footprints.

The intersection of global taxation and green supply chains

The intersection of global taxation and green supply chains presents a unique opportunity to address environmental concerns and promote sustainable business practices. By leveraging taxation mechanisms, governments can incentivise corporations to embrace green supply chain strategies and reduce their carbon footprint.

One approach is to implement carbon pricing mechanisms, such as carbon taxes or emissions trading systems. These policies assign a cost to carbon emissions, making it financially advantageous for corporations to reduce their greenhouse gas emissions. The revenue generated from carbon pricing can be used to fund investments in renewable energy, energy efficiency, and other climate-friendly initiatives.

Another strategy is to offer tax incentives for corporations that adopt green supply chain practices. This could include tax credits, deductions, or exemptions for investments in energy-efficient technologies, sustainable sourcing, and waste reduction initiatives. By providing financial incentives, governments can encourage corporations to make long-term commitments to environmental stewardship.

Furthermore, governments can use taxation to discourage environmentally harmful practices. For example, they can impose higher taxes on fossil fuels and carbon-intensive industries, making it more costly for corporations to rely on traditional, polluting energy sources. This can create a level playing field and promote the adoption of renewable energy and sustainable technologies.

Additionally, governments can use taxation to promote transparency and accountability in supply chains. By requiring corporations to report on their environmental performance and supply chain practices, governments can empower consumers to make informed choices about the products they purchase. This can create market pressure on corporations to adopt more sustainable practices.

The convergence of global taxation and green supply chains offers a powerful avenue for addressing climate change and fostering a more sustainable global economy. By leveraging taxation mechanisms, governments can create a conducive environment for businesses to embrace green practices, reduce their environmental impact, and contribute to a low-carbon future.

Environment taxes and incentives

Carbon taxes: Carbon taxes are implemented, which is predicted to restrict the amount of greenhouse gas emissions. Then bring corporations around the world to adopt eco-friendly fuels and lessen their consumption of carbon fuel. The most well-known way to price emissions is through a cap-and-trade system, the best-known example being the European Union’s Emission Trading System (EU ETS).
Tax breaks for green investments: Several countries provide tax benefits to companies that invest in green measures, which may come in the form of tax credits, deductions and grants for renewable energy projects, or whatever scenario lawmakers dream up.
Reporting: Every business must disclose their environmental performance and sustainability journey. Requirements under laws such as the EU Non-Financial Reporting Directive (NFRD) require companies to disclose information that indicates how sustainable they are and what their impact is on the environment.

Tax incentives for green investments

Tax credits: These can be a boon for saving big on taxes in the case of the company if it takes action, such as investment into renewable energy systems or purchase of new improved equipment with better efficiency. In the US, tax breaks are available for financing solar energy under Investments Tax Credits (ITC).
Tax deduction: Some benefits or provisions (other than a row on the accounts) that enable businesses to reduce their taxable income, like deducting anything from energy efficient upgrades, sustainable materials, etc. That lowers a company’s tax bill and also encourages the adoption of environmentally conscious practices.
Accelerated depreciation: Businesses are allowed to write off green investments more quickly. This obviously has economic benefits for corporations that want to develop commercially viable energy technologies and infrastructure, since they could be paid a dividend on their investment.
Grants and subsidies: Apart from the tax incentives that you can avail of, at times governments also offer grants or subsidies to further boost green initiatives. The cost of transitioning to green technologies and practices can often be offset by financial incentives.

The carbon taxes and their influence on supply chains

The imposition of carbon taxes has far-reaching implications for supply chains, particularly for activities that consume a substantial amount of carbon. These taxes can significantly increase costs and present challenges to companies operating within these supply chains. To navigate this complex landscape and mitigate the impact of carbon taxes, businesses can consider various strategic options:

Emissions reduction:
- Invest in cleaner technologies and energy-efficient equipment to reduce carbon emissions throughout their operations.
- Adopt sustainable production methods and optimise processes to minimise carbon footprint.
- Implement carbon capture and storage solutions to capture and store carbon dioxide emissions.
Supplier review:
- Collaborate with suppliers to assess their carbon footprints and identify opportunities for improvement.
- Shift sourcing strategies to suppliers with lower carbon footprints or alternative, more sustainable product solutions.
- Encourage suppliers to adopt sustainable practices and technologies to reduce their carbon emissions.
Cost transfer to consumers:
- Evaluate the feasibility of passing on some of the increased costs associated with carbon taxes to consumers through price adjustments.
- Communicate transparently with customers about the impact of carbon taxes and the company’s commitment to sustainability.
- Offer incentives or loyalty programs to encourage consumers to make eco-friendly choices and support sustainable products.
Investment in renewable energy:
- Invest in renewable energy sources such as solar, wind, and hydropower to power operations and reduce reliance on fossil fuels.
- Collaborate with energy providers to secure long-term contracts for renewable energy at competitive rates.
- Advocate for policies that support the transition to a clean energy economy.
Supply chain transparency:
- Implement traceability systems to track carbon emissions across the supply chain.
- Share emissions data with customers and stakeholders to promote transparency and accountability.
- Collaborate with industry peers to establish standardised reporting frameworks for carbon emissions.
Government engagement:
- Engage with policymakers and regulatory bodies to advocate for fair and efficient carbon tax policies.
- Provide input on carbon tax design and implementation to ensure they effectively address environmental concerns without creating undue burdens for businesses.
- Support initiatives that promote research and development of innovative carbon reduction technologies.

Challenges and opportunities

Though there are many advantages of adoption to global taxation and the green supply chain, at the same time it has some limitations that need to be addressed.

Challenges

Unclear nature of the tax law: The intricate global tax system makes it hard for corporations to understand what they need in order to follow environmental taxations. This can result in uncertainty and increased administrative costs.
Coordination at the global scale: It would be hard to reach a consensus with respect to green supply chain practices and environmental taxation. By the very nature of different countries having their own rules and norms, this can lead to problems for global businesses.
Socioeconomic effects: Introducing carbon taxes and other environmental levies may have socioeconomic consequences such as additional business costs and limited competitiveness. This will require careful balancing of competing priorities between environmental and economic objectives by policymakers.

Opportunities

Innovation: The move towards greener supply chains and environmental taxes can only stimulate the development of clean technologies and responsible corporate practices. The rapidly growing green economy may provide an opportunity for businesses that research and develop their products to get ahead of the curve.
Cooperation: The international nature of environmental problems means there are opportunities for collaboration between social organisations, businesses and governments. Partnership and alliance offer solutions to common challenges they face for sustainable development.
Consumer engagements: As customers become increasingly aware of the environment, companies have a new opportunity to connect with their customers on sustainability. And yet there is perhaps no better way to build customer loyalty and add value to your brand than by showing that you are serious about your green image.

Conclusion

This nexus—the merger of global taxation and green supply chains—cannot be overlooked by governments, businesses, or environmental advocates. With the evolution of tax policies to be more supportive for sustainability and the green supply chain becoming an inherent part of business operations vis-à-vis customer buying processes, it is crucial that stakeholders understand how these dynamics work together.

Through tax incentives, carbon pricing mechanisms, and green supply chain practices, governments can partner with businesses to fight environmental issues, making the next steps toward a more sustainable future. Marrying global taxation with green supply chains is something that, if successful, can make some waves—good ones for our environment and economy.

Global taxation and green supply chains

Introduction

What is global taxation