While the pandemic is not yet behind us, the end seems to be in sight and there’s a real sense of optimism globally that we’re set for better days ahead. For those of us who work in tax, the new reality will present new challenges and opportunities, and meeting them will draw even more on the agility, flexibility and resilience that has served us so well over the past year.
This overarching message came through loud and clear during the KPMG 2021 Virtual Tax & Legal Summits. As we explored emerging tax and business considerations in the post-COVID era, our keynote speakers and panelists pointed out plenty of bright spots and opportunities for tax leaders and their teams in 2021 and beyond, which I’d like to reflect on here.
Things are looking up
As the pace of vaccination programs accelerate around the world, there is every reason to expect that lockdowns will lift, restrictions will ease, and people, businesses and governments will shift their focus toward building back better. The balance sheets of many businesses are in good shape, and pent-up demand among lockdown-weary consumers could soon be released. Whether we’re poised for a 1920s-style economic boom remains to be seen, but there are lots of reasons to believe the recovery will be robust.
Following several years of depressed productivity among much of the developed world, we’re seeing productivity growth rebound with the tremendous innovations that many businesses brought toward solving pandemic-related problems. This includes innovations in processes and new technology solutions deployed within the tax department.
Many tax and other business leaders I speak to say they expect to see increasing innovation and productivity to be among the new reality’s defining features. While many business models became more digitalized in 2020, a majority of tax leaders ― 54% of those responding to our polls throughout the Summit series ― indicated that they expect digitalization within their organizations to accelerate even further in 2021.
New pressures, competing demands
At the same time, businesses around the world face new pressures and competing demands. The pandemic has focused the world’s attention on the environmental consequences of what businesses do, pushing the environmental, social and governance (ESG) agenda to the forefront and highlighting the responsibility of companies to demonstrate the positive impact they are having for their people, their customers and in society more broadly. These imperatives are creating a complex stakeholder environment that tax leaders will need to help navigate going forward. Indeed, many have taken steps in this direction already, with more than half of tax leaders (53%) indicating they have a strong sutainability focus built into their Tax Policy or Tax Strategy for the organization.
Tax leaders are also expected to have a full tax policy agenda on their hands. Around the world, governments have spent some US$9 trillion1 on economic stimulus payments in the past year, and an expected new package of relief from the new US administration will drive that total even higher. At some point, governments will have to pay that bill — but probably not in the immediate future.
In a series virtual of roundtables on tax responsibility that KPMG firms recently conducted, business and government leaders agreed that economies remain too fragile and that raising taxes too soon would risk choking off the recovery before it truly takes hold. In the near term, governments are likely to keep relying on low borrowing costs and avoid imposing new revenue-raising measures. Tax policy priorities for the near term are more likely to aim at priming a burgeoning recovery, using investment tax credits and other tools to spur innovative research and development.
Tax changes on the horizon
We are nevertheless moving into a period of important fiscal changes. Achieving global consensus on how to tax the digital economy remains high on the agenda of the Organisation for Economic Co-operation and Development and the Inclusive Framework countries. If they succeed, the world will see a wave of complex corporation income tax reforms and a new, more harmonized international tax order. If they don’t, we can expect tension over taxing rights will continue to rise and the patchwork of digital services taxes to continue to spread.
Meanwhile, the European Union’s move toward a new Green Deal could presage a global shift in tax and fiscal policy toward spurring the transition to cleaner renewable energy and reduced harmful emissions. With a short-term emphasis on tax incentives for green initiatives and innovation widely expected, companies will need to balance how to tap these funds for competitive advantage against rising calls for transparency around their global tax approach.
Top trends to watch for tax leaders
As we look to the future, tax leaders would do well to keep three key emerging trends front and center as we navigate the way forward:
- Brace for more tax controversy. In response to polls throughout the Summit series, 79% of tax leaders indicated that they expect to see an increase in disputes and controversy, with most of those suggesting that they expected to see this in numerous jurisdictions. I think this expectation may be well founded; just as the focus of tax authorities may shift from delivering stimulus to delivering green incentives short-term, their focus will inevitably shift eventually toward revenue-raising activities. This will likely mean more review of tax positions and more challenges by tax authorities around the world. Tax leaders will need to determine how to manage that risk, and to do so, a focus on engaging with tax authorities at every stage will be crucial.
- Intensify your engagement with stakeholders. With the rising ESG agenda, the intensifying focus on tax transparency, and ongoing uncertainty on the international tax front, tax leaders need to ensure that proactive consideration of tax issues and risks is an integral part of all major strategic business planning. In this regard, stakeholder interaction and engagement will be critical for heads of tax, especially with senior management, the board and the leaders of other functions. Tax leaders may also seek to engage more with tax authorities, policy makers and business associations to help ensure the business implications of proposed tax reforms are raised and addressed.
- Leverage technology and new ways to work. The necessity of remote working during lockdowns has propelled a significant digital transformation among businesses and tax functions. Continued digitalization of the tax function will be a key focus for the next several years as tax leaders seek new ways to use technology to help manage tax risk and tax compliance obligations more efficiently and effectively. For those who have invested previously in digitalization, this period will be a chance to optimize those investments and find innovative approaches to cumbersome processes. For departments that have not yet been able to make a strong business case for investment in technology and innovation, now is the time to do so.
Above all, innovation will likely be the biggest key to success in the new reality. The past year has compelled us to see agility, flexibility and resilience as among the most vital characteristics of business leaders in the today’s environment. As we move forward, tax leaders both at KPMG firms and within the organizations we serve will aim to build capability in these areas among our own teams and the tax functions of clients.
Thank you to all who participated in our Virtual Summit Series. We welcome your feedback and ideas for future events at email@example.com.
1 "Tracking the $9 Trillion Global Fiscal Support to Fight COVID-19,” IMF Blog, 20 May 2020
By: David Linke
Global Head of Tax and Legal Services, KPMG International