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Managing through the crisis

  • Jane McCormick, Leadership |

Five predictions to watch for in the world of tax as we look to the new reality of COVID-19

Amid the uncertainty of the past three or so months, governments and businesses innovated responses and put them into action at unprecedented speed. My KPMG colleagues and I have charted these developments and shared our thoughts and predictions through weekly webcasts, articles and podcasts, reporting what we’re hearing from governments and business executives, as well as what we see ahead.

It’s widely agreed that even when we emerge from COVID-19, life will likely be quite different. Businesses, governments and citizens need to prepare for a new reality ahead.

Many view the lockdown period as a long pause, but in many ways, I see it more as a speeding up as the situation actually put many trends that were already underway on fast forward, especially in the area of tax.

As the pandemic took hold and lockdowns were imposed, many jurisdictions relied on their tax systems to distribute emergency funds designed to help citizens, businesses and economies cope. These measures may leave many governments with tremendous budgetary deficits, so tax systems will again be important for restoring public sector finances. Here are my predictions for the areas to watch.

1. There will be a renewed call for transparency

Business will be expected to play their part in this, and their degree of tax responsibility during and after the crisis may come under even sharper scrutiny than before. As the pandemic eases, community expectations will be sky high for companies to do the right thing and contribute their share. This could drive existing pressure on tax governance even higher, with potential for increased reporting and reputational risks. Organizations will be asked to account for how they handled the pandemic, both in their tax decisions and in the incentives they pursued. 

2. Many governments will look to indirect taxes to help fund recovery

Of course, this will be challenging for businesses who will also be working to recover from the crisis, get people back to work and carve out their future in a new reality.

Thus, it seems unlikely that most jurisdictions will try to extract more revenues from businesses directly by raising corporate income taxes, especially as profitability remains fragile. Such a move would likely be criticized for delaying the recovery. Rather, we may expect to see governments rely more on indirect taxes, environmental taxes and/or specific turnover taxes to aid in recovery. As governments look to stimulate economic growth, some may also offer additional tax incentives, while a few governments may even look to reduce tax rates in order to rebuild a competitive position.

As my colleague and our Head of Global Indirect Tax Services has written about elsewhere, Value Added Taxes may rise in line with existing trends and their bases may be expanded. For example, Saudi Arabia announced a VAT rate increase in May, and VAT base expansion is being discussed in the European Union. Some jurisdictions may also eliminate preferred VAT rates on some goods or services. On the other hand, Germany recently announced a temporary reduction in VAT rates in order to help address the economic challenges they see ahead.

3. Recovery is likely to be green

Governments will also likely be looking for new sources of tax revenues, including through green taxes. Indeed, our polls indicate that most people support a green recovery, with 89% of survey respondents in our webcast poll indicating that the post COVID-19 recovery should be green.

When it comes to environmental taxation, budgetary constraints could compel governments to shift away from incentives that encourage lower carbon activity and towards approaches that penalize high carbon activity. We could therefore see an array of punitive green tax measures, including plastic bag levies, road congestion charges, or higher taxes on harmful emissions or extractive activity. I have written previously about the challenges of this approach, including that these taxes have dual objectives, which aren’t always complementary to one another: on the one hand, they seek to change behavior and on the other, they seek to collect tax revenues. Of course, if the behavioral change is achieved, the tax objective is not. This is a significant challenge at a time when economic recovery is a priority.

4. Tax authorities will leverage data even more

We have written elsewhere about how the COVID-19 situation has further accelerated digitalization in organizations and within tax departments. In addition, we may also expect tax authorities to put even more effort into leveraging technology to pursue higher tax collections from the existing base through aggressive audit and enforcement activity, enabled by advanced digitalization. The pandemic is likely causing tax authorities around the world to pay more attention to the data-driven approaches to tax compliance being adopted by peers in other jurisdictions, and so the laser focus on data that multinationals have seen from tax authorities in some countries already will likely become even more prevalent across jurisdictions. For example:

  • Tax authorities in the UK and many EU countries now require taxpayers to submit automated data feeds to enable real-time reporting.
  • Government-regulated invoicing systems and invoice matching are now in place for indirect taxes in a number of Asian countries, including China, India, Korea, Indonesia, Vietnam and Taiwan.
  • Tax authorities in some countries, such as Poland, are using data enhancements to pre-fill tax returns on their taxpayers’ behalf.

Electronic processes like these give tax authorities more scope to reduce the risks of under-reporting and non-payment in real time, and we expect the priority on increasing collections could speed their rate of uptake of digital solutions.

5. Unilateral measures may threaten multilateral cooperation – at least short term

In the area of cross-border tax, it remains to be seen whether the recent spate of unilateral measures will win out over the longer-term trend toward multilateral cooperation. Especially in the digital realm, we will likely see greater taxation of non-residents making purchases in local jurisdictions. However, it’s not yet known whether this will be achieved through coordinated measures like the Organisation for Economic Co-operation and Development’s (OECD) work on Pillar 1 of its digital economy tax project, or whether domestic actions, like digital services taxes, will continue to proliferate. Especially in the digital realm, we will likely see greater taxation of non-residents making purchases in local jurisdictions.

Beyond the digital economy, we’re also seeing more unilateral tax policies directed at deemed permanent establishments (e.g. Indonesia), increased customs duties and tariffs, and other measures that inflate business costs for non-residents. We believe that these retreats to national practices may be steps in the wrong direction. Increased taxation is likely one of the keys needed to regain economic ground and fuel a return to strength.

Many of the business leaders we talk to advocate for a multilateral response to COVID-19, not just in tax policy but in a number of other areas, including in the areas of public health and tax climate change. The OECD has had success in the last few years as a collaboration platform for its members, and this leads us to believe that a cohesive international response in tax policy and other areas of development may be within reach.

In the long run, however, no country can rely only on tax to return to economic prosperity. I believe taxation must support broader economic reforms and stimulus measures. Responses to COVID-19 have shown how tax can be used to help support desired outcomes in many jurisdictions, and it will be important for this type of thinking to continue in order to think about how holistic tax policies could contribute to sustainable economic growth.

COVID-19 seems to have thrown everything in our lives up in the air, and together, tax and business recovery will play an important role in putting it all back together to create a sustainable new reality for all.