Three megatrends are reshaping the global tax landscape – here’s how
This year is shaping up to be a year of extraordinary challenges and change that can unexpectedly interconnect and alter the global economic landscape. As a result of the pandemic, the world is experiencing a confluence of geopolitical, economic and social issues that are forcing governments and businesses to rethink the way they operate. Tax is at the centre of it all.
There are three trends that carry substantive tax implications affecting revenue, liabilities and behaviours that governments and businesses alike cannot overlook: global tax reform; sustainability; and Web3 and the metaverse.
Global tax reform
The Organisation for Economic Co-operation and Development project, known as BEPS 2.0, is well on its way to addressing the tax challenges of the global economy with a fundamental overhaul of the long-standing international architecture for taxing global businesses.
With continuing leadership from the G7, as well as exceptional coordination across jurisdictions, this initiative could have ramifications that reach well beyond the specific tax rules under development.
As it stands, the proposed tax reform has the backing of 137 jurisdictions, which represent about 90% of the global economy and reflect the spectrum of national economies and tax systems around the world. The new rules effectively divide taxing rights over global business income among jurisdictions.
The success of this reform hinges on unprecedented and ongoing cooperation among tax administrations – cooperation that is by no means a given.
There is substantial work to be done to provide certainty to tax administrations and businesses without protracted disputes or risk of double taxation. And the need for coordination and cooperation will not end with agreement on the details of the new rules. To achieve the intended results, there must be day-to-day coordination in how tax authorities apply these new rules to prevent overlapping claims of taxing rights over global business income from becoming a barrier to cross-border investment.
This kind of operational coordination needs deep and permanent commitments from governments. A successful result could mean the beginning of a new era of multilateralism in tax, with the potential to pave the way for a more fully integrated global economy that benefits us all. However, government policymakers must work closely with business stakeholders to ensure simple and transparent rules that facilitate efficiency in both tax compliance and tax administration.
The G7 played a significant role in bringing the participating jurisdictions to agreement on key design parameters for these new rules in 2021. Its continuing leadership in 2022 and beyond will be essential to fostering the necessary cooperation among tax authorities.
The tax implications of sustainability might be less obvious than those relating to a changing global tax regime, but they are no less significant. And the OECD has hinted that an inclusive framework on carbon pricing could be next on the agenda after BEPS 2.0.
Leaders around the world are beginning to understand the costs of climate inaction – and the fact that doing nothing is not an option. At the same time, they are aiming to raise revenue and grow their economies in the tough aftermath of the COVID-19 pandemic.
Governments have at their disposal a whole range of tax levers – credits, incentives and carbon taxes – used to reward good behaviours while discouraging the bad. Simply put, taxes influence behaviours and serve as a tool for policymakers to achieve certain sustainability outcomes. These tax policies are being deployed alongside non-tax regulations, mandatory reporting and carbon markets to address critical climate issues.
They are still in flux, however, and vary widely across jurisdictions. There is much for governments to consider – not least the fact that a complex policy landscape could create unintended consequences for business.
In the search for revenue and growth, these policy shifts require agility but also offer significant opportunities for organisations that prioritise sustainability in their strategy, operations and supply chains around the world. With a business community driving towards net zero and addressing a range of social issues, it is crucial for governments to work hand in hand with the private sector when developing new proposals or accelerating existing policies to meet their own sustainability objectives.
Web3 and the metaverse
Web3 is the next iteration of the internet, representing new technology with the potential to improve societies. This innovative tech extends today’s internet, but in a decentralised manner that relies on distributed ledger technology. Leveraging AI, Web3 has spawned blockchain platforms for both public and private sectors, along with new digital assets such as cryptocurrencies, non-fungible tokens and self-executing smart contracts. And new decentralised autonomous organisations are governing such change. Many governments have already adopted Web3 technology to better serve their citizens, protecting personal data rights and offering critical social services more efficiently.
Web3 is also powering the metaverse, an interconnected set of computer-generated virtual worlds where people can work, play and do business. This new technology will impact our lives in unexpected ways. Governments and multinationals alike are scrambling to build their presence in this new digital world, a space in which material commerce will take place. In addition to consumer brands with a metaverse presence, governments such as South Korea are investing in this new virtual space to promote economic growth with vast societal benefits.
The tax implications of these technological breakthroughs will be enormous.
There are questions about which jurisdictions are entitled to tax digital transactions, and how to handle the complex and evolving tax treatment of cryptocurrencies. The characterisation and taxing rights relating to NFTs are unsettled as well. Tax law created for the old economy is struggling to evolve at the pace of commercial and technology developments, leaving taxpayers to apply old economy rules analogously to new digital assets and transactions.
Web3 and metaverse innovations will require broad policy regimes to protect citizens and organisations alike, underpinned with a commitment from government to strongly consider the tax implications. Many will benefit from a clear and globally aligned set of tax rules associated with this new digital economy. Until such clarity exists, however, individual countries will continue to take divergent tax positions. Governments should collaborate across borders and engage with the business community to ensure that the tax policies they develop are equitable without impeding innovation.
A look ahead
We are seeing the global effects of the megatrends on economies and societies in the combined influence of collaborative tax reform, policies to endorse sustainability and new technologies that create new business models.
As these megatrends gain speed and traction this year and beyond, they will impact businesses across all sectors and geographies. We cannot afford to ignore them. Nor can we afford to look at each in a silo. Governments must use their collaborative momentum to strengthen tax certainty with a forward-thinking approach to future regulations; and the business community must look at these trends as an opportunity to weave resiliency and sustainability into their move towards the future. The time for us all to act is now.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.