There are more than 138 jurisdictions that have moved quickly to implement some form of tax relief and economic stimulus to help blunt the devastating impact of COVID-19 on their economies, according to the EY Tax COVID-19 Stimulus Tracker. Kate Barton, global vice chair – tax, EY, says governments should follow sound principles as they manage their budgets, reframe their organisational outlook and contemplate a ‘next normal’ for tax
Governments worldwide moved quickly and decisively to treat the economic pain caused by the first viral pandemic of the modern globalised economy. According to the International Monetary Fund, governments have collectively announced more than $27 trillion in monetary and fiscal stimulus – close to a third of global gross domestic product – via measures intended to help jobless and furloughed workers, boost consumer sentiment and encourage liquidity in capital markets.
As it did in the 2007–2008 global financial crisis, tax policy plays an important role in this effort. Governments prudently extended tax filing and payment deadlines for individuals and businesses, including in the US, which postponed payment deadlines for the first time in its history. Nearly half of the more than 138 jurisdictions EY teams are tracking – including every member of the G7 – are offering some form of employment support. Jurisdictions have made it easier to utilise losses and provide incentives for recovery-related expenses, such as Italy’s 50% tax credit towards the cost of sanitising work environments and tools. Many countries also put in place extensive programmes offering grants, loans and loan guarantees. In order to ease administrative burdens at a time when workforces are scattered, many tax administrations put a pause on audits, litigation and other enforcement activity. These are all positive measures for taxpayers and businesses aimed at keeping economies afloat in the immediate term.
Beyond the health crisis and associated containment, many governments are looking at using their tax systems to deploy substantial stimulus packages designed to encourage investment and drive economic growth. Stimulus could take the form of targeted investment incentives or broader measures, such as accelerated cost recovery and rate cuts.
Sovereign debt grows
Of course, there will be significant costs from these tax relief and stimulus measures. Many jurisdictions are building up high levels of sovereign debt and some are already beginning to feel pressure to shift from offering fiscal stimulus to seeking tax revenue to shore up budgets. The push for revenue may include tax policy changes and heightened tax enforcement.
Potential sources of future tax revenue were already under debate before the pandemic: in some places, wealth taxes, taxes on ‘super profits’ and financial transaction taxes were being debated. Carbon taxes intended to mitigate climate change were on the agenda in others. Governments reacted to the global financial crisis by relying more heavily on value-added taxes as a source of revenue. And many governments have been tempted by the lure of new and unilateral digital taxes in the shadow of the Organisation for Economic Co-operation and Development’s work on the taxation of the digitalised economy. Indeed, successive OECD studies have indicated tax revenues were already rising before the pandemic, while surveys of multinational enterprises by EY indicated tax enforcement had also increased sharply.
We now face a very different set of circumstances. Just as people must adapt their lifestyles to minimise the risk of contracting COVID-19, decisions about how – and how much – businesses should be taxed should be viewed through the lens of new realities. Governments should not rush to increase tax burdens on businesses to reduce their budget deficits. Rather, they should focus on finding the right mix between tax and austerity to restore sustainable economic growth.
Much has been made about the trust gap between people and institutions, including governments and businesses, both of which have been viewed sceptically. The crisis response may change that: governments stepped in to provide testing and financial relief and keep people safe, while businesses shifted manufacturing lines to make protective equipment and embraced new ways to keep as many people as possible working during nationwide quarantines. Getting the recovery right is an opportunity to earn more trust from people; as business growth will be the engine of recovery, including them in future tax policy discussions will be critical.
Governments should use a basic framework to evaluate any new revenue sources. They should embrace the ongoing work of the OECD on ways to increase the level of tax certainty for businesses. They should apply the principles of the Ottawa Convention, under which new tax policies should strive for neutrality, efficiency, certainty and simplicity, effectiveness and fairness, and flexibility. And governments should work together, because a coordinated approach can prevent the double or multiple taxation that would be a barrier to global trade and investment.
Similarly, governments should extend the innovative approaches taken by some tax administrations during the crisis to the ‘next normal’. Relationships between policymakers and tax administrators who worked together to respond quickly should be reinforced, and best practices shared between governments. It is also important to build on the stronger relationships tax administrators have forged with taxpayers during the crisis. Building on this cooperation and engagement can help develop better tax administration environments for the future.
The coronavirus pandemic is a global human tragedy and an enormous economic challenge. But emerging from the crisis presents an opportunity for organisations to reframe their futures. We should seize this opportunity together to build a better working world.