The Covid-19 pandemic has undoubtedly been one of the major crises that governments have had to overcome in recent times. While countries have reacted differently and taken various measures, there is at least one element they have all used to fight Covid: their tax policies.
The most commonly used tax policy measures concerned:
- Extension of deadlines and deferral of tax payments and tax penalties
- Tax exemptions, subsidies and incentives.
In TMF’s Global Business Complexity Index 2022 study, we looked at whether Covid-19 tax policies were just short-term policies and how they have changed in the post-Covid world, where governments have to manage the inflation, slowing economic growth and war. effects. What we have learned is that:
- Most of the pandemic fiscal policy measures have started to be rolled back or, if still in place, should be by the end of this year. Very few incentives will be maintained (such as extending the ability to carry losses).
- Apart from the Asia-Pacific region, all other regions have reversed most pandemic tax policies. Some APAC countries will continue to apply pandemic tax policies until the end of 2022.
- Post-pandemic tax policies are influenced by budget deficits and the need to improve tax revenue collection. Thus, governments must strike the right balance between tax policies that stimulate growth, policies that strengthen tax revenues and those that emphasize equity.
We will see in more detail how the balance is struck between growth, tax revenue and tax equity in each of the regions.
In APAC, the focus appears to be on tax policies that spur growth by extending some of the tax relief that was available during the pandemic – for example, in Hong Kong and Indonesia, tax filing deadlines have been extended – or continue pandemic-related tax incentives or introduce new ones. If we take a closer look at tax incentives, some of the ones that stand out are:
- Value-added tax exemptions applied to small businesses in China or additional deductions for newly purchased equipment.
- Additional tax deductions such as those introduced in Singapore or Vietnam. In Singapore, for example, companies that allowed their employees to purchase equipment to facilitate working from home are allowed to deduct such expenses.
In addition to the focus on stimulating growth, there are also concerns about the level of tax revenues. Thus, some APAC countries have focused on introducing or expanding the tax base of digital tax (e.g. Malaysia and Thailand) while other countries have focused on increase in tax rates (e.g. Goods and Services Tax in Singapore).
At the same time, governments are trying to make taxation fair for local and multinational companies and to roll out base erosion and profit shifting provisions. Hong Kong is one of the most advanced countries in the region in terms of transfer pricing rollout, while South Korea and Japan have introduced new rules regarding transfer pricing documentation and country-by-country reporting .
In summary, the APAC region (and particularly China) is trying to position itself as an attractive destination for foreign investors, while carefully managing tax rate increases and additional reporting requirements (particularly in the area transfer pricing). Companies looking to invest in APAC countries should carefully assess the tax incentives available and should prepare their tax functions for additional reporting requirements.
Europe, Middle East and Africa
Unlike APAC, EMEA focuses on tax fairness and policies to increase tax revenue. The measures that have been taken recently are:
- Detailed digital reporting requirements either for sales invoices only (e.g. Serbia and Poland have introduced, or will introduce, e-invoicing) or for all or some categories of transactions (e.g. Norway has introduced SAF- T for ledger transactions, Slovakia asked companies to provide bank account information). Detailed reports allow tax authorities to have better control over reportable transactions and tax revenues.
- Focus on voluntary compliance rather than more tax audits. For example, in the United Arab Emirates, tax authorities have reduced VAT penalties for non-compliance. Taxpayers will now have time to settle underpaid taxes before late penalties are imposed. Taxpayers can also benefit from a 70% waiver of unpaid penalties if they meet certain conditions. The changes encourage companies to review their historical ranking positions and voluntarily disclose any errors before being notified of an audit. Businesses should also review any outstanding penalties to determine if they qualify for relief.
- Increase in tax rates. Switzerland announced an increase in VAT rates, the United Kingdom introduced a new tax on plastic packaging, while South Africa reduced allowable spending on interest.
Companies doing business in this region or wishing to expand their activities there must organize the process very efficiently around the legal changes and their implementation, and must be ready to adapt their accounting and tax tools to the ever-increasing reporting requirements. .
United States and Latin America
The United States and Latin American countries have a similar approach to the EMEA region, focusing on tax fairness and tax policies that help increase tax revenue or collection. The focus is on rolling out transfer pricing requirements and introducing detailed digital reporting requirements (e.g. Mexico and Bolivia are introducing e-invoicing) as well as maximizing tax revenue by introducing additional taxes (e.g. digital tax in Canada), broadening the tax base (e.g. Chile and Venezuela), or increasing the tax rate (e.g. companies in Colombia).
What should companies do?
For companies operating abroad, it is very important to understand the direction of tax policy and the tax measures applied in a country, as these will have an impact on the business decisions of the company. For example, a tax policy focused on increasing tax revenue should encourage businesses to:
- Understand the tax cooperation mechanisms available in each country and take advantage of them to avoid or minimize tax disputes. Our report shows that 90% of countries around the world provide some form of tax advice.
- Increase digitization to meet digital reporting requirements. Digital tax reporting requirements are increasing year on year, with the highest level of digitization in the area of VAT/GST.
Tax policies play an important role in the success of businesses in their cross-border operations. Understanding what kind of tax policies are being promoted in countries and regions will allow businesses to better plan their expansion and be prepared for legal changes that may require process changes or additional investments in digitalization.
This column does not necessarily reflect the opinion of the Bureau of National Affairs, Inc. or its owners.
Emine Constantin is Global Head of Accounting and Tax at TMF Group.
The author can be contacted at: [email protected]