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 have taken various measures, there is at least one element that they have all used to fight Covid—their tax policies.
The most common tax policy measures used were around:
- 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 have looked at whether the Covid-19 tax policies were just short-term policies and how they have changed in the post-Covid world, where governments need to manage inflation, slow economic growth and war effects. What we have learned is that:
- Most of the pandemic tax policy measures have started being reversed or—if still in place—they are expected to be reversed by the end of this year. Very few incentives will continue (such as the extension of the ability to carry forward losses).
- Apart from the Asia-Pacific region, all other regions have reversed most of the pandemic tax policies. Some APAC countries will continue to apply pandemic tax policies to the end of 2022.
- Post-pandemic tax policies are influenced by budget deficits and the need to improve tax revenue collection. As such, governments need to find the right balance between tax policies that stimulate growth, policies that strengthen tax revenues, and those that focus on equity.
We will look in more detail into how the balance between growth, tax revenues, and tax equity is being achieved in each of the regions.
In the APAC region, the focus seems to be on tax policies that stimulate growth by extending some of the tax facilities that were available during the pandemic—for example, in Hong Kong and Indonesia the deadlines for filing tax returns have been extended—or by continuing with pandemic tax-related incentives or introducing new ones. If we look closer at the tax incentives, some of those that stand out are:
- Value-added tax exemptions applied to small companies 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 buy equipment to facilitate work from home are allowed to deduct this expenditure.
Apart from the focus on stimulating growth, there is also some concern around the level of tax revenues. As such, some APAC countries have focused on introducing or extending the tax base for digital tax (for example, Malaysia and Thailand) while other countries have focused on increasing the tax rates (for example, goods and services tax in Singapore).
At the same time, governments try to make taxation fair for local and multinational companies and roll out base erosion and profit shifting provisions. Hong Kong is one of the most advanced in the region in terms of transfer pricing rollout, while South Korea and Japan have introduced new rules around transfer pricing documentation and country-by-country reporting.
In summary, the APAC region (and especially China) tries to position itself as an attractive destination for foreign investors, while carefully managing tax rate increases and additional reporting requirements (particularly in the transfer pricing area). Companies looking to invest in APAC countries should carefully assess the available tax incentives and should prepare their tax functions for additional reporting requirements.
Europe, the Middle East, and Africa
Unlike APAC, the focus in the EMEA region is around tax equity and policies allowing an increase in tax revenues. Measures that have been taken lately are:
- Detailed digital reporting requirements either for sale invoices only (for example, Serbia and Poland introduced, or will introduce, electronic invoicing) or for all or certain categories of transactions (for example, Norway has introduced SAF-T for general ledger transactions, Slovakia has requested companies to provide information on bank accounts). Detailed reporting allows 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 the VAT penalties for noncompliance. Taxpayers will now be given time to settle underpaid taxes before late payment penalties are imposed. Taxpayers may also benefit from a waiver of 70% of unpaid penalties if they meet certain conditions. The amendments stimulate businesses to review their historic filing positions and to voluntarily disclose any errors before they are notified of an audit. Businesses should also review any outstanding penalties to determine if they can benefit from relief.
- Increased tax rates. Switzerland has announced an increase in VAT rates, the UK has introduced a new tax on plastic packaging, while South Africa has reduced the allowable expenses for interest.
Companies doing business in this region or interested in expanding their operations there need to organize very effectively the process around legal changes and their implementation, and need to be ready to adapt their accounting and tax tools to the ever-increasing reporting requirements.
US and Latin America
Both the US and Latin American countries have an approach similar to the EMEA region, focusing on tax equity and tax policies that contribute to increasing tax revenues or their collection. The focus is on rolling out the transfer pricing requirements and introducing detailed digital reporting requirements (for example, Mexico and Bolivia are introducing electronic invoicing) as well as on maximizing tax revenues by introducing additional taxes (for example, digital tax in Canada), widening the tax base (for example, Chile and Venezuela), or increasing the tax rate (for example, corporate income tax in Colombia).
What Should Companies Do?
For companies operating cross-border it is very important to understand the tax policy focus and the tax measures applied in a country, because these will impact the company’s business decisions. For example, a tax policy focused on strengthening tax revenues should stimulate companies to:
- Understand the tax cooperation mechanisms available in each country and take advantage of those to avoid or minimize tax disputes. Our report shows that 90% of the countries around the world provide some form of tax guidance.
- Increase digitalization to respond to the digital reporting requirements. Digital tax reporting requirements increase year on year, with the highest level of digitalization in the VAT/GST area.
Tax policies play an important part in companies’ success in their cross-border operations. Understanding what type of tax policies are promoted in countries and regions will allow companies to better plan their expansion and to be ready for the legal changes that might require process changes or further investment 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 with TMF Group.
The author may be contacted at: email@example.com