Welcome
Daily Tax Report ®

Countries Seek New Revenue Sources to Pay for Virus Relief (1)

May 15, 2020, 8:45 AMUpdated: May 15, 2020, 4:37 PM

As countries across the globe borrow billions of dollars in the fight against the coronavirus, they are trying to figure out how to foot the enormous bill.

Large segments of their populations are unemployed, and with few stores open for business, traditional revenue-raising measures—income and sales taxes chief among them—aren’t likely to generate enough money to cover spending.

Instead, some countries are eyeing new revenue sources or making better use of existing tax measures to fund coronavirus recovery.

Argentina and Peru are considering increasing taxes on high-income earners. Indonesia last month extended its value-added tax to digital companies to help pay for virus spending. Saudi Arabia recently tripled its value-added tax rate, and the International Monetary Fund and the Organization for Economic Cooperation and Development are talking about taxes on carbon emissions.

Members of the European Parliament recommended that member countries dedicate new sources of revenue to aid post-virus economic recovery in a May 12 resolution. They called on leaders to “take bold decisions” over the next decade and consider digital services taxes, income from the emissions trading schemes, a common consolidated tax base, and a financial transactions tax.

The European Commission’s long-term budget, which will include plans for a recovery fund, will be presented to Parliament May 27, according to a commission spokesperson.

“The biggest challenge right now as countries are implementing the large fiscal responses to the pandemic, is thinking through what the long term fiscal consequences of these current policies will be,” said Daniel Bunn, vice president of global projects at the Tax Foundation. “Some countries are much more constrained as far as their borrowing capacity, so they’re going to be looking for other sources of revenue.”

“The challenge is designing new taxes during a very weird time for the economy,” Bunn said.

Wealth Taxes

While higher-income countries have greater capacity to issue debt, cash-strapped nations may soon need to start raising revenue through taxes to respond to the Covid-19 crisis.

Some are eyeing a one-time tax on wealthy residents.

Argentina, which was already facing debt default if it doesn’t reach a restructuring deal with international creditors, has spent about 3.5% of its GDP on coronavirus response, according to a recent IMF report.

To avoid deeper economic turmoil, politicians have proposed a one-time tax on Argentina’s wealthiest citizens. The tax would collect 2% on fortunes of more than $3 million and 3.5% on fortunes of more than $44 million.

While President Alberto Fernández has endorsed the plan, legislators have yet to approve it.

The move to tax the country’s elite would come at an opportune moment, but it would be politically risky, said Julia Strada, a director at Argentina’s Center for Political Economy. Etched into the nation’s collective memory is the agricultural sector’s loud 2008 protests against proposed taxes on soybean exports.

“They are considering if it’s a good and intelligent strategy to go on with this tax, or stop it and use it as a threat for the rich,” Strada said, noting the government could use a possible tax as leverage to prevent layoffs. “If you fire your workers or don’t pay taxes or if you don’t collaborate, well, we can go on with this tax.”

In Peru, President Martin Vizcarra is studying proposals to impose a one-time “solidarity tax” that would affect high-earning workers—though as in Argentina, no such plan has been approved.

“There’s no time to lose,” Vizcarra said at a press conference in late April. “It’s extremely important for those who have more to show solidarity with those who have less.”

While some economists say the public health crisis lends credence to the argument for wealth taxes, others say such measures may be too polarizing to be feasible.

Ecuadorian President Lenin Moreno had to shelve plans Thursday to increase taxes on wealthy individuals, companies, and foreign-owned real estate as it became clear that he lacked congressional support for the move.

Jennifer Roeleveld, a tax researcher at the University of Cape Town, said she opposed calls for South Africa to impose a wealth tax because it would “turn people off” from investing and working there.

“They are very portable,” she said of the wealthy. “They will just move everything out of the country.”

Digital Tax Measures

Other countries are looking to tax digital platforms’ services to generate revenue.

In early April, Indonesia’s government applied a 10% value-added tax to services on electronic platforms that operate in the country—in part to help pay for Covid-19 relief.

“We decided to tax digital companies with an electronic transaction tax because their sales have soared amid the Covid-19 outbreak,” Finance Minister Sri Mulyani Indrawati said at a press conference last month.

India expanded its digital tax—called an equalization levy—through a budget bill passed in late March. As of April 1, foreign e-commerce companies became subject to a 2% tax on online sales of goods or services into India.

The move has caused a backlash from business groups, who urged the government in a recent letter to delay the tax by at least nine months and to seek their input on the measure.

A handful of European countries have already implemented digital taxes on platform services, ranging from 3% to 7%—though they face opposition from American officials who call the measures unfair.

European Union Economy Commissioner Paolo Gentiloni suggested in a video conference in early April that the coronavirus’ impact could persuade some countries to back digital taxation.

Meanwhile, although the pandemic has halted much of the world’s heavy industry, some have called on countries to consider taxing carbon emissions as part of their recovery strategies.

“Low oil prices and the need to rebuild fiscal positions make raising carbon taxes (or closely related instruments, such as fuel taxes) and eliminating fossil fuel subsidies especially opportune,” the IMF’s fiscal affairs department said in a paper published April 20.

VAT Increases

Richard Asquith, vice president of global indirect tax at Avalara Inc., a tax software company, expects to see increases in VAT and sales taxes when countries have overcome the public health crisis and must raise revenue to pay back money borrowed. Countries may look at new ways to tax the gig economy and financial services as well, he said.

“Tactically, governments can only raise VAT or consumption taxes when there’s a crisis because they can sell it,” Asquith said. “So this will be the same opportunity, the perfect storm, as it were, to do that.”

Saudi Arabia’s decision to increase the VAT from from 5% to 15% starting July 1 has “enormous implications,” said Hossein Askari, an economist focusing on the Middle East. The dramatic increase could lead to political unrest, he said.

To go from a low VAT to a high VAT “is going to be a heavy bill for everyone, including the less well-off, Asquith said.

Expand Existing Taxes?

Some observers contend that imposing new taxes during a global pandemic is impractical altogether.

Instead, said Wilson Prichard, CEO of the International Centre for Tax and Development, why not better enforce existing tax law to reap more revenue?

“Wealth taxes are complicated to implement,” he said. “Whereas simply enforcing what’s on the books is comparatively much more simple. And it still has huge revenue potential.”

He pointed to property taxes, which are often under-collected, as one potential source for pandemic relief. In Freetown, Sierra Leone’s capital, the mayor has already begun expanding the property tax base and revaluing homes in its wealthiest neighborhoods in an attempt to collect additional revenue.

Authorities could bolster existing tax regimes by closing loopholes and increasing the tax rate for wealthier citizens, said Allison Christians, a tax law professor at McGill University.

“Moments of crisis are moments of reckoning,” Christians said. “The tax system we have built is not really resilient. We’re going to have to build a more resilient one going forward.”

Check out Bloomberg Tax’s country-by-country roadmaps covering direct and indirect tax developments.

(Adds information on European Commission plans in sixth paragraph. Earlier version corrected Wilson Prichard's title.)

To contact the reporter on this story: Meg Bernhard at correspondents@bloombergindustry.com

To contact the editors responsible for this story: Meg Shreve at mshreve@bloombergtax.com; Vandana Mathur at vmathur@bloombergtax.com

To read more articles log in. To learn more about a subscription click here.