How tax will play a role as the world strives for stability in 2021

While 2021 is expected to be another unpredictable year with COVID-19 management continuing to be a large variable, there are some notable trends emerging as jurisdictions across the globe contend with broadly similar challenges. In addition to continuing to respond directly to the circumstances of COVID-19, tax administrations are accelerating the adoption of digital administration approaches as they operate in this dynamic environment. Meanwhile, work on a solution to the perceived tax challenges of the ever-growing digitalization of the economy continues with increased urgency. Jurisdictions are also expected to focus on enforcement to collect all revenues due in order to bolster their ailing budgets.

COVID-19 responses

By the end of 2020, roughly US$30 trillion in financial stimulus was issued by governments in 140 jurisdictions around the world. As shown in the EY Tax COVID-19 Global Stimulus Tracker, commonly used measures include employee retention schemes, loans and guarantees, tax payment and filing deferrals, accelerated tax refunds, temporary changes to Value Added Tax (VAT) treatment, enhanced loss utilization rules, accelerated and bonus depreciation, and targeted tax incentives. Many of these measures expired in 2020, but some continue in 2021. New initiatives are also possible as governments seek to stimulate their economies or provide further support in the face of further outbreaks.

The monumental level of support and stimulus enacted by policymakers comes at a significant cost, and government plans to offset these expenditures are still uncertain. In the Outlook survey, EY tax professionals were asked to forecast their jurisdiction’s primary response to these costs, with the opportunity to select multiple areas. Only slightly more than a tenth of the respondents in the 68 jurisdictions indicated that they expect higher taxes in their jurisdiction in any particular category during 2021, including corporate income, indirect (including VAT) or individual income, reflecting the expectation of a collective reticence on the part of governments to raise taxes right now. More than a third have observed little or no discussion to date within their jurisdiction’s government about covering such costs by raising revenue, more than half expect a shift of resources from other governmental priorities to cover the costs of COVID-19 measures and half expect increased enforcement of existing taxes to support the funding gap in coming years.

Tax administration developments

Many tax authorities embraced new technologies after the first wave of COVID-19 shuttered their offices. Tax authorities adopted new platforms in order to keep working, and 70% of EY respondents to the Outlook survey expect continued digital advances in their jurisdiction’s tax administration in 2021. This includes several jurisdictions expected to move to digital auditing. Updated technology platforms are expected to affect many areas of compliance ranging from simple registration (such as for VAT or goods and services taxes (GST)) to cash registers being automatically linked to tax authority databases. Additionally, requirements to use e-invoicing have continued to expand with recent implementation in Chile, El Salvador, Saudi Arabia and several other jurisdictions. Overall, the scope and scale of tax authorities’ digital transformation is anticipated to be considerable.

A more connected and technological tax authority is not just about increasing compliance; it can also bring greater efficiencies. As an example, the Mutual Agreement Procedure (MAP) process, designed to help multinational companies resolve double taxation, could be made more efficient through greater digital communication between jurisdictions. With more frequent virtual meetings, taxpayers may see a faster resolution of their case and tax authorities may sooner notice, and potentially address, particular areas that are creating conflict for taxpayers. “Given the high cost of tax litigation, both monetarily and in time, governments and taxpayers are well served by an improved MAP process,” says Joel Cooper, EY Global Tax Desk Leader for Transfer Pricing Controversy.

Heightened focus on taxing the digital economy

Taxation of the digital economy has been a focus of policymakers for several years. It was the subject of Action 1 of the OECD’s 15-action BEPS project, which began in 2013 and culminated with the release of final reports in 2015 but without significant progress on digital taxation. Continued concerns fueled work in the European Union, including development of the concept of a digital services tax (DST). While agreement to move forward was not reached at the EU level when the DST proposal was first advanced, the concept attracted significant interest from individual jurisdictions. The potential adverse implications of uncoordinated unilateral action led the G20 to task the Inclusive Framework with further work on addressing the tax challenges of the digitalization of the economy. This current project, commonly called BEPS 2.0, began in 2019 with the release of a framework for a two-pillar approach and an ambitious target of consensus agreement in 2020.

The BEPS 2.0 project is complicated both technically and politically. The Pillar One proposals for new nexus and profit allocation rules and Pillar Two proposals for global minimum tax rules would fundamentally alter the long-standing international tax architecture. The changes contemplated would alter how taxing rights over global business income are divided among governments, meaning that there would be net winners and net losers of tax revenue among jurisdictions. Moreover, implementation and application of new rules of the type contemplated would require an unprecedented level of multilateral cooperation.

Despite the complexity of the BEPS 2.0 project and the logistical challenges created by the COVID-19 pandemic, the Inclusive Framework in October 2020 released detailed blueprints on the two pillars. While agreement on a solution was not achieved in 2020, the Inclusive Framework jurisdictions agreed to work with a goal of achieving consensus by mid-2021. Several factors can be viewed as increasing the political urgency of the project. Beginning with France in 2019, several jurisdictions have enacted DSTs and more are moving toward doing the same. COVID-19 has accelerated the digitalization of the economy and the massive government spend on support and stimulus measures has heightened governments’ need for tax revenue.  With the United States viewed as an essential participant in any consensus, considerable attention is focused on the new Biden administration and the position it will take on the project. U.S. Treasury Secretary Janet Yellen has signaled the intention to actively engage on this global effort, with more specifics on US policies with respect to Pillar One and Pillar Two expected to emerge through discussions at upcoming G20 Finance Ministers meetings and Inclusive Framework technical working group meetings.

There are significant policy differences that would have to be resolved to reach consensus on the BEPS 2.0 project and move forward to implementation of the proposed rules. There also are other avenues for potential multilateral agreement, including ongoing discussions in the UN tax committee and ongoing work at the EU level. Moreover, without agreement on a coordinated approach, jurisdictions likely would take action on their own, including consideration of DSTs and other digital tax approaches as well as minimum tax measures. 2021 is expected to bring substantial activity in this area, whether coordinated or unilateral, with significant implications for all multinational businesses.

To date, governments have announced relatively few revisions to corporate or individual income tax bases or rates in effect for 2021, although policy changes for 2021 could yet come. More change may be seen with respect to indirect taxes in 2021, which was an area that governments turned to in 2020 to provide incentives and targeted temporary relief. And it will be important to watch what changes to tax rates and bases are adopted in 2021 with implications for 2022 and beyond.

Corporate income taxes

The global trend toward lower corporate income tax rates and broader bases continued, but with less dramatic effect than in recent years and with limited change to the overall corporate income tax responsibility. To date, no jurisdictions have raised their corporate tax rates in effect for 2021, and five jurisdictions have lowered their rates. Argentina and the Philippines each reduced their rate by five percentage points, Turkey by two, Colombia by one, and France by a half percentage point. Outlook survey respondents in 11 jurisdictions expect increased tax bases in 2021, while respondents in 7 jurisdictions anticipate a move in the opposite direction. The most frequently cited measures expected to be used to expand the tax base are changes to transfer pricing and withholding taxes, and changes to the treatment of losses are expected to narrow the tax base.

Increased incentives also play a part in the corporate income tax in many jurisdictions. A quarter of Outlook survey respondents expect expanded research and development (R&D) incentives in their jurisdiction in 2021. Additionally, a quarter of respondents expect expanded incentives for business investment, such as enhanced capital allowances, depreciation and amortization. Respondents in eight jurisdictions expect expansions in both these areas in their jurisdictions.

“We are also seeing an increase in incentives related to reductions in greenhouse gas emissions and other activities aimed at reducing carbon footprints,” says Cathy Koch, EY Global Sustainability Tax Leader and Global Tax Policy Network Leader. “Globally, governments are working to address climate-related risks, and tax is a critical component of that effort. Historically, tax has always been a powerful government tool to drive behavior. By using tax, in particular incentives, to reflect true environmental costs and benefits, businesses and individuals will be incentivized to make more environmentally informed decisions about operations and consumption.”

Recent examples of such activity include Korea’s proposed Green New Deal, Japan’s focus on innovation to meet its new commitment to be carbon neutral by 2050, Germany’s Package for the Future and similar initiatives in other jurisdictions.

Indirect taxes

Sustainability behaviors are also being influenced through VATs, such as Colombia’s VAT exemption for the import of equipment used to improve environmental conditions or decrease emissions of greenhouse gases. In addition, many jurisdictions are putting in place new taxes on plastics and single-use items.

VAT, as it always is, will be an important area of tax policy to monitor through the course of 2021. In 2020, many governments provided VAT exemptions for items needed to battle COVID-19, including material used in vaccine production, medical equipment such as ventilators, sanitization items or personal protective equipment.

However, targeted changes like those we saw in 2020 do not have a significant revenue effect when compared to the general levying of VAT on mainstream goods or services. Outlook survey respondents are expecting limited VAT changes in 2021, with more than 80% expecting the VAT level in their jurisdiction to stay the same (12% expect a VAT increase in their country, largely due to base broadening). None of the respondents reported an increase in the top VAT rate in their jurisdiction in effect for 2021, although Oman did introduce a new 5% VAT, effective beginning in April 2021, and Saudi Arabia increased its VAT rate in mid-2020.

Individual income taxes

Individual income tax rates in effect for 2021 have risen in five jurisdictions and have decreased in two. Expectations regarding changes in the individual income tax bases also are fairly limited, with 15% of Outlook survey respondents anticipating expansions of the base in their jurisdiction and 12% anticipating contractions of the base. Three-quarters of respondents expect the overall level of individual income tax in their jurisdiction to remain the same in 2021.

While many governments are still considering what tax policy changes to make in the complex environment of 2021, tax administrations are changing their approach to enforcement. “We are already seeing some governments shift their focus to raising revenue,” says Luis Coronado, EY Global Tax Controversy Leader and Global Transfer Pricing Leader. However, governments must balance protecting their economies – and inbound investment – with their need for revenue, making raising taxes a challenging proposition. Fully collecting all that is due from existing revenue sources may be seen by tax authorities as the path of least resistance. Coronado further notes that according to the 2021 EY Tax Risk and Controversy Survey, “Many global businesses may not be prepared for the impact of dramatic changes occurring in tax authority scrutiny of their tax affairs.” Those changes – including more multilateral, whole-of-group examinations, supported by transparency, information exchange, and greater use of data analytics – have begun according to the Outlook survey, with a third of EY respondents expecting increased tax enforcement in their jurisdiction in 2021 alone. This impression is amplified by the EY Tax Risk and Controversy Survey, where more than half of global respondents foresee higher levels of tax enforcement – not just in 2021, but in the following two years as well.

Governments now are resuming collection and enforcement actions that were paused in 2020, including tax audit and litigation activity. Transfer pricing has historically been identified as a top audit issue and 2021 is no exception. More than 80% of Outlook survey respondents listed transfer pricing as one of their government’s top audit issues. Multinational companies are expected to be a core focus of most tax authorities, with more than 70% of respondents anticipating increased audit pressure on such companies in 2021. Additionally, COVID-19 stimulus measures, mobile worker risk, the treatment of losses and the issuance of tax refunds are all forecast to drive new tax audit activity in 2021.

Beyond such immediate concerns, governments are looking at other methods to more efficiently and fully collect current tax revenue through improved compliance. Nearly two-thirds of Outlook survey respondents have already seen or are expecting the imposition of new disclosure or transparency rules in their jurisdiction in 2021. More than 40% expect that their jurisdiction may offer voluntary disclosure programs, and a quarter of respondents have seen or expect their government to offer companies tax certainty in return for early tax payments through various programs.

Implementation work continues in EMEIA

“The biggest tax focus in EMEIA, other than the COVID-19 crisis, is the implementation of the EU’s Mandatory Disclosure Regime (MDR) that requires the reporting of certain cross-border arrangements,” says Jean-Pierre Lieb, EY EMEIA Tax Policy and Controversy Leader. “There was a flurry of activity in 2020 as governments and businesses prepared to put the MDR into action.” The initial reporting deadline of 31 August 2020 was postponed to 28 February 2021, yet another COVID-19-impacted event, as jurisdictions needed more time to prepare themselves to receive and exchange submissions. The MDR creates extensive reporting obligations for a wide range of tax arrangements, and there are no minimum threshold exceptions. Taxpayers and intermediaries must implement policies, procedures and processes to identify and capture details of transactions that they will need to disclose. “Penalties for noncompliance can be significant,” warned Marlies De Ruiter, EY Global International Tax and Transaction Services Policy Leader, “Taxpayers and intermediaries should seek assistance in identifying and managing their obligations under the MDR.”

As MDR implementation currently takes center stage in the EU, the legislative aspects of BEPS and the related EU Anti-Tax Avoidance Directives (ATAD) have now been largely completed in most jurisdictions. However, there seems to be some ATAD activity still ongoing as six of the nine jurisdictions where respondents forecast an increasing level of tax as a result of tighter controlled foreign corporation (CFC) rules are in the EU. Additionally, some of the jurisdictions that joined the Inclusive Framework more recently still have some BEPS implementation work to complete, which will be an area for companies to monitor.

Measures such as those developed in the BEPS project may gain greater focus elsewhere as Middle East jurisdictions begin to rebalance their tax systems and connect more globally on tax policy. Hit hard by the decline in oil and gas revenue as a result of the COVID-19 crisis, some Middle East jurisdictions are seeking to diversify their revenue streams, including additional consideration of new or increased VATs.

“Enforcement of current revenue streams will be a top concern throughout the EMEIA region as governments begin to tackle their budgetary pressures from the record stimulus packages and support measures,” says Bridget Walsh, EY EMEIA Tax Managing Partner. “At the same time, we are increasingly seeing tax rise up the agenda of boards with C-Suite executives taking much more interest and having greater oversight in tax issues, particularly managing tax risks and resulting disputes.”

Growth is the goal in Asia-Pacific

“Governments in Asia-Pacific are more concerned with stimulating the economy and ensuring long-term competitiveness than with immediate revenue raising measures in the wake of the COVID-19 crisis,” says Siew Moon Sim, EY Asia-Pacific Tax Policy and Controversy Leader. Indeed, the region leads the world in new and expanded business incentives according to the Outlook survey, with more than half of Asia-Pacific jurisdictions expected to offer more beneficial R&D incentives, and more than a third expected to expand other incentives in 2021. “It seems the plan for bringing in revenue in 2021 is to grow the tax base by attracting business rather than increasing the current level of tax,” concurs Eng Ping Yeo, EY Asia-Pacific Tax Leader. “This is consistent with the cautions offered by OECD economists regarding the potential growth-dampening effects of tax increases at this time, and we can expect governments to be monitoring the results of these policies closely.”

The entire Asia-Pacific region has only two rate increases in effect for 2021 to date, both involving individual income tax (New Zealand and South Korea). A significant decrease in the corporate income tax rate in the Philippines, from 30% to 25%, is scheduled to take effect retroactively to 1 July 2020 when enacted. Additionally, across all three major tax areas (corporate income tax, indirect taxes and individual income tax), Outlook survey respondents expect only two base expansions and five base constrictions in 2021 – a relatively stable outlook for taxpayers this year.  

In seeming contrast to the rest of the world, most governments in the Asia-Pacific region do not appear to be increasing enforcement efforts. As of January 2021, no survey respondents have observed tax audit efforts intensifying to above pre-2020 levels, 70% have seen their jurisdiction return to generally normal audit functioning, and 30% have seen their jurisdiction continuing to operate at a reduced level of audit activity.

Dynamic tax landscape in the Americas

The environment is more varied for taxpayers in the Americas, where respondents forecast higher levels of change in 2021 than in other geographies. Outlook survey respondents expect the overall level of corporate income tax to increase in Brazil, Colombia and Costa Rica, and no respondents anticipate a lower overall level of tax despite corporate tax rate reductions in effect for 2021 in three jurisdictions.

Generally speaking, jurisdictions in the Americas have been following the global trend of lower rates and broader bases. However, the region features the highest average statutory corporate tax rate based on jurisdictions surveyed in the Outlook: 28% in the Americas vs. 24% in Asia-Pacific, 21% in EMEIA and 23% across all 68 jurisdictions.

The average corporate income tax rate in the region may change, as a third of the Outlook survey respondents in the Americas anticipate significant tax reform in their jurisdiction in 2021, compared to only 13% in EMEIA and 20% in Asia-Pacific. While some current reform efforts are carry-over projects, many reflect new initiatives in jurisdictions that are contemplating joining the OECD or that are otherwise taking a new look at modifying their tax systems.

Tax policy changes in the Americas are developing against the backdrop of a strong enforcement environment. These efforts may create uncertainty for taxpayers, with nearly 80% of Outlook survey respondents in the Americas reporting an expectation that their country’s tax authority could adopt new interpretations of existing tax laws as they seek tax revenues in 2021.

“With an increasing focus on government spending related to pandemic heightened economic challenges, governments are considering a wide array of responses – from tax rate changes, to tax base broadeners, to new taxes, to increased enforcement,” said Marna Ricker, EY’s Americas Vice Chair of Tax. “Because we also expect some governments to increase incentives for investments as well, it’s essential for tax leaders to have a holistic view of their specific fact patterns and the potential tax changes to properly evaluate the risks and the opportunities.”

Looking forward

“Businesses will need to be resilient and agile as they anticipate and navigate the coming economic and tax developments,” agrees Angus. “They must adapt their strategies and responses as the situation demands, especially with policymakers in governments around the world trying to balance the continued need for support and stimulus with concern about growing budget imbalances.” This requires monitoring the tax policy and tax administration developments in all the jurisdictions that are relevant to the company’s business footprint.  Barton emphasizes, “For tax departments, being able to anticipate potential changes in the tax environment and clearly communicating to stakeholders the implications of those changes for the company is more important than ever.”