A guide to understanding opportunities and challenges in 24 key jurisdictions

Introduction: Whatever it takes: combating the crisis

In less than a year, the "credit crunch" has deteriorated into the first global recession we've experienced since World War II. In fact, in its 31 March 2009 Economic Outlook report, the Organisation for Economic Co-operation and Development (OECD) called this the "most severe and synchronized" downturn in post-war history — forecasting gross domestic product (GDP) growth in OECD countries of negative 4.3% in 2009. As a result, many countries are facing serious structural economic issues, the effects of which can be seen in the steep decline in world trade — a contraction of 13.2% for 2009, according to recent OECD projections.

Countries around the world continue to focus intensely on efforts designed to lessen the impact of the global economic and financial crisis. Through monetary policy, regulatory action, fiscal stimulus and, most often, some combination of all three, the majority of countries — whether “developed” or “emerging” — have been undertaking a variety of activities designed to spur demand and restart the flow of credit to businesses.

From a monetary policy perspective, this has included traditional approaches like lowering interest rates and increasing the money supply and less traditional methods like quantitative easing, which involves the injection of new money into the financial system by a central bank through the purchase of both government and corporate debt.

From a regulatory perspective, we have seen numerous changes primarily intended to reduce systemic risk, with government guarantee programs expanding rapidly in size and scope. In many cases, governments are becoming significant shareholders in, or are in fact taking over, financial institutions that have been deemed “too big to fail.”

In addition to these monetary and regulatory efforts, most countries have also pursued discretionary fiscal stimulus through a combination of spending and tax mechanisms. Though the approach has varied from country to country, each package has shared a common goal: to boost demand and improve liquidity and cash flow — both on an overall basis and, often, in targeted segments of the market.

Interestingly, while spending measures have generally received more public focus over the last few months, tax measures actually comprise the larger share of overall fiscal stimulus packages. In fact, according to a recent OECD report¹, tax measures represent 56% of the net effect of fiscal stimulus as an average among OECD countries. In this guide, we focus on the tax-related fiscal stimulus measures in 24 jurisdictions where we are seeing particularly robust stimulus activity and identify themes that are emerging as governments increasingly rely on their tax systems to administer stimulus.

This tax-based approach to fiscal stimulus has included a wide range of measures in categories such as:

• Accelerated depreciation programs
• Carryforward and carryback provisions for net operating losses
• Adjustments to corporate income tax rates
• Enhancements to research and development tax credits
• Indirect tax changes
• Tax measures affecting individuals

Recognizing opportunities, overcoming challenges

In an increasingly global and interconnected business arena, these kinds of tax measures likely are being adopted in many of the jurisdictions in which a multinational corporation operates; tax directors must understand their implications in order to prepare for their impact. Beyond that, most observers agree that these are not the last stimulus efforts that we will see before the global economy again finds firm footing. As governments prepare their next round of actions, many will look to the experiences of their neighbors and trade partners — both positive and negative — in determining their approach. This guide can help tax executives better recognize developing trends.

It’s also important to note that, while most government activities to date have necessarily focused on addressing urgent needs, history shows us that today’s actions lead to tomorrow’s consequences. In fact, many governments are already contending with ballooning deficits as they launch aggressive spending programs in an environment of sharply falling tax revenues. The impact of this widening gap on future tax policy and administrative decisions will be significant. World-class tax functions are already actively assessing and preparing for the future; we take a look at some of the things that tax directors are focusing on to benefit from potential opportunities while managing challenges in this volatile environment.

¹OECD Economic Outlook — Interim Report, 31 March 2009

Next section: Accelerated depreciation