Tax and Legal News - May 2025

What we might expect in the tax world in the foreseeable future

Half a year since my last post (more HERE), please allow me one more (last) personal reflection. This time, I won't turn my gaze to the past, but rather allow myself to speculate on what might await us in the tax world in the foreseeable future.

There are, of course, many possible scenarios – from the most optimistic rose gardens for all the people of the world to the more imaginable worlds of the Hunger Games, the Matrix and 1984. Despite the concentration of wealth and power, where the world goes may ultimately be decided by the mere flapping of a butterfly's wings, so I'd prefer to stay grounded and focus on trends in tax and tax advisory.

I have been intrigued by three pairs of mutually contradictory trends – trends sometimes quite obviously contradictory, other times less so.

The first trend is away from raising taxes – politicians have found that printing money is easier than raising taxes, and are driving budget deficits to unprecedented heights: inflation eats into people's savings and reduces national debt, yet somehow hurts the population less than if the tax rate on their paycheck were to be increased.

I speculate this will not be sustainable in the long run, one day the creditors will want to repay the debts and, in addition to selling off the remaining public assets, taxes will have to be raised.

Here a dilemma may arise: raise direct or indirect taxes? I think politicians are clear that it's always more painful to increase a direct tax that is visible on a tax slip or return than to increase (or better yet, introduce a new) indirect tax. We can expect a whole range of innovations from higher taxes on electricity (80 billion in fuel taxes will need to be replaced) to taxes on sugar, fat, plastic, etc.

The other apparent contradiction is the globalisation of the economy and the world, on the one hand, where an increasing part of the world economy is owned by the largest multinational corporations and financial institutions, and, on the other hand, de-globalisation, where, especially after the US elections, trade barriers are being created between countries, continents and economic blocs.

The effect of globalisation on taxation was transnational tax planning aimed at minimising the tax burden on companies (with interest, royalties and transfer pricing at the centre). The national response to this trend has been the 15-point interstate initiative under the OECD banner known as "BEPS" and its specific manifestations, which in my view will continue to shape much of the tax world, initiatives such as Pillar 2 (minimum effective tax rate), ATAD, CbCR, MDR, MLI, MAP and a host of other incomprehensible, albeit internationally recognised, acronyms whose common denominator is a unified approach to tackling international tax planning.

The trend towards international cooperation is being countered by good old-fashioned protectionism, increasing tariffs and indirect taxes, from the standard ones, where it is enough to increase tariffs, to innovative instruments such as carbon tariffs protecting against environmental dumping (the EU is not protecting itself very much yet – I want to believe that it isn't waiting for European industry to lay down completely and there will be nothing to protect) or digital taxes on software and content imports. We can see and continue to expect support for domestic production from the developed countries – the Chinese have started massively, the US has joined in and the results are already visible – production is moving to China, to the US, from Europe, or at least from the Czech Republic. Neighbouring countries are trying to respond, adjusting incentive schemes, and the Czech Republic is just passively watching how Pillar 2 and the minimum tax will crack down on those who have already received incentives in the past.

The third contradiction I would like to point out is artificial intelligence and the green deal. How can these two seemingly positive trends be mutually exclusive?

AI is undoubtedly something that, like in many other fields, will change tax practice significantly. We can automate many processes, and with a bit of practice AI can research and investigate better than many novice and moderately advanced tax professionals. Weaknesses? It sometimes makes things up – not just conclusions, but sources. It occasionally draws the wrong conclusion, even if its argument looks beautifully reasoned and plausible. It will certainly improve, making it all the more difficult to distinguish between valid and invalid conclusions.

Two things bother me: the human ability to read maps and speak foreign languages is already atrophying thanks to navigators and translators. AI must necessarily lead to loss of the ability to think, analyze and synthesize – in a few years, will anyone be checking AI to see if it is right? How will a tax (or any other) expert who relies on AI in the early days of practice be trained? Will taxes then just be a battle between the taxman's AI and the taxpayer's AI? (I don't even want to think about fields like nuclear power or the military).

Now the contradiction with our green mission – do you know how much energy it takes an AI to answer a moderately complex query? For example, the energy consumed to do the research in writing this article would take the average car nearly half a kilometre. Today, that's still unknowable, but when AI use takes off, it could take a nasty toll on our carbon karma. Then again, maybe it will help fill the national budget deficit.