18 minute read 17 May 2021
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Six key challenges facing tax leaders in 2021 and beyond

By Kate Barton

EY Global Vice Chair – Tax

Helping organizations develop smart tax strategies. Passionate about diversity, women in business and tax tech.

18 minute read 17 May 2021
Related topics Tax Tax planning

From pandemic stimuli and global tax reform to political challenges and technology, tax leaders and their teams are about to be tested.

In brief
  • Disruptions to global tax and trade will continue on the back of COVID-19 while the possible impact of Brexit remains largely unknown.
  • Ongoing regulatory and technological change will continue to put pressure on tax functions who will need to be agile in their responses.
  • Tax leaders will need to be on the front foot in order to avoid tax controversy or to respond quickly if it occurs.

Those believing 2020 was a roller-coaster of stimulus, tax, trade and related issues are finding little relief in 2021 — and are preparing for more disruption for years to come.

Below are six of the most prominent challenges and how tax leaders may want to address them — focusing on what is already known and those aspects that are, as yet, unclear.

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Chapter 1

Emerging from COVID-19

The rapid response by governments to support businesses during the pandemic helped protect economies. They also complicated tax.

The known

Since the outbreak of the COVID-19 pandemic, more than 130 jurisdictions have made significant changes to their tax codes, focusing on mitigating negative economic consequences.

Initiatives from tax authorities have been broad-ranging and have included revised requirements for tax notices, tax filings and collections; suspension of tax audits; and leniency on tax litigation. One look at the EY COVID-19 Tax Controversy Response Tracker gives a clear indication of the scale of the tax changes that were put into force.

Alongside these reliefs, governments also implemented multi-billion-dollar packages in order to support businesses through closures — providing loans and grants as well as critical furlough schemes.

“Governments are going to extraordinary lengths to see that businesses remain solvent, individuals remain employed or financially sound, and overall economies remain competitive,” says Susan Pitter, EY Global Deputy Vice Chair — Tax.

As the world begins to emerge from the pandemic, tax policy will slowly return to normal. Indeed, many of the measures put into place have already expired or will do so by the middle of 2021 – leaving tax authorities playing catch up as they start bringing businesses back in line with typical reporting and tax deadlines.

This is happening against a backdrop of monumental stimulus packages being implemented around the world – the most headline-grabbing being the US$1.9 trillion coronavirus relief package signed by President Biden in March 2021.1

Such spending, and the stimulus that has preceded it, will need to be recouped in the years ahead – and that will be achieved through further changes to taxation.

The unknown

Executives can’t be certain of when it will happen or to what degree, but they must prepare for inevitably higher taxation. “Tax authorities around the world face a difficult dilemma,” explains Pitter. “They are going to have to pay for all of this stimulus at some point. But if they move too fast or too far in raising taxes, they risk dragging an already weak global economy into a double-dip recession or depression. Higher taxes are coming, but we can’t be certain which jurisdictions will move first or how far.”

That said, some countries seem to be laying the groundwork for a way beyond pandemic stimulus. In Europe, Bridget Walsh, EY EMEIA Tax Managing Partner, points to the European Union’s EU’s roadmap on new sources of revenue including proposals by the European Commission (EC) linked to a carbon border adjustment mechanism, a digital levy and the EU Emissions Trading System. “Throughout the passing of stimulus packages, the EU has been very strategic in terms of tying the funding to green initiatives,” she says.

In the US, Robert Weber, EY Global Leader of Business Tax Services, points to the current discussion related to the potential increase in the corporate tax rate to 28% as a significant pillar of the new administration’s tax policy – up from the 21% enacted in 2017 under the Trump Administration (it previously having stood at 35%).2

Weber says any rate increase could have an exponential impact because Trump’s rate reduction was made possible by limiting certain deductions to expand the tax base. “If those deductions aren’t restored in tandem with a rate increase, this could become a more significant tax increase with effective rates higher than the headline rate,” he says.

This is just one small part of a complicated picture. Ultimately, there is likely to be a gap between the winding down of certain tax reliefs and implementation of new tax regimes to recoup revenue – during which businesses will need fully assess their tax position.

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Chapter 2

Responding to the twin pillars of BEPS 2.0

Significant progress is expected on the OECD project. That will continue to shape the tax risk environment.

The known

The Organisation for Economic Cooperation and Development (OECD) project on taxation of the digital economy, colloquially known as Base Erosion and Profit Shifting (BEPS) 2.0, should be a key focus for all tax teams. The initiative, as currently evolved, consists of two elements or “Pillars”.

Pillar 1 is a complex, ambitious and transformational proposal that is intended to stave off a wave of unilateral legislation creating Digital Services Taxes (DSTs). “These are taxes on an multinational corporation’s (MNC) gross revenue,” says Barbara Angus, EY Global Tax Policy Leader. “The proliferation of unilateral and globally inconsistent DSTs is accelerating, so we can only imagine the levels of complexity, double taxation and controversy that would result if the world can’t find a multilaterally coordinated approach to digital taxation.”

Pillar 2 is a proposal to establish a global system of minimum taxation. It involves a set of interlocking rules that would allow the imposition of a top-up tax on income of multinational groups that otherwise would be subject to an effective tax rate at below a to-be-agreed minimum rate. Its focus is on tax competition among countries and the potential for profit shifting in response.

In both areas, Angus expects substantial activity in the coming months. “There’s a very good chance we’re going to see significant progress this year,” she says. The BEPS 2.0 project reached a milestone in October 2020 with the release of consultation documents in the form of blueprints for both Pillar 1 and Pillar 2. These received close attention from the business community, with more than 250 comment letters submitted by stakeholders and discussed at the virtual meeting hosted by the OECD in mid-January 2021.

The unknown

Progress is by no means guaranteed, with Angus and others acknowledging the challenges to date. For example, the OECD had been targeting achievement of consensus by the end of 2020, but that has now been pushed back to mid-2021 which is still very ambitious.

Though Angus believes an agreement could be announced by the new target date, the question is how detailed such an agreement might be and what might be encompassed. “One possible scenario is that they’ll advance Pillar 2 first, because those discussions are closer to conclusion. However, there has been opposition to bifurcating the project and allowing one pillar to get ahead of the other,” she says. Regardless of what is announced by mid-2021, it is expected that significant additional technical and procedural work will be required to get to implementation of any new rules.

Progress cannot be held to a strictly enforced schedule because much of the work is extraordinarily ambitious and challenging and there are more than 135 participating countries with differing perspectives and objectives.  “The collaboration process is leading to proposed rules that are exceedingly complex, but if they lean too far in direction of simplification, the result will be an overly blunt instrument yielding results that are not viewed as fair,” Angus says.

As work on Pillar 1 and Pillar 2 continues, businesses around the world are exposed to heightened risk of new DSTs featuring little if any standardization. Many EU nations have already either implemented or proposed at least some form of unilateral DSTs, as have countries beyond the EU. Other countries are expanding the application of VATs or GSTs to digital services. In addition, some countries are exploring changes to how their corporate income taxes apply to digital business activity.

Another unknown issue is the degree to which the US policy regarding BEPS 2.0 will change in the new administration. However, Angus says there may well be policies with respect to Pillar 1 that carry over. “Starting with President Obama and continuing with President Trump, the US has stated opposition to rules that would single out technology companies for special tax treatment, stressing the impossibility of ring-fencing digital business activity,” she says. “This has been a bipartisan view and that doesn’t seem likely to change fundamentally with the new administration.”  What business activity should be in scope of new Pillar 1 rules remains a major issue to be resolved in the global negotiations.

A sticking point with respect to Pillar 2’s global minimum tax rules has been the treatment of the Global Intangible Low-Taxed Income (GILTI) rules enacted in the US with the Tax Cuts and Jobs Act (TCJA) in 2017. GILTI has been described by some as the original minimum tax but its details differ in some key respects from the design that is developing in the Pillar 2 discussions. The Trump Administration maintained that GILTI should be deemed to be a qualifying Pillar 2 minimum tax that would take priority over a foreign country’s application of a Pillar 2 tax on a US multinational that is subject to GILTI.

In this case, Angus anticipates a different focus for the US going forward. “When we look at the Biden administration, they have proposed some modifications to GILTI that would have the effect of bringing it more in line with the Pillar 2 design. So the new administration is citing the OECD project in its efforts to advance those legislative changes in the US, rather than focusing on getting special treatment for GILTI under Pillar 2.” How this plays out will have important implications for the global Pillar 2 discussions.

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Chapter 3

Navigating the ongoing disruptions in global trade

Trade sentiments have shifted. Tax leaders need to understand how – and how those shifts affect them.

The known

Prior to COVID-19, tax leaders already faced challenges helping their companies stay abreast of and optimize against a sea of global trade negotiations, deals and disagreements, not least the ongoing trade dispute between the US and China. Then the pandemic struck, wreaking havoc and uncertainty across global supply chains.

And yet, says Gijsbert Bulk, EY Global Director of Indirect Tax, there have been a number of positive developments. While the Trans-Pacific Partnership may have fallen through, Asia-Pacific has since seen its largest free trade agreement (FTA) ever — with the Regional, Comprehensive Economic Partnership. Just before that, the EU entered into an FTA with Japan. ”Tax leaders should recognize the shift, the feeling that the US is no longer the first and foremost trading partner. The EU is looking to the East,” says Bulk.

As 2020 drew to a close, one of the most pressing matters in Europe was whether the EU and the UK would be able to agree on a Brexit deal. After delays during the year and an inability for both parties to agree on the minutiae, a deal was finally struck on 24 December 2020.

As the UK left the single market and customs union on 31 December 2020, new arrangements allowing for tariff-free trade in goods came into force. Yet it has been far from plain sailing since then, with the EU formally launching legal action against the UK in mid-March over alleged infringement of the Northern Ireland protocol relating to checks on goods shipped from Great Britain.3

The unknown

COVID-19 has shown companies and entire nations the weaknesses in their supply chains and footprints. Adjustments are being made, but will this be transformational or merely incremental?

“Disruptions brought on by national lockdowns and a decreasing demand in export markets has resulted in companies assessing their supply chain vulnerability and resilience,” says Walsh. “Even so, any short-term appetite to onshore and de-risk will be constrained in 2021 because of the costs of diversifying suppliers, logistics and holding larger inventories. Over the longer term, however, government incentives to onshore will likely begin to have an impact.”

Still to be sorted out is the degree to which trade rifts will persist. Bulk says that many executives he speaks with, ask whether a Biden administration will significantly soften the US stance on China trade and tariffs. “If anyone believes there is going to be a major reset now that there’s a new administration in Washington, I believe they will be disappointed,” he says.

“The economic tensions, the constraints in China on Western companies doing business and the allegations of espionage and IP infringement all persist. And though the rhetoric may not be as harsh going forward, the tension is actually greater than before. So, it is likely that tariffs will be in place for at least another four or five years.”

With regard to Brexit, while it is here now, what it actually means in reality remains to be seen.

Bulk explains, the deal has no provisions that constrain the UK’s domestic tax regime or tax rates, rather committing both parties to uphold global standards on tax transparencyand fight tax avoidance. It also contains commitments to specific international tax standards as they stand at the end of the transition period, including on the exchange of information, anti-tax avoidance, and relevant legislation on public country-by-country reporting by credit institutions and investment firms.

The impact on many businesses, most notably those in the UK, are already being felt from an import/export perspective — but the full scale of the Brexit deal is likely to only truly be revealed over time.

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Chapter 4

Keeping up with the European Commission FAST rules

Efforts in Europe to simplify tax compliance actually has many moving parts. Administering all the changes may be a challenge at first.

The known

The EC is moving on a sweeping plan to modernize and simplify tax compliance. In July 2020, it adopted a package for fair and simple taxation. This includes a set of new initiatives to ensure EU tax policy supports Europe’s recovery from COVID-19 and long-term sustainable growth.

The tax package contains three separate but complementary initiatives:

  • Action Plan for fair and simple taxation supporting the recovery
  • Legislative proposal in the form of a Revision of the Directive on administrative cooperation (DAC7)
  • Communication on Tax Good Governance in the EU and beyond.

The overarching goal of FAST, says Walsh, is to make taxation fairer, simpler and better adapted to modern modes of business technology. The Tax Action Plan is expected to roll out fully by 2024. DAC7 essentially and immediately extends the EU’s existing transparency rules to digital platforms – and efforts to communicate about the benefits of sound governance are ongoing.

In parallel, there are efforts to update the EU Code of Conduct regarding harmful tax practices, adjust lists of non-cooperative jurisdictions, and emphasize how the EU will be helping developing countries in the area of taxation in accord with the 2030 Sustainable Development agenda.

The unknown

The FAST initiatives can be seen as something of a mixed blessing for tax and finance functions. On the upside, the fact that they intend to modernize and simplify – as well as emphasizing fairness in tax administration and compliance – can be viewed as a positive. The bad news is that they’re moving in so many directions with so many moving parts, that it may prove difficult to achieve all their stated objectives. This will make it difficult for tax teams to stay on top of all the changes.

Simplification and digitalization, if done well and consistently, can lead to greater harmonization and reduce administrative compliance costs and risks. But at the moment, these are just the theory – the practice may prove different.

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Chapter 5

Catching up with the digital wave

Many businesses lag behind governments on digital transformation of tax function operations. Getting up-to-date is crucial.

The known

Companies in general are accelerating their digital transformations but, as Weber explains, “Most of the tax departments we see recognize they’re already well behind where they need to be. The future of taxation is digital, it’s real time, and companies need to move expeditiously or will expose themselves to significantly higher risks and costs relative to their peers.”

What should further spur action in corporate tax departments is the widespread and fast-developing digitalization of global tax authorities themselves, with governments digitalizing their collection, audit and enforcement capabilities.

“It started with Latin America, but now the trend is expanding to include Italy, Spain, Russia, mainland China, Hong Kong, Australia and a number of others” says Weber. “Over the next five to 10 years, almost every major jurisdiction will, to a significant degree, require businesses to share their tax data digitally in real time. Tax functions are running out of time and need to take action if they want to ensure compliance.”

The unknown

According to Weber, many tax departments are well behind other aspects of finance and other business functions because they’ve been less prioritized in key digital transformation initiatives. Added to this, governments aren’t applying a globally standardized approach to capturing tax data or doing so to the same timescales. For many tax and finance functions this creates a lot of uncertainty — leaving them searching for solutions.

One method of achieving rapid digitalization is through partnering with a firm to outsource certain aspects of their tax function reporting. Wherever technology is advancing rapidly, a provider can create scale advantage.

“They can build a sophisticated solution once and then roll it out for many clients as opposed to each of those clients building something on their own,” says Weber. “And if you’re a large company doing business in multiple jurisdictions, working with a key provider means you’ll have access to a solution better positioned to keep up with the rules as well as the fast-evolving digital landscape.”

No matter how tax leaders approach digital transformation, all will need to begin to hire or train staff that can perform in a digitalized tax environment. “It used to be that businesses would hire a tax person and they would know a bit about technology,” says Weber. “But for the future, what they may need to recruit are a number of technology specialists who can be trained in tax. They need to consider flipping the model and diversifying the type of professionals on their team.” 

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Chapter 6

Reducing the risks and costs of controversy

Tax leaders need to take a comprehensive and strategic approach to preparing for rising tax risk and controversy.

The known

What is known is that all of the above — digitalization of tax authorities, disruptions to global trade, evolving yet still uncertain tax laws and regulations — is a recipe for controversy. And it’s a situation that is only likely to become increasingly pressing.

Indeed, the pre-existing risk of controversy has been accelerated by COVID-19 and, in some instances, in unexpected ways. The pandemic has, for example, created challenges for mobile workers, which has subsequently led to issues around permanent establishment and broader employee tax risk.

As the 2021 EY Tax Risk and Controversy Survey noted, the pace and volume of tax change is relentless, and digitalization is disrupting the decades-old tax compliance life cycle. The way in which tax auditors collect information, risk-rate businesses and then select and audit them is shifting, with human interpretation being supplemented by data analytics, machine learning and artificial intelligence. There is an urgent need for tax leaders to respond.

The unknown

What is unknown, however, is how fully individual businesses will prepare in anticipation of this coming storm. To address the financial and reputational risks accompanying controversy, tax leaders need a comprehensive, consistent and contemporaneous set of strategies and processes.

“It’s absolutely crucial to refresh your tax risk and controversy management strategy, putting in place new defenses now,” says Luis Coronado, EY Global Tax Controversy Leader and Transfer Pricing Leader. “That’s how you get ready to provide answers in the coming years, when revenue authorities request substantial amounts of detailed evidence about a specific structure or transaction put in place today.”

“Policies and practices need to be managed centrally so there is coordination and consistency to everything from transfer pricing and intellectual property to compliance,” says Weber. “Everything must also be well-documented and ready to go in the case of an audit — because a quick and confident response can help lead to a better outcome.

“So, businesses need a team with the right skills in the right places with the right data and tools or else they could find themselves overwhelmed by this era of rising controversy.”

Transformation to a future state tax risk and controversy management strategy requires deliberate investment and committed action by companies, especially those who may not already be building such an approach. Failing to understand the critical consequences — or taking no action at all — may have a deep, detrimental impact on any organization.

  • Seven steps tax leaders can take to reduce unknown risks

    The challenges described in this article are all in addition to the everyday work of today’s global tax functions. To cope, we offer the following suggestions for tax leaders. 

    1. Sound the warning about future tax increases. The C-suite, board and shareholders need to be made aware of the potential for an about-face when deficit spending gives way to revenue collection.  
    2. Document eligibility and compliance for stimulus packages. Today the focus of stimulus has been to get 1         cash into the hands of businesses to get economies moving. Over the next several years, tax authorities may audit stimulus payments and loans to ensure eligibility. Organizations need to get their documentation in order.
    3. Get active in digital transformation. Find other groups within your organization focusing on digital transformation and get involved. Encourage staff to embrace technology. But even more so — find a number of technology people who can get excited about understanding and creating value in a tax context.
    4. Get ahead of the tax controversy curve. Develop a global framework that can ensure consistency in implementing and then sustaining a tax risk and controversy management approach.
    5. Take a closer look at Brexit. Companies with a significant presence in the UK may need to revisit their tax footprint.  
    6. Advocate within your organization for the right resources. The vast range of concurrent challenges means tax departments will need to have the right people in the right roles. Digitalize, restructure, and rethink the workforce.
    7. Form meaningful partnerships. You can try to do everything in-house, but in an era of rapidly changing frameworks and fast-evolving technologies, it can pay to co-source with a third party that provides scale. 
  • Show article references#Hide article references

    1. https://www.cnbc.com/2021/03/11/biden-1point9-trillion-covid-relief-package-thursday-afternoon.html
    2. https://www.reuters.com/article/us-usa-treasury-yellen-idUSKBN2BS0RK
    3. https://ec.europa.eu/commission/presscorner/detail/en/ip_21_1132


These are unprecedented times for taxation. But if tax leaders can assess their risks and alert their organizations, the ensuing reduction in risks and costs as well as improvement in tax transparency and efficiency will result in sustained value creation.

About this article

By Kate Barton

EY Global Vice Chair – Tax

Helping organizations develop smart tax strategies. Passionate about diversity, women in business and tax tech.

Related topics Tax Tax planning