The more resilient a company’s tax function is today, the better equipped it is to find growth opportunities in a downturn or the subsequent recovery. Asking some key questions, like the ones below, is a good place to start:
- When did your tax directors and the functions they oversee start to prepare for the end of the long economic boom?
- What has been done to identify cost savings and to better manage and apportion existing resources?
- What is your tax function’s level of digital preparedness?
- Will you be able to make informed decisions about the level of risk your business will have an appetite for once the downturn has passed?
- Are you able to monitor and take advantages of the emergency fiscal relief governments around the world are offering to offset the economic shock?
There are two reasons to ask yourself these questions. First, businesses that best anticipate a slowdown are more likely to weather the economic storm and to position themselves to profit from the upturn that will follow.
The second reason is less immediately visible, but no less important. When the immediate crisis passes, governments, just like businesses and individuals, will act to protect themselves. While governments will be focused on economic stimulus measures in the near term to offset economic shocks from widespread and extended shutdowns related to the virus, they will eventually return to protecting tax revenue streams and, whenever possible, to expand them.
The bottom line is you need to act. Here are five steps to take now:
1. First, get a handle on precisely how your tax function allocates resources, particularly when it comes to technology.
In the past, businesses filed financial information to the relevant authorities and might have had to wait six months or more before being presented with a bill. Today, tax has no "materiality": wherever you go, tax authorities operate down to the dollar, pound, euro, yen, rupee and yuan. They won’t have 50 people inspecting every document to ensure it is perfect, but they will be doing what the best multinationals do: using big data and artificial intelligence to flag up uncertainties, contradictions, and notable inflection points. Your technology must be just as advanced as the governments’ – in many jurisdictions, tax administrators now have better digital tools than businesses.
2. Second, ensure your tax function is equipped with the right people and procedures. In a world of just-in-time data, in which tax authorities are more likely than not to present tax directors with 10 or 15 questions each week, staff need to have the tax and data skills to answer them.
You are going to be asked some tough questions wherever you pay taxes, so you should also ensure that systems and procedures are in place to handle queries as they arrive.
3. Third, explore what specific areas of your business might be subject to risk-based analysis by a given tax authority. Today’s technologies enable tax authorities to pinpoint, with greater precision than ever, when a company is failing to fulfil its tax obligations.
They might challenge a contradiction between your VAT filings and your tax filings, for example, or take a more in-depth look at your sales in a given market. If your business doesn’t prepare for that kind of eventuality, it will immediately be at a disadvantage.
4. Fourth, revisit your organization’s tax exposure across all markets. Remember, tax reforms are impacting local tax laws all around the world, so you need to ascertain which rules have changed, which are in the process of changing and which are going to change in the future.
5. Finally, be monitoring tax policy changes that in the short term will offer stimulus and in the long term will recoup revenue.
As the economic damage inflicted by COVID-19 increases, central banks are dramatically cutting interest rates, and governments are putting forward spending and tax packages as well as offering administrative relief such as extending tax filing deadlines. For example, Taiwan’s parliament has adopted a US$2 billion stimulus package containing tax relief that allows an enterprise to claim a 200% tax deduction for expenses incurred in the tax year on salaries and wages paid to employees who take leave for the following reasons:
- Quarantine and isolation
- Taking care of family members
- Upon receiving special instructions from the epidemic command center of the government.
Other measures of this type are being adopted or are under active consideration around the world. Italy, which has been especially hard-hit by the virus, plans to introduce tax credits for companies that reported a 25% drop in revenue along with additional tax cuts. The United States has enacted major stimulus packages containing tax relief and is considering more.
In the longer term, governments will want to recoup the revenue that they have used as stimulus in the short term, so tax functions are best advised to plan for those policies, too, well before proposals are made public.
One constant amid the economic uncertainty is the rapid pace of legislative and regulatory change, especially as governments and administrators adapt to a new digital tax landscape. Keeping up with change requires frequent monitoring and, ideally, building productive relationships with key policymakers. It also helps to identify trends; a policy adopted in one county may inspire another to take a similar action, especially if it is viewed favorably by a supranational organization.
All of these steps to take are not just good preparation for an economic slowdown and the recovery to follow. They are also symptomatic of good, sensible corporate leadership that will help set up businesses to thrive in the future.