Then there’s the matter of those record deficits. While the pandemic may seed different pressures to those sparked by the GFC, those budgets will need to be balanced at some point. In the next two or three years, perhaps, some predict a return to austerity, this time with the onus falling on higher taxes rather than cuts to already drained public services. Indeed, 51% of respondents to the recent EY Tax Risk and Controversy Survey expect higher direct taxes in the coming three years, with that figure rising to 66% in the UK and 93% in the US.
Then there’s tax collection enforcement. In the years since the GFC, governments’ revenue collection capabilities and methods have become much more robust. Thanks to subsequent changes to legislation, there’s a greater emphasis on transparency, and tax enforcement has become far more effective, with governments increasingly using technology tools to ensure compliance and recoup much-needed revenue.
“Compliance is a really good way to squeeze blood out of a stone,” says Koch. “In 2008, we had a crisis, started to recover, and a couple of years later people started getting together to make sure every penny was taxed. And that’s what’s going to happen again — you wait a couple of years until things start recovering and then you start squeezing. It’s just a question of who’s going to pay the bill. But you always see the same themes.”
By way of identifying those themes now, Koch points to the US’s global intangible low-taxed income (GILTI) tax and how US treasury secretary Janet Yellen recently came out in support of BEPS 2.0, and the proposals for a global minimum corporate tax.10
Indeed, the majority of countries are facing the need to shore up their funding after such significant spend. And the US won’t be the only nation to re-examine how it approaches that funding. All of which suggests companies and tax functions can expect to face a heavy workload.
Learn from the past, focus on the present
There’s certainly plenty of value in organizations looking back at the previous crisis as they navigate out of this one. But the real focus should be paying attention to the potentially seismic changes going on right now — changes that may affect everything from staffing locations to supply chains, and have an impact on tax across the board.
“It’s a complicated environment, because each country has its own interests and its own tax system, and will have its own fiscal path forward, even though countries are all responding to the shared circumstances of the global crisis,” says Barbara Angus, EY Global Tax Policy Leader. “The global tax changes contemplated in the ongoing G20/OECD Inclusive Framework project, which began well before the pandemic, do involve a greater degree of coordination and cooperation than has existed on tax matters to date, but these proposals are not estimated to result in a substantial increase in overall corporate tax revenues. So even as consensus develops in the Inclusive Framework on these changes, each government also will be looking beyond this global project to the design and implementation of other aspects of its own tax system for potential sources of revenue. So tax executives will need to be watching activity on both tax policy and tax administration in all the countries that are relevant to their business footprint, and preparing for change on multiple fronts simultaneously.”
Companies should extend that attentiveness to the carrot as much as the stick. Note the primary role of tax credits, cash grants and other incentives in recovery packages now being offered around the world.
In the wake of the GFC, smart tax departments took stock of their overall footprint and identified which incentives were being offered in the various different countries in which they had a tax presence. They then worked out whether responding to those incentives was in keeping with their overall mission and vision for the business.
The same thing will apply post-pandemic. Those companies that are able to adapt themselves appropriately to the new opportunities will be the quickest to prosper.
“This isn’t a situation where the tax tail wags the dog — where companies see an incentive and just go for it,” says Sanger. “Best-in-class tax departments consider this from a far more strategic perspective. They make sure they’re aware of these opportunities, and they take them into the broader business as part of a holistic decision-making function.”
All of which suggests the tax function has a particularly strong role to play in the recovery phase. With governments using tax as a tool, not just to recoup income, but to incentivize behavior — note the rise of Pigouvian taxes such as carbon levies — the tax function will be a critical player in helping the company steer its way through. And in a world where businesses are now far more global and digitalized than ever, they need to know which compliance demands and support mechanisms are relevant to them, beyond their headquarter country and across their global footprint.
There is still a lot of uncertainty as we enter the middle of 2021, and there are no guarantees as to how and when economic activity will universally return to normal, let alone what the recovery will actually look like. Yet one thing is clear — it’s essential for business to pay attention to policymakers as they start to pull together their measures for recovering sovereign finances.
And as Koch is at pains to point out, this is no time to be passive. “To sit on the sidelines and wait for it to happen is not very wise,” she says. “There are always collateral victims in any type of legislation — especially with taxation, which is a huge machine.
“So business really has to help the people who are designing the policy, to make them aware of the disparities or the disincentives that are created by their tax systems. If you don’t offer yourself as a credible, helpful resource, how are policymakers supposed to know the impacts to companies like yours? Be aware. Be involved. This is critical to business.”