“Tax competition will not be eliminated by BEPS 2.0 or other multilateral agreements, it will just move in new directions as jurisdictions find their balance in this shifting environment,” says Marlies de Ruiter, EY Global International Tax and Transaction Services Policy Leader. During much of 2020 and 2021, governments focused on supporting their people, businesses and economies, further straining their fiscal balances. This exacerbated the need for increased revenue that already existed in many jurisdictions. We see momentum building for tax change with close to 30% of Outlook contributors expecting significant local tax reform in their jurisdictions in 2022, up from under 20% in the 2021 Outlook.
Outlook contributors report that corporate tax rate changes have been proposed and are under debate in several jurisdictions. At the time this article was written, such rate changes have been put in place effective for 2022 in Colombia (plus 4 percentage points), France (minus 2.5 percentage points or 1.5 percentage points, depending on the tax bracket), Malaysia (temporary increase of 9 percentage points for 2022), the Netherlands (plus 8/10ths of a percentage point) and Turkey (temporary increase of 3 percentage points for 2022, phasing down from a temporary increase of 5 percentage points for 2021). Changes to the corporate tax base continue to be more fluid, with about 20% of Outlook contributors expecting overall expansions of their jurisdictions’ tax base and just over 10% expecting reductions. Transfer pricing, withholding tax and the treatment of losses, in that order, are the most common areas where contributors expect their jurisdictions to make changes that could increase tax costs for businesses.
The story is similar for value-added taxes (VAT), with 15% of Outlook contributors expecting their jurisdictions to make rate changes (eight increases and two decreases) and about 20% of contributors expecting base changes (eight increases, four decreases). “With the largest revenue generator in many jurisdictions being VAT, small changes to the scope or rules with respect to VAT can have a large impact,” says Richard Stern, EY Tax Administration and Reform Services. “Additionally, while headline VAT rates typically capture the most attention, changing secondary and zero rates are frontline tools for governments, particularly during times of crisis.” It remains to be seen what effect the December 2021 EU Council agreement on VAT rates will have. That agreement, with a stated intent of giving EU member states more flexibility to apply reduced and zero rates while supporting European Green Deal commitments, still requires adoption by the European Parliament.
Changes to the personal income tax are also on the table in some jurisdictions, with greater expectation of base changes than rate changes. Almost a quarter of Outlook contributors report proposed changes to the personal income tax base in their jurisdictions for 2022, and another 15% view such changes as possible in 2022. The expected effects of such potential changes, while not dramatic, are mixed: close to half of contributors who expect proposed or possible changes forecast broadening of the personal tax base in their jurisdictions and about a quarter expect contractions. With respect to personal tax rates, roughly 20% of contributors report proposed or possible changes in their jurisdictions in 2022, with close to a third of them expecting increases and close to a quarter expecting decreases.
One area that could see further activity in 2022 is the treatment of cryptocurrencies, as tax authority interest in cryptocurrency expands along with the increase in use. Jurisdictions currently have very different approaches to cryptocurrency, from a ban on its use in mainland China, to monitoring programs in Taiwan, to tax reporting requirements in the U.S. and specific taxes in Hungary. The extent to which jurisdictions move toward coordination in this area will be something to watch in the coming years.