6 minute read 24 Apr 2020
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How governments are using tax to help economies affected by COVID-19

By EY Global

Ernst & Young Global Ltd.

6 minute read 24 Apr 2020

Governments are using tax relief as part of a mix of fiscal stimulus after ‘flattening the curve‘ of COVID-19 flattened their economies.

COVID-19 isn’t just a worldwide pandemic; it’s becoming the biggest economic shock at least since the global financial crisis of 2008-2009 – and possibly one of the most disruptive shocks to the global economy ever.

Governments are racing to “flatten the curve” and keep their people healthy through travel restrictions, social distancing, and lockdowns. They’re simultaneously trying to support individuals and businesses as an economy that was beginning to slow after a decade of expansion has slammed to a halt.

Economists have revised their economic projections significantly downward as the virus spreads around the globe, with the most pronounced negative effects expected in the second quarter. Many forecasters show the global economy with growth below zero for 2020. Impacts will vary by country and region, depending on the extent and duration of the health crisis. Many economists expect a rebound to begin in the second half of the year and continue into 2021. The strength and pace of recovery, however, is highly uncertain and will depend, in part, on the strength of the monetary policy and fiscal stimulus measures adopted by governments around the world.

The latest tax-related stimulus measures are collected in the EY Tax COVID-19 Response Tracker. To date, more than 120 jurisdictions have adopted emergency economic stimulus measures. Generally, the new policies have been a mix of interest rate cuts, lending vehicles, unemployment assistance, direct payments to individuals, assistance to businesses and significant tax relief. And while new legislation is still being adopted at a fast pace, it is possible that the proportion of benefit provided through tax measures may eventually be more than half of the total fiscal stimulus – as was the Organisation for Economic Co-operation and Development (OECD) estimate of stimulus measures enacted in response to the global financial crisis.

The bare policy toolbox

Although the global financial crisis may be the most recent example for how governments respond to a universal economic shock, the current crisis is unprecedented, and the actions taken by governments across the globe are equally extraordinary. On the eve of the pandemic, governments were in a weaker position to respond because the ability to employ typical levers for injecting stimulus into their economies – direct spending, interest rates, and tax rates – were already limited by sovereign debt accumulated in the decade following the global financial crisis that remained elevated and other policy initiatives increased deficits across the globe. One of the notable hangovers of the current crisis, when resolved, will be higher levels of government debt around the globe.
 

Actions taken so far indicate that, for the moment, government debt isn’t as big a concern as sustaining citizens and businesses until the storm passes (although additional debt may eventually require future reductions in spending or increases in taxes).

“Eventually, governments will need to pay down these debts, but helping individuals and businesses get through the current crisis is paramount,” says Cathy Koch, EY Global Tax Policy Network Leader. “We expect to see governments continue to respond aggressively with spending and tax measures to help consumers and businesses right now. Debts are for another day.”

Tax relief measures adopted to date can generally be grouped into three broad categories: Measures affecting corporations, measures affecting individuals, and measures affecting indirect taxes including value-added taxes (VAT) and customs duties. In most cases, jurisdictions are offering both administrative relief (such as delay of filing and payment deadlines), as well as adjustments to tax bases (for example, credits for individuals and extended carryback and carryforward of losses for businesses, among many other things).

We expect to see governments continue to respond aggressively with spending and tax measures to help consumers and businesses right now. Debts are for another day.
Cathy Koch
EY Global Sustainability Tax Leader; EY Americas and Global Tax Policy Network Leader

Business tax measures

Jurisdictions from Australia to Vietnam have deferred payments of corporate income taxes for at least three months, and companies in Japan can apply for up to a year of deferral. Many are postponing filing deadlines, including Argentina, mainland China, the Czech Republic, New Zealand, and Ukraine, to give just a sample. Other jurisdictions, including Curaçao, Finland, Malaysia and Switzerland, have waived or reduced penalties for late filing or payment. (For more details about particular jurisdictions, see the EY Tax COVID-19 Response Tracker.)

Making it easier to deduct losses is a common focus across many jurisdictions including Chile, mainland China, Norway and the United States. Other jurisdictions are offering credits for specific recovery-related activities. For example, Italy has adopted a tax credit worth 50% of the cost for sanitizing work environments and tools, while France is offering a tax credit for competitiveness and employment delivered through a rapid refund mechanism. Taiwanese enterprises may claim a 200% tax deduction for expenses incurred in the tax year on salaries and wages paid to employees taking leave due to COVID-19.

“Given the volume of tax assistance out there, accessing what’s available could be the difference for some between survival and collapse,” says Chris Sanger, EY Global Government and Risk Tax Leader. “It’s even more important now to monitor legislative and regulatory developments and be in a position to claim benefits when and where they are offered.”

Help with respect to indirect tax obligations is also part of many packages, but the relief comes in different forms. Belgium, Colombia, Costa Rica, Finland, Israel, Italy, Japan, the Phillipines and Saudi Arabia are among many jurisdictions postponing filing obligations, while jurisdictions including Australia, Sweden, the United Kingdom and Vietnam are among those deferring remittance, for up to a year in some jurisdictions. Germany, Greece and Luxembourg are waiving or reducing penalties and interest on late payments. Jurisdictions including Russia are offering zero import duties on some goods deemed socially significant (as defined by the government) and some jurisdictions are offering VAT exemptions for similar goods.

In addition to tax relief, many governments are giving a reprieve on tax enforcement, especially for small- and medium-sized businesses. For example, countries ranging from Canada to Ukraine have temporarily suspended ongoing audits, while other governments have postponed hearings and litigation.

Helping individuals

Many governments have also postponed tax payment deadlines for individuals. The United States, for example, postponed its April 15 payment deadline for the first time in history, while encouraging those who are expecting refunds to file promptly. Other jurisdictions have waived penalties and interest for late payments. And many of the same tax enforcement reprieves for corporations are also being applied to individuals.

In terms of using the tax system to provide funds to their people, governments are commonly using tax credits. The US payment of up to $1,200 per person, for example, is technically a tax credit against taxes owed on income earned in 2020. Thailand, on the other hand, is giving special tax exemptions to health care workers.

Finally, governments, including Barbados, China, Costa Rica, Curaçao, France, Guatemala, Israel, Poland and Portugal, are temporarily suspending or postponing social security contributions in order to increase workers’ paychecks.

“Most tax relief provisions aimed at helping individuals around the world are intended to put cash into the hands of consumers,” says Barbara Angus, EY Global Tax Policy Leader. “This will play a critical role in helping the businesses that serve them survive and begin the process of recovery.”

Summary

More than 120 jurisdictions have adopted emergency economic stimulus measures. Generally, the new policies have been a mix of interest rate cuts, lending vehicles, unemployment assistance, direct payments to individuals, assistance to businesses and significant tax relief. And while new legislation is still being adopted at a fast pace, it is possible that the proportion of benefit provided through tax measures may eventually be more than half of the total fiscal stimulus – as was the Organisation for Economic Co-operation and Development (OECD) estimate of stimulus measures enacted in response to the global financial crisis.

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By EY Global

Ernst & Young Global Ltd.