Will the EU’s and national recovery plans significantly influence investor decision-making? An initial review of the survey responses would indicate not. Foreign investors say that the weight of national stimulus packages and their potential impact is not a critical factor in determining where they invest.
But this is likely because most European member states had not announced their stimulus packages when the survey data was collected, which may have led investors to downplay their importance. Investors also likely noted that national and European stimulus packages are aimed at the long-term and deep-rooted transformation of economies and societies. This might jar with businesses’ more urgent need to survive.
But although individual investors may not appreciate its importance, the RRF will certainly boost Europe’s attractiveness in the long-term. There will likely be some foreign investment opportunities associated with large-scale infrastructure projects, but perhaps more importantly, a significant proportion of the funds will be allocated to drive reforms, which will undoubtedly fortify Europe’s attractiveness in the long-term.
In addition, by specifically promoting Europe’s sustainability and digital transformation–at least 37% of expenditure must be allocated to climate investments and reforms and 20% must be used to foster digital transformation–the RRF is addressing two of the most important areas for businesses when considering investment decisions. The RRF therefore has great potential to boost Europe’s long-term attractiveness.
4. Continue down the hard path of tax harmonization and transparency
Based on our experience of working with clients, tax has fallen down the agenda in recent years as a factor that determines where businesses locate their operations in Europe. We think this is in part thanks to the work of the EU and other multilateral organizations such as the Organization for Economic Co-operation and Development (OECD) in driving tax harmonization. President Biden’s objective for countries to adopt a global minimum rate of corporation tax would, if implemented, further harmonize tax regimes, not just in Europe but globally.
Uniform tax rates won’t necessarily eradicate tax as a factor that determines countries’ attractiveness. Instead, countries may look at other ways of remaining competitive, such as the rates of indirect taxes or the extent to which new types of tax, such as environmental taxes, are implemented. Countries may also try to carve out a competitive edge by how they administer taxes and the extent to which they assist large businesses with tax compliance.
Governments may be unwilling or unable to lower indirect taxes or relax administration. The US$30t in financial stimulus provided by governments around the world will have to be paid for somehow. According to a report from EY tax professionals in 68 jurisdictions, increased enforcement of existing taxes and shifting resources from other government priorities are the most likely ways that governments will cover the cost of this stimulus. 2