Recovery from the COVID-19 crisis

Global tax policy and five important issues to monitor

In this paper, Deloitte’s tax policy experts explore five major issues to pay attention to as the crisis evolves, and as the resulting economic effects continue to unfold. None of these subjects are new. However, we expect a renewed interest in assessing the options that these issues present. It is essential to understand the associated role of tax policy in the decision-making process as governments and their advisors plot a path toward economic recovery.

Issue 1: Industrial nationalism vs. globalization

Globalization has resulted in increased trade between nations, which has been credited with bringing about increased efficiency, productivity, and innovation, as well as generating higher standards of living and reduced prices for consumers. Tax treaties have had a part to play by limiting double taxation, while trade agreements that reduce duties and tariffs have promoted cross-border trade.

From a business perspective, the disruption of the supply of a single key component has a direct impact on the overall global supply chain. This result stems from the independencies between geographic locations within the chain. COVID-19 has highlighted these dependencies. In the early stages of the crisis, some countries found themselves reliant on imports for critical goods such as medical equipment (e.g., ventilators and personal protection equipment for health care workers). There were instances of countries blocking outgoing shipments to prioritize local needs. In some cases, countries resorted to rarely used measures to compel local companies to retool and produce essential supplies. Some remain concerned about their continued reliance on importing crucial commodities such as food and medical supplies.

Download the full paper to read more about differing points of view on industrial nationalism vs. globalization (PDF).

Issue 2: Big government vs. small government

There are a range of differing ideological and political views regarding how expansive or how limited a role government should play in regulating the affairs of individuals and businesses, and different countries and their voters have landed at different spots along the spectrum.

The crisis has caused many countries around the world to embrace the notion of “big government”—regardless of previously held ideologies. Many governments have needed to take actions that would have been unthinkable only a few months ago. The implemented measures that severely limit what individuals and businesses are and are not allowed to do, putting their economies into a temporary “coma” in order to mitigate the spread of COVID-19. In many cases, governments are spending and borrowing much more than would have seemed possible prior to this crisis. Current estimates would suggest that many now face the most significant economic contraction since the Great Depression. Governments have needed to provide financial support to individuals who have lost their income, and to businesses whose operations have come to a halt or have experienced severe disruption. Policy makers are hoping that their actions will allow most businesses to survive the crisis, and that individuals will therefore have jobs to return to. However, the cost of these emergency measures and the loss of revenue that governments have experienced have brought about deficits. The corresponding levels of debt are of historical significance.

Download the full paper to read more about the role of government during COVID-19 (PDF).

Issue 3: Unilateral action vs. coordinated response

An April 15, 2020 communication released following a virtual meeting of the G20 Finance Ministers and Central Bank Governors included this statement:

“We stand ready to act promptly and take any further action that may be required. We reiterate our commitment to use all available policy tools to safeguard against downside risks, ensure a swift recovery and achieve strong, sustainable, balanced and inclusive growth, while continuing to tackle the global challenges, notably those related to addressing the tax challenges arising from the digitalization of the economy and enhancing access to opportunities.”

The fact that the Pillar One/Pillar Two tax project remains high on the list of priorities of the G20 during a global pandemic demonstrates a desire by this body for a coordinated response—as does the fact that the OECD Secretariat and others have continued work on the project throughout the crisis. They are adhering to their goal of reaching political agreement by the end of this year. The OECD view is that a coordinated multilateral solution is needed to curtail deployment of unilateral digital services taxes (DSTs) which could result in increased complexity, double taxation, and the hindrance of cross-border trade. The project should also result in needed improvements in dispute mechanisms.

Download the full paper to learn more about global tax cooperation and COVID-19 (PDF).

Issue 4: Digital imperative

This may be the area that causes, or at least accelerates, the most permanent changes post-crisis. It quickly became very clear that governments and government agencies (including tax authorities), businesses, not-for-profit organizations and households that could operate digitally would fare better during the crisis.

The compelling need for access to strong digital bandwidth nationally and around the world was very evident. Those that have already digitized had a significant head start.

Directionally, this movement towards digital was already afoot: the crisis made it an imperative. And now having successfully moved to digital platforms, it is unlikely that governments or businesses will simply return their operations to where they were before—particularly while social distancing remains necessary, until (and if) a vaccine or treatment of the virus is found, and while the threat of returning to lock-down measures remains. More likely it is a combination of digital and non-digital operations but with an increased focus on digital. This has very significant implications for business and governments.

Download the full paper to read more about digital imperative initiatives that have been accelerated as a result of the pandemic (PDF).

Issue 5: Tax disputes and tax administration

There is already a trend towards an increase in tax disputes around the world, particularly in the area of transfer pricing, where the dispute is often between two tax administrations over which one has the right to tax certain income. This is consistently borne out in Deloitte’s annual global survey regarding BEPS and the Global Tax Reset in which only a relatively small percentage of respondents anticipate that tax administrations will interpret the OECD Transfer Pricing Guidelines in a consistent manner.

There is a risk that the increased needs of governments to address deficits and debt stemming from the pandemic will fuel more disputes with tax authorities.

This speaks to the need to have robust dispute resolution processes in place, and to the extent possible, dispute prevention mechanisms such as the International Compliance Assurance Programme (ICAP) are being explored. These may be a favorable way forward. While ICAP itself is very labor-intensive for both business and tax administrations and therefore may not be scalable to smaller businesses, there may be best practices from ICAP that are. Similarly, part of the Pillar One/Pillar Two Project is the development of enhanced dispute resolution processes with binding results and deadlines to achieve them. The need for this will be even more compelling in the post-crisis world. It is also now perhaps more likely that such processes could be administered using a digital platform rather than completely relying on physical meetings.

Download the full paper to read more about the increased trend in tax disputes around the world in 2020 (PDF).

While tax policy is not the only lever that governments have in addressing issues that have been brought to the foreground as a result of the COVID-19 crisis, it is an important one.