Five EY Tax Leaders Share Their 2021 Outlook

Kate Barton, EY Global Vice Chair—Tax
It’s no secret the Covid-19 pandemic has provided an extremely challenging environment in which organizations must operate.

As economies and borders reopen and temporarily close, and as many employees continue working remotely, organizations are being forced to reimagine traditional business operations and accelerate their digital transformation efforts. While this may provide newfound opportunities to reach new markets and accommodate more flexible work practices, it has also compounded the uncertainty organizations (and individuals) face.

More than 138 jurisdictions around the world have changed their tax laws and regulations to mitigate the economic impact of the pandemic. Whether through instituting tax cuts, shifting tax filing deadlines or providing subsidies and incentives for organizations, tax policies have been front and center. This has created a challenging regulatory environment for many organizations to navigate.

To put the scale of change in perspective, a whopping US$27 trillion in financial stimulus has been issued by governments around the world to-date to help offset the economic fallout of the pandemic. That’s more than the annual GDP of the United States and Japan combined.

But even prior to Covid-19, organizations were still facing unprecedented digital and legislative changes that tax and finance functions were struggling to address. According to the recent EY Tax and Finance Operate (TFO) survey, 73% of respondents say they are more likely than not to co-source critical activities given the rapid pace of change.

The digitalization of the global economy has been the biggest catalyst of this change. With more data, comes more real-time reporting and information-sharing obligations.

All the while, the world has become far more integrated and interdependent. In a globalized economy, many organizations now have intricate supply chains and are sensitive to developments that occur far from their manufacturing centers and possibly even their consumer base.

Meanwhile, a highly integrated digital economy can trigger almost instant shifts in political, social and economic behavior. This, in turn, can upend long-standing organizational frameworks, trade relationships and industry regulations, spurring heightened volatility and uncertainty. The impact of digitalization, which COVID-19 has accelerated tremendously, has in turn triggered greater focus on the OECD BEPS 2.0 project.

During our 39th annual International Tax Conference, which fittingly was held virtually this year, we discussed how agile tax operations will be critical for any organizational recovery. To help organizations navigate the pandemic going forward, we’re sharing our 2021 outlook on BEPS 2.0, tax risk and controversy, supply chains, and more.

BEPS 2.0 and the digitization of the global economy

Barbara Angus, EY Global Tax Policy Leader

Work on the OECD BEPS 2.0 project has continued from home offices around the world, with significant progress on the technical development of both the Pillar 1 nexus and profit allocation rules and the Pillar 2 global minimum tax rules. However, the political differences are not yet resolved (due in part to the constraints of virtual meetings), which means that work will continue into 2021, beyond what had already been a very ambitious target of agreement by the end of 2020.

In July, the G20 ministers endorsed releasing of a detailed blueprint on each pillar in October, reiterating their commitment to achieving a consensus-based solution. Against this backdrop, unilateral action on digital services taxes (DSTs) is continuing, with more countries expected to put DSTs in place by year-end, with plans for an EU digital levy also picking up steam.

Looking ahead, the expected public consultation on the October blueprints will provide an opportunity for the business community to provide comments on these proposals. Given that these new rules under development are intended to transform the international tax architecture, engagement with policymakers is critically important. The specifics (which are yet to be provided in the blueprints) will allow for business feedback on the technical details. At the same time, this also will be the time for businesses to share with participating governments their perspectives on the major technical and political issues that remain to be addressed, in preparation for a push by the OECD and G20 toward consensus in 2021.

Indirect taxes

Gijsbert Bulk, EY Global Director of Indirect Tax

Following the financial crisis of 2008, indirect taxes climbed around the world as governments sought new revenue streams to balance diminishing income. In the EU, for instance, VAT rates hit an average of 21.5%. Covid-19 may likely see a similar trend when the pandemic subsides, but in the immediate aftermath of the pandemic, indirect taxes have fallen in some countries as governments seek to boost consumer confidence and encourage liquidity.

Most notably, several governments around the world have slashed VAT for the hospitality, travel and leisure industries—those that have been hit the hardest. In Turkey, for instance, VAT on domestic travel was cut from 18% to 1%. But these rate decreases are temporary, and in the course of 2022, the VAT/GST rates may well be trending up again. Saudi Arabia, for instance, tripled their standard VAT rate, from 5% to 15% earlier this year.

Looking ahead, we may see more countries adopt VAT or GST, with countries including China, Egypt and India all having introduced VAT in recent years. Also, the levying of local VAT, GST or sales tax on business-to-consumer (B2C) digital services, rendered by foreign services providers to local residents, has become the rule in many different countries across the globe. With the continued digitalization of many parts of the economy, this trend looks likely to continue.

Globalization and shifting supply chains

Michael Bowes, EY Americas Tax Operating Model Effectiveness Leader

Shifting attitudes toward globalization and changing trade relationships were already impacting traditional supply chain models prior to Covid-19. After the pandemic, organizations are likely to pivot to more resilient, agile models. On the operating model side, companies are rethinking how they organize their resources. The days of offshoring and centralization are over.

After the pandemic, companies will want their top talent close to the customer and diversified across key markets. These changes will inevitably bring a myriad of new tax and transfer pricing issues and opportunities for organizations across all sectors. As uncertainty continues to pervade organizational thinking, successfully transitioning from lean to agile will be viewed as a key source of competitive advantage.

Tax risk and controversy

Luis Coronado, EY Global Tax Controversy Leader and EY Global Transfer Pricing Leader

Expanded information sharing, real-time reporting obligations, and enhanced transparency requirements have increased demands on all organizations. These factors may lead to augmented tax risk and controversy, particularly when organizations operate across borders and must interact with multiple tax authorities. If organizations are to thrive in this ultra-connected digital environment, they must include tax strategy in C-suite discussions and incorporate tax audits directly into projects and reporting. They must also enhance internal operating procedures and communications to better align their policies and messaging.

Developing a global, company-wide centralized tax controversy management strategy to facilitate oversight and quickly identify global controversies is key. An integrated approach helps organizations anticipate and prepare a proper defense plan and resolve disputes if—and when—they arise. As we begin to look beyond the Covid-19 pandemic, it’s imperative that organizations get out in front of potential tax controversies. Lower-than-expected tax revenue may trigger increased compliance efforts by tax authorities. Recent agency announcements and statements suggest taxpayers should prepare for audits focused on computational and definitional issues.

This column doesn’t necessarily reflect the opinion of The Bureau of National Affairs Inc. or its owners.

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.