Kate Barton, EY Global Vice Chair—Tax
I was on a call a couple of days ago with a Singapore-based colleague to prepare for the EY 2020 Asia-Pacific Tax Symposium, when I heard his children in the background return from sports practice.
It was a welcome interruption as it offered those of us who do not live in Singapore a glimpse of normalcy during a global pandemic. But it also re-enforced the uneven impact the pandemic is having on our lives, businesses, and economies. That same week, after-all, saw new lockdown restrictions announced in the U.K. and France, while the U.S. saw more than 100,000 new Covid-19 cases in a single day.
When we look back, the Asia-Pacific region was the first to experience the full brunt of the pandemic, including its economic fallout. But today, many of the jurisdictions in the region are experiencing sustained recoveries. As jurisdictions in other regions see flat, if not negative growth, places like mainland China have managed to grow. Meanwhile, others in the region have even managed to contain the virus to varying degrees of success. New Zealand, South Korea, Australia, and Taiwan come to mind.
But this is not surprising: the Asia-Pacific has always been one of the most dynamic regions. Today, it is home to more than 4.3 billion people, has three of the world’s largest economies, and is the primary manufacturing center for a globally connected supply chain that many multinationals find indispensable. The smallest regional downturn in economic activity can have ripple effects globally.
The Covid-19 pandemic, of course, has caused no small downturn. It has caused a seismic shift. It has accelerated digital and operational transformation for organizations, many of which were left scrambling to manage disrupted supply chains and remote workforces as mobility became restricted and national borders closed. It has also layered a whole new level of uncertainty and volatility to a global business environment that was already reckoning with myriad challenges before contact tracing, face masks and video conference calls defined the “new normal.”
With every lockdown, border-closure, re-opening and mobility reprieve has come a host of new tax implications, not to mention financial stresses. To put the scale of change into perspective, more than 138 jurisdictions around the world have amended their tax laws and regulations to-date to tackle the economic impact of the Covid-19 pandemic, shifting everything from tax filing deadlines to slashing personal and corporate income tax rates. Tax policy, here, has been at the epicenter of governments and their crisis management playbooks.
As the pandemic continues to spread and the world awaits a vaccine, governments are likely to continue to leverage tax policy by keeping tax rates low in order to encourage capital flows and consumer confidence. But inevitably, the tax bill will come. Governments will then need to pivot from growth strategies to those that are revenue raising—the timing of which is crucial.
But while the crisis has caused great duress, it has also represented an opportunity to reimagine and transform existing business practices. Remote-work, a reduced carbon footprint, and a more digitally connected, cross-border ‘work from anywhere’ culture has represented an opportunity for organizations and governments to build a more inclusive, sustainable future. Talent may no longer find itself geographically constricted.
Following the 2020 EY Asia-Pacific Tax Symposium, our global and Asia-Pacific tax leaders share how the pandemic has impacted tax policy in the region, and what this means for supply chains, the implementation of BEPS 2.0, and organizational operating models.
New taxes and a rise in tax controversy and tax audits
Eng Ping Yeo, EY Asia-Pacific Tax Leader
As governments look to balance their government deficits and recoup more than $27 trillion in fiscal and monetary stimulus, taxes—both direct and indirect—will inevitably rise across the world, including in the Asia-Pacific with targeted rate increases, broadening of the tax scope, or the introduction of new taxes altogether. In New Zealand and Korea, for instance, personal income tax rates are expected to rise for high-income groups, whereas Indonesia is considering new taxes on plastics and high carbon emission vehicles. While some countries have decreased VAT or consumption taxes in the immediate aftermath of the crisis, it is likely this would be temporary, and we may yet see rate increases or broadening of the tax base in the medium-term.
Governments are also carefully considering whether to raise corporate income taxes as they balance against the need to create a pro-growth and investor-friendly economic environment. To this end, the introduction of specific tax incentives and reliefs could be expected as well. In this challenging economic environment, we expect a push for broader tax reform in many countries.
Accompanying an increased focus on generating government revenue to balance government deficits will be a greater push by tax authorities to resume and increase tax enforcement. Due to the pandemic, many countries suspended both tax audits and controversy cases to allow businesses to focus on the immediate liquidity impact of the crisis. Tax controversy is expected to rise as tax authorities look to address a backlog of cases, and to ensure they are collecting their fair share of tax revenue. Companies in the Asia-Pacific should also expect a greater push for tax transparency and increased information disclosure requirements.
At the same time, tax authorities are accelerating their digital transformation and will become much more effective and adept at collecting, analyzing and using information. We expect companies to continue to invest in tax technologies, enabling deployment of their best resources to high-value activities, while ensuring their tax functions are responsive, efficient, and resilient.
Shifting supply chains and organizational resilience in the Asia-Pacific
Nick Muhlemann, EY Asia-Pacific Digital Tax Effectiveness Leader
Supply chains today have grown into complex webs of physical, financial, and legal transactions often spanning multiple geographies. While historically they have delivered significant cost and competitive advantages, the Covid-19 pandemic has exposed weaknesses in such integrated, international structures. In the “new normal”, resilience and agility will be key considerations, requiring organizations—and governments—to think more acutely about how they manage the flow of products and services, whether essential or not. For instance, during the early months of the pandemic, many countries experienced a shortage around vital products, such as personal protective equipment (PPE).
Even before the pandemic, supply chains were a key focus area for many organizations, having had to traverse other sources of disruption including trade disputes and political events, but the pandemic is now likely to further accelerate supply transformation plans. This means that taxation, now more than ever, will need to be carefully considered when organizations reimagine their supply chains. Governments have issued a plethora of new tax laws to manage both the financial crisis and international business, with changes to tax incentives, rates, and reporting all impacting how multinationals operate. Looking ahead, the supply chain of the future will need to be lean, agile, and tax aligned, if it is to be resilient and competitive.
Preparing for BEPS 2.0 in the Asia-Pacific
Luis Coronado, EY Global Tax Controversy Leader and EY Global Transfer Pricing Leader
Prior to the Covid-19 pandemic, governments in the Asia-Pacific had already increased their focus on ways to tax digital businesses. In fact, several countries in the region introduced indirect taxation on digital services, including Malaysia and Singapore (with effect from Jan. 1, 2020). This year, Indonesia introduced taxation on digital services supplied by non-residents. Vietnam is introducing a new mechanism to collect tax from cross-border e-commerce traders and digital-platform based service providers, while the Philippines has plans to subject value created in the digital economy to value-added tax (VAT).
In a Covid-19 environment, as a greater portion of business activity moves online, governments in the Asia-Pacific, along with others around the world, are monitoring even more keenly the developments on BEPS 2.0, the OECD’s project for addressing the tax challenges of the digital economy. The progress made by the OECD on reaching a consensus-based solution, aimed for mid-2021, will be a subject of interest for many. They may look to industries impacted by Pillar One and Pillar Two to balance their budgets, replenish reserves, and evaluate how their current and proposed unilateral actions to tax digital businesses will be affected.
‘Work from anywhere’ and the tax implications of remote-work in the ‘new normal’
Barbara Angus, EY Global Tax Policy Leader
‘Work from anywhere’ may bring newfound flexibility for employees, but it will invariably bring new tax, legal, and immigration considerations—for both employer and employee. The place where work is performed can have significant tax—and tax compliance—implications. If employees work remotely, they may trigger new income tax obligations for themselves, new reporting and withholding obligations for the employer, and changes in the corporate tax obligations of the organization. For the employee, a change in work location can affect social security, healthcare entitlements and payroll tax obligations. For the organization, changes in where employees work can also trigger new considerations around transfer pricing and permanent establishment determinations.
When employees work remotely, a range of legal requirements may also be implicated, notably around immigration, right to work, and safety protections. In the new ‘work from anywhere’ paradigm, organizations need a clear road map for addressing these complexities in order to meet the needs of a more agile, global talent market, and provide flexibility to their workforce without the risk of unwelcome surprises for either the employer or the employee.
This column does not 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.
For all media inquiries, please contact: firstname.lastname@example.org