There’s a Delicate Balance Between Economic Impact and Taxation

A KPMG private enterprise report last year suggested that supporting the resilience, adaptability, innovation, and long-term focus of privately owned companies is in everyone’s best interest. This is even more relevant today as governments across the world look for ways to raise money to reduce their post-pandemic debt and address the decline in tax revenue in part from an economic slowdown.

Increasing taxes alone isn’t the answer.

Economic Opportunities Beyond Taxation

Every citizen and organization has an obligation to pay their fair share of taxes. And, to a certain extent, it’s understandable that raising taxes may be governments’ default position when the need for a global economic revival is looming. However, it’s important to achieve the right balance between taxation changes and incentives. This is especially the case where private companies have proven to be the economic drivers and sources of growth in their countries.

Should governments target their efforts toward more tax incentives, for example, to stimulate growth, versus introducing tax rate increases? Or can—and should they—do both?

Tax-Positive Policies

Equilibrium entails tax-positive fiscal policies that encourage and incentivize private companies to increase their business activity—with less reliance on corporate and personal tax increases for achieving that goal.

In many jurisdictions, privately owned businesses are long-term engines of growth, and have the potential to generate new tax revenue through the jobs they create, the suppliers they support, and the economic contributions they make to their communities. Throughout the pandemic, most of these companies behaved responsibly by making use of government support where necessary, combined with their own resources to protect their employees, customers, suppliers, and local communities.

An Unequal Burden?

There is a legitimate concern that private companies and their owners may be required to carry an unequal burden in helping to close the gap between the financial safety net that governments provided during the pandemic and the costs of reconstruction going forward. The concern is that private companies may become entangled in a web of increased corporate taxes, a rise in succession and inheritance taxes, and the introduction of new personal wealth taxes.

Achieving the right balance will be critical for sustaining the long-term economic and societal impact of these companies.

Upside and Downside of Incentives

While government subsidies, tax credits, and other incentives may be welcomed, they can have unintended knock-on effects. Private companies operating in a global economic environment are facing an entirely new set of opportunities as well as challenges.

There are questions regarding how the new clean energy tax credits in the US will be treated in terms of the OECD 15% global minimum corporate tax rate agreement. The concern is that these “green” tax credits may reduce a company’s US tax liability to less than the globally agreed 15%. Multinational enterprises investing in the US could, therefore, be open to taxation from foreign jurisdictions to “top-up” their tax contribution to reach that 15% level.

As well, these incentives reward companies for building equipment nationally or for sourcing components and critical minerals from the US or from countries where the US has a free-trade agreement. In response, the EU is working on its own green subsidy proposals, which has prompted concerns that companies will “subsidy shop” and play governments against each other.

A World View

In our report, we emphasized the importance of encouraging entrepreneurship, introducing workplace advances, accelerating environmental and societal improvements, and removing barriers to entry in certain industries.

The question remains, though, of how much money governments need to raise in order to finance their operations. And companies will need to recalculate their paths in light of their governments’ fiscal requirements and potential corporate and personal tax changes, as well as other obligations and concerns, such as the Organization for Economic Cooperation and Development BEPS 2.0 global minimum corporate tax, decarbonization targets, and urgent environmental, social, and governance priorities.

Each of these issues is accompanied by new regulations and additional compliance and reporting requirements.

Achieving measurable ESG progress, for example, requires companies to collect the right data and to be transparent and consistent in reporting it. There were calls for greater tax transparency and public disclosure long before the surge in sustainability metrics. And with heightened pressure from stakeholders and regulators for consistent, transparent reporting in every aspect of their business, companies will be expected to provide evidence that they aren’t only meeting the regulatory requirements, but are also complying with their own tax policies.

Getting the Balance Right

Private companies are accustomed to preparing for new challenges such as these while also seeking out fresh opportunities. Many have already undertaken a thorough review of their business models and supply chain operations that were directly affected by the pandemic. Now, it will also be important to review their affairs in light of potential legislative changes that are evolving.

Promoting the benefits of patient and responsible capital and its deployment has never been so important. Entrepreneurial privately owned businesses make important contributions to employment growth and the economic prosperity that generates its own increased tax contributions. In contrast, increased taxation may have the countereffect of inhibiting entrepreneurial ambitions and slowing the economic growth that governments are striving to achieve.

Planning Begins Now

No one can predict the actions that governments in different countries and jurisdictions may take to move their economies in a positive direction. It’s unlikely that these will be short- or even medium-term decisions. At a minimum, it’s best to be prepared for the transparent and consistent reporting that will likely be required in all aspects of business.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Mike Linter is global head of KPMG private enterprise tax, KPMG International.

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