With vaccination rollouts bringing an end in sight to the Covid-19 pandemic, multinational enterprises should begin gearing up for a rebounding global economy. The second half of 2021 seems destined to be a year of rebuilding, growth, and new opportunities. The stars also seem aligned for some big changes to multinational group taxation in 2021, both in the U.S. and internationally.
Multinationals should be prepared to face some challenges, as well. Public finances were severely depleted during the pandemic. Expect a significant uptick in tax scrutiny, audits, and penalties.
Vaccinated and Ready for Growth
The Organization for Economic Cooperation and Development (OECD) has upped its prediction for global gross domestic product (GDP) growth to 5.6% in 2021. World output is expected to reach pre-pandemic levels by the middle of the year.
However, this growth will likely be uneven across regions and sectors. Moreover, growth will depend on the ability of the vaccination rollout efforts to get ahead of the ongoing spread of the virus.
There is no doubt that U.S. businesses took a big hit from this virus—U.S. real GDP dropped 3.5% in 2020. By comparison, the last recession, following the 2008 financial crisis, saw a 2.5% reduction in GDP. However, that is all expected to change as life gets closer to normal. In fact, many signs point to the next recovery being even more robust than the last.
Predictions for U.S. growth in 2021 are optimistic for recovery, though varied in magnitude. For instance, the U.S. Congressional Budget Office has predicted 3.7% growth, while the International Monetary Fund predicted a bolder 5.1% U.S. GDP growth rate for 2021. By comparison, U.S. GDP growth from 2010 through 2019 fluctuated between 1.6% and 3.1%.
Governments are starting to relax quarantine requirements, even in places like New York City that have had relatively rigorous regulations. Almost half of New York City adult residents were at least partially vaccinated as of May 19, with two in five fully vaccinated.
With the vaccination roll-out gaining momentum, the economic recovery should be swift in some industries like travel and hospitality. People will begin to feel more confident traveling, and, in fact, we already see an uptick in travel. The ensuing boost to the travel and hospitality industry will fuel job growth, creating new positions for many that lost jobs during the pandemic.
After spending a year not traveling, commuting, or even going out to lunch, those that have been able to continue working will be looking to make up for lost time and spend some of that disposable income.
Tax Planning for the Post-Pandemic Economy
The improving macroeconomic climate will open opportunities for more global expansion and growth, as well as for diversification of supply chains. In addition, governments looking to boost the economic recovery may roll out new tax incentives.
Many countries, including the U.S. and the U.K., are reviewing their research and development (R&D) tax incentives with a goal to further encourage investment to invigorate the economy. China has recently renewed a slew of tax incentives available to businesses and has significantly enhanced the R&D “super deduction” available to manufacturing enterprises.
Companies should keep an eye on opportunities to benefit from expanded initiatives as they become available and be prepared to meet documentation and recordkeeping requirements necessary to claim them.
On top of these shifts, multinational enterprises face a potential overhaul of international tax rules, as contemplated by the OECD’s Pillar One and Pillar Two initiatives addressing the tax challenges of the digital economy.
With the OECD shooting to reach an international consensus solution by mid-2021, companies should already be analyzing the coming changes. Anticipation of these changes might inform multinational group tax strategies this year, but of course, such strategies need to be carefully contemplated given the high-risk environment.
Governments Eye Tax Revenues
Public revenues took a hit during the pandemic from the combined effect of reduced revenues stemming from the economic slowdown and increased spending to combat the crisis. The quickest path for many governments to recoup lost revenues is an increased focus on tax compliance. Companies should be prepared to see an increase in tax scrutiny and audits.
There is global interest in addressing tax avoidance, and there are ever-increasing compliance requirements to meet the challenge. Tax authorities are expected to be increasingly on the lookout for non-compliance and missteps. Companies need to be meticulous in ensuring they are complying with all applicable tax and transfer pricing requirements. Tax administration sentiment is to target companies that ignore requirements and to ensure that companies respect arm’s-length pricing and pay their fair share of taxes, especially in a post-crisis environment where many governments provided financial support and intervention.
Some countries may approach longer-term revenue concerns by combining an increased focus on compliance with higher tax rates. Recent trends globally have been toward lower corporate tax rates, including in 2020, when nine countries reduced their corporate tax rates; only Micronesia increased its rate. But with hopes of an economic recovery in sight, countries from the U.K. to Malaysia are looking at new or increased taxes to bolster public finances.
However, the movement is not universal. Other countries, such as the Philippines, are cutting taxes to help businesses recover and attract new investment.
In the U.S., President Biden’s tax plan would increase the corporate tax rate and revise the international tax rules applicable to multinational enterprises. While the administration tries to move its plan through the legislative process, it is concurrently seeking to garner international cooperation from other nations on the concept of a global minimum tax, in support of the OECD Pillar Two initiative.
Multinational enterprises should continue to follow progress on these talks and consider the implications for their global operations. More pressingly, these companies will need to prepare robust analyses, both qualitatively and quantitatively, to support their tax and transfer pricing positions. Multinational companies must work to avoid being penalized and targeted as non-compliant, so they can take full advantage of opportunities presented by a welcome 2021 global economic recovery.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
As Chief Economist of CrossBorder Solutions, Mimi Song is responsible for managing client relationships and ensuring the successful completion of all work. At the original iteration of the company, she served as Vice President of Professional Services. Following the sale to Thomson Reuters, Song was a Vice President at Duff & Phelps and served as the Head of Transfer Pricing at the Bank of Tokyo-Mitsubishi UFJ.
Mimi Song can be reached at email@example.com.
Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.