The Tax Policy and Controversy Outlook in 2021

If record books were kept for tax policy, there would be an asterisk next to 2020.

As the world grappled with the humanitarian and economic crisis created by the Covid-19 pandemic, longer-term policy objectives were largely put on hold by governments. The outlook for 2021 is less dramatic, although tax policy and tax enforcement may still be far from normal. Undoubtedly, the year 2021 will be defined by transformation, particularly as governments and businesses continue to reimagine their operations for the next normal.

Throughout the many waves of the pandemic, tax policy played a pivotal role in supporting economies. When the pandemic first hit, governments took rapid action, delivering record levels of support and financial stimulus and suspending some audit and litigation activity. At the same time, limitations around mobility saw the adoption of new digital ways of working, a trend likely to continue and provide additional avenues for global coordination and cooperation in both tax policymaking and tax administration.

As the pandemic runs its course, jurisdictions will certainly need every tool available to them as they attempt to balance the significant and competing priorities confronting them in 2021. Governments are still faced with addressing continued relief needs, while also protecting their economies from further harm by taking action to spur recovery, whether through new or enhanced tax incentives. Jurisdictions also will need to begin to turn their attention to paying for pandemic-related expenditures. How governments will contend with deficits, some of historic size, and put their fiscal houses in order are still works in progress, though heightened tax enforcement may well play a significant role.

These observations are supported by data gathered in the annual EY Tax Policy and Controversy Outlook survey, which was completed at the end of 2020 by EY tax professionals in 68 jurisdictions. Below we share some of the highlights from this data.

Global tax trends

While 2021 is expected to be another unpredictable year with the management of the Covid-19 pandemic continuing to be a large variable, there are some notable trends emerging as jurisdictions across the globe contend with broadly similar challenges.

Covid-19 pandemic responses

By the end of 2020, governments issued roughly US$30 trillion in financial stimulus in more than 140 jurisdictions around the world. The monumental level of support and stimulus enacted by policymakers comes at a significant cost, and exactly how governments plan to offset these expenditures is still uncertain.

For the Outlook, EY tax professionals were asked to forecast their jurisdiction’s primary response to these costs, with the opportunity to select multiple areas. Only slightly more than a tenth of the respondents indicated that they expect higher taxes in their jurisdiction in any particular category during 2021, including corporate income, indirect (including VAT) or individual income, reflecting the expectation of a collective reticence on the part of governments to raise taxes right now.

Tax administration developments

Many tax authorities embraced new technologies after the first wave of the Covid-19 pandemic shuttered their offices. Tax authorities adopted new platforms in order to keep working and 70% of responders to the Outlook expect continued digital advances in their jurisdiction’s tax administration in 2021. Updated technological platforms are expected to affect many areas of compliance ranging from simple registration to cash registers being automatically linked to tax authority databases.

Heightened focus on taxing the digital economy

Taxation of the digital economy has been a focus of policymakers for several years. The current project to address this challenge, commonly called Base Erosion and Profit Shifting (BEPS) 2.0, is complicated both technically and politically. The Pillar One proposals for new nexus and profit allocation rules and Pillar Two proposals for global minimum tax rules would fundamentally alter the long-standing international tax architecture. Implementation and application of new rules of the type contemplated would require an unprecedented level of multilateral cooperation.

Despite the complexity of the BEPS 2.0 project and the logistical challenges created by the Covid-19 pandemic, the Inclusive Framework in October 2020 released detailed blueprints on the two pillars with a goal of achieving consensus by mid-2021. There are significant policy differences that would have to be resolved to reach consensus and move forward to implementation of the proposed rules. There also are other avenues for potential multilateral agreement, including ongoing discussions in the UN Tax Committee and ongoing work at the EU level. Moreover, without agreement on a coordinated approach, jurisdictions likely would take act on their own, including consideration of digital services taxes.

Minimal changes to tax bases and rates in effect for 2021

The global trend toward lower corporate income tax rates and broader bases continued, but with less dramatic effect than in recent years and with limited change to the overall corporate income tax responsibility. To date, no jurisdictions have raised their corporate tax rates in effect for 2021, and five jurisdictions have lowered their rates.

Increased incentives also play a part in corporate income tax in many jurisdictions. A quarter of Outlook respondents expect expanded research and development (R&D) incentives in their jurisdiction in 2021. Additionally, a quarter of respondents expect expanded incentives for business investment. Respondents in eight jurisdictions expect expansions in both these areas.

“We are also seeing an increase in incentives related to reductions in greenhouse gas emissions and other activities aimed at reducing carbon footprints,” says Cathy Koch, EY Global Sustainability Tax Leader and EY Global Tax Policy Network Leader. “Globally, governments are working to address climate-related risks and tax is a critical component of that effort.” Sustainability behaviors are also being influenced through VATs, with many jurisdictions putting in place new taxes on particular items.

In 2020, many governments provided VAT exemptions for items needed to battle the Covid-19 pandemic. However, targeted changes like those we saw in 2020 do not have a significant revenue effect when compared with the general levying of VAT on mainstream goods or services. Outlook respondents are expecting limited VAT changes in 2021, with more than 80% expecting the VAT level in their jurisdiction to stay the same. None of the respondents reported an increase in the top VAT rate in their jurisdiction in effect for 2021, although Oman did introduce a new 5% VAT, effective beginning in April 2021.

Individual income tax rates in effect for 2021 have risen in five jurisdictions and have decreased in two. Expectations regarding changes in the individual income tax bases also are fairly limited. Three-quarters of respondents expect the overall level of individual income tax in their jurisdiction to remain the same in 2021.

Enhanced enforcement efforts anticipated

While many governments are still considering what tax policy changes to make, “We are already seeing some governments shift their focus to raising revenue,” says Luis Coronado, EY Global Tax Controversy Leader and EY Global Transfer Pricing Leader. However, governments must balance protecting their economies – and inbound investment – with their need for revenue, making raising taxes a challenging proposition. Fully collecting all that is due from existing revenue sources may be seen by tax authorities as the path of least resistance.

Governments now are resuming collection and enforcement actions that were paused in 2020, including tax audit and litigation activity. Transfer pricing has historically been identified as a top tax audit issue and 2021 is no exception. More than 80% of respondents to the Outlook listed transfer pricing as one of their government’s top audit issues. Multinational companies are expected to be a core focus of most tax authorities, with more than 70% of respondents anticipating increased tax audit pressure on such companies in 2021. Additionally, Covid-19 pandemic stimulus measures, mobile worker risk, the treatment of losses and the issuance of tax refunds are all forecast to drive new tax audit activity in 2021.

Regional trends

While there are notable commonalties on a global basis, some tax policy trends are more pronounced when viewed through a regional lens.

Implementation work continues in EMEIA

“The biggest tax focus in EMEIA, other than the Covid-19 crisis, is the implementation of the EU’s Mandatory Disclosure Regime (MDR) that requires the reporting of certain cross-border arrangements,” says Jean-Pierre Lieb, EY EMEIA Tax Policy and Controversy Leader. “There was a flurry of activity in 2020 as governments and businesses prepared to put the MDR into action.”

As MDR implementation currently takes center stage in the EU, the legislative aspects of the original BEPS project and the related EU Anti-Tax Avoidance Directive (ATAD) have now been largely completed in most jurisdictions. However, some of the jurisdictions that joined the Inclusive Framework more recently still have some BEPS implementation work to complete.

Measures, such as those developed in the BEPS project, may gain greater focus elsewhere as Middle East jurisdictions begin to rebalance their tax systems and connect more globally on tax policy. Hit hard by the decline in oil and gas revenue as a result of the Covid-19 crisis, some Middle Eastern jurisdictions are seeking to diversify their revenue streams.

“Enforcement of current revenue streams will be a top concern throughout the EMEIA region as governments begin to tackle their budgetary pressures from the record stimulus packages and support measures,” says Bridget Walsh, EY EMEIA Tax Managing Partner. “At the same time, we are increasingly seeing tax rise up the agenda of boards with C-Suite executives taking much more interest and having greater oversight in tax issues, particularly managing tax risks and resulting disputes.”

Growth is the goal in Asia-Pacific

“Governments in the Asia-Pacific region are more concerned with stimulating the economy and ensuring long-term competitiveness than with immediate revenue raising measures in the wake of the Covid-19 crisis,” says Siew Moon Sim, EY Asia-Pacific Tax Policy and Controversy Services Leader. Indeed, the region leads the world in new and expanded business incentives according to the Outlook, with more than half of Asia-Pacific jurisdictions expected to offer more beneficial R&D incentives, and more than a third expected to expand other incentives in 2021. “It seems the plan for bringing in revenue in 2021 is to grow the tax base by attracting business rather than increasing the current level of tax,” says Eng Ping Yeo, EY Asia-Pacific Tax Leader. “This is consistent with the cautions offered by OECD economists regarding the potential growth-dampening effects of tax increases at this time. We can expect governments to be monitoring the results of these policies closely.”

The entire Asia-Pacific region has only two rate increases in effect for 2021 to date, both involving individual income tax (New Zealand and South Korea). A significant decrease in the corporate income tax rate in the Philippines, from 30% to 25%, is scheduled to take effect retroactively to 1 July 2020 when enacted.

Dynamic tax landscape in the Americas

The environment is more varied for taxpayers in the Americas, where respondents forecast higher levels of change in 2021 than in other geographies. A third of respondents to the Outlook in the Americas anticipate significant tax reform in their jurisdiction in 2021, compared with only 13% in EMEIA and 20% in Asia-Pacific. While some current reform efforts are carry-over projects, many reflect new initiatives in jurisdictions that are contemplating joining the OECD, or that are otherwise taking a new look at modifying their tax systems.

Tax policy changes in the Americas are developing against the backdrop of a strong enforcement environment. These efforts may create uncertainty for taxpayers, with nearly 80% of respondents to the Outlook in the Americas reporting an expectation that their country’s tax authority could adopt new interpretations of existing tax laws as they seek tax revenues in 2021.

“With an increasing focus on government spending related to pandemic heightened economic challenges, governments are considering a wide array of responses—from tax rate changes, to tax base broadeners, to new taxes, to increased enforcement,” said Marna Ricker, EY Americas Vice Chair of Tax. “Because we also expect some governments to increase incentives for investments as well, it’s essential for tax leaders to have a holistic view of their specific fact patterns and the potential tax changes to properly evaluate the risks and the opportunities.”

Looking forward

Businesses will need to be resilient and agile as they anticipate and navigate the coming economic and tax developments. They must adapt their strategies and responses as the situation demands, especially with policymakers in governments around the world trying to balance the continued need for support and stimulus with concern about growing budget imbalances. This requires monitoring the tax policy and tax administration developments in all the jurisdictions that are relevant to the company’s business footprint. For tax departments, being able to anticipate potential changes in the tax environment and clearly communicating to stakeholders the implications of those changes for the business is more important than ever.

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

For all media inquiries, please contact: dan.barabas@uk.ey.com