Tax professionals who were practicing in 2008 will remember that tax policy played a critical role in mitigating the impact of the global financial crisis. This may be even more pronounced during the COVID-19 pandemic, as governments use both fiscal and monetary policies extensively to manage the pandemic. Hence, several governments have extended tax filing deadlines for individuals and businesses, and deferred payments for most types of taxes.
The EY Global Stimulus Response Tracker has found that nearly half the jurisdictions being tracked are offering some form of employment support. They are also making it easier to utilise losses and are providing incentives for COVID-19 crisis-related expenses.
Many jurisdictions have put in place extensive programmes offering grants, financial assistance, and loan guarantees. Also, to ease administrative burdens at a time when corporate leaders are trying to save their businesses, minimise losses and preserve liquidity, many tax administrations have put a pause on tax audits, litigation and other enforcement activities. So while taxes are not actually lowered, a number of changes designed to aid businesses in paying them have been adopted.
The tax policy outlook for APAC before COVID-19
Even before the global pandemic, 2020 was set to be another notable year in global tax policy and enforcement. This was abundantly clear from the data gathered in an annual survey as reported in the 2020 EY Global Tax Policy & Controversy Outlook (the Outlook). This year's edition covered reports from 51 jurisdictions, including 13 from APAC.
Broadly speaking, the Outlook found that five key global trends were playing out before the pandemic took hold:
- Widespread tax reform was occurring at a national level;
- Governments were continuing to pursue low-rate, broad-base tax policies, as in previous years;
- Governments were continuing to pursue competitive and stimulatory tax policies;
- The standards and recommendations developed by the OECD at the heart of its base erosion and profit shifting (BEPS) project continued to be a focus of legislation everywhere; and
- There was an extremely strong, continued focus on anti-avoidance and tax enforcement.
These global trends were generally observed in APAC, though assessing the region's tax policy data has always been a highly nuanced exercise, reflecting the different stages of economic development across the region. It was forecasted that around a third of jurisdictions in APAC would experience tax reform in 2020. In this aspect, Japan, New Zealand, the Philippines and Vietnam are all experiencing what can be described as 'significant' tax reform.
The second global trend – the low rate, broad-base mantra – is, however, generally not observed in APAC, with the regional outlook characterised by an absence of rate reductions and lower levels of base broadening when compared to other regions at the time of the survey (January 2020). Since then, Indonesia has reduced its corporate income tax rate from 25% to 22% for fiscal years 2020 and 2021, then to 20% starting from fiscal year 2022. An additional reduction of 3% is applicable for qualified listed companies on the Indonesian Stock Exchange.
Prior to the COVID-19 outbreak, APAC jurisdictions were making policy changes to maintain their competitiveness and attract foreign investments, which was a trend most apparent in the region's emerging economies. This trend is still continuing, with nearly half of all APAC jurisdictions making their research and development (R&D) incentives more favourable, compared to one-third globally. Additionally, around one-third of jurisdictions in the region are incentivising business investments in 2020 through improved capital and other incentives and allowances, depreciation and amortisation.
Taxation of digital business activity was, and will surely continue to be, a key focus for governments in the APAC region. Five of the 13 jurisdictions in the report – Indonesia, Malaysia, New Zealand, Singapore and Thailand – forecast a higher business tax burden as a result of new digital taxation laws in 2020. While most of these burden increases come from the imposition of indirect taxes (i.e. VAT or GST), New Zealand is reported to be considering a digital services tax.
Tax enforcement efforts are also ramping up in APAC. Exceeding the global average, eight of 13 jurisdictions in APAC are forecasted to see a rising tax burden as a result of increased enforcement activities by the tax authorities, in particular across Indonesia, the Philippines, South Korea and Vietnam.
While these long-term policy objectives have underpinned the work of finance ministries in APAC, the COVID-19 outbreak has driven more urgent and necessary temporary tax shifts.
Policy changes are being proposed and implemented swiftly to address the fallout from the COVID-19 pandemic to help impacted businesses and individuals stay afloat. Measures such as tax rebates, expanded loss carry back and forward rules, changes to filing and collection deadlines, wage support schemes, reliefs targeted at the worst-hit sectors and regions, expediting tax refunds or even the remission of tax penalties – are all playing a significant part in alleviating the ongoing financial and economic turmoil.
Jurisdictions like Australia, Malaysia, New Zealand and Singapore have addressed the issue of stranded employees due to travel restrictions and provided certainty to assure companies that the unplanned presence of foreign employees in a jurisdiction will not cause the business to have a permanent establishment and that tax residency will not be affected.
To help companies prepare for a post-COVID-19 world, some APAC jurisdictions have introduced enhanced deductions for the renovation and refurbishment of premises, and asset write-offs, and accelerated tax depreciation on the acquisition of plant and machinery to reduce the tax base and encourage capital investment. New job opportunities are also created, as well as training programmes for upskilling and reskilling of employees and displaced workers.
What lies ahead
One thing is certain, significant costs are being incurred from the extensive tax relief and stimulus measures introduced in the region. Many jurisdictions are likely chalking up high levels of sovereign debt as a result. Some are already starting to feel the pressure to shift from offering support to seeking tax revenue to shore up budgets. This revenue phase may include both tax policy changes and heightened tax enforcement.
Potential sources of prospective tax revenue were already under debate before the pandemic: carbon taxes, wealth taxes, taxes on 'super profits' and financial transaction taxes. Likewise, many governments may be tempted to implement digital taxes outside the framework of the OECD programme.
Moving forward, the post-COVID-19 world will present a very different new normal. Governments may find their coffers running low while many businesses face a long road to financial recovery. Governments play a critical role in ensuring the right mix between tax and austerity and restoring sustainable economic growth during this challenging time. This is the time to find opportunities in adversity.
Sim Siew Moon
T: +65 6309 8807
Sim Siew Moon is Asia-Pacific Tax Policy and Controversy Leader, and a partner based in the Singapore office. She works across the network of tax controversy professionals, and helps clients to prevent, manage and resolve their tax disputes. She also works with the global tax policy network to advise governments and companies on developing and implementing policy initiatives.
With more than 35 years of experience, she advises her clients on structuring transactions, including cross-border deals and mergers and acquisitions. She also assists her clients in negotiating and applying for tax incentives, applying for advanced tax rulings as well as designing and implementing tax risk management frameworks.
Siew Moon holds a bachelor's degree in accountancy from the National University of Singapore.
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