How to prepare for a post-pandemic tax world
Opinion 7 minute read

How to prepare for a post-pandemic tax world

05 May 2020

COVID-19 has forced governments to dig deep to support their economies. Fiscal policy change after the crisis is a sure bet. What will it mean for business?

As the world responds to the COVID-19 pandemic, businesses are scrambling to protect their workforces and manage their cash flow. For a tax professional, the truly interesting time will come when the medical crisis starts to slow and the recovery begins.

Governments are reaching deep into their pockets to prop up their economies. The USA has passed a $2 trillion support package, while UK businesses driving innovation and development during the crisis can access a £1.25 billion government fund. Singapore is supporting its firms and workers with SGD $4 billion.

As a result of this massive spend, we may see significant changes to fiscal policies. What could this mean for businesses? It depends partly on the approach that countries choose to take – the carrot or the stick.

Stick approach to fiscal policy

Authorities have extended some tax filing and payment deadlines during the crisis, but it’s important to note that these measures relate mostly to direct taxes. VAT declarations still need to be filed and bills paid according to the usual deadlines in most jurisdictions.

Countries may well consider increasing indirect taxes. As part of its economic response to COVID-19, the Hungarian Government has decided to impose a surtax on domestic and foreign retail businesses, the rates increasing with turnover. This is a direct tax in principle but may well lead to higher prices for consumers.

Given that an average 32.2 per cent of government budgets across the EU are made up of indirect taxes, increasing VAT rates would have a pronounced impact on tax collection and potentially help economies bounce back faster.

Carrot approach to fiscal policy

Once the crisis begins to ease, governments may decide to take the more positive path and reduce indirect tax rates as an economic recovery strategy. The flow of cash back into government coffers would be slower, but attracting a new wave of businesses looking for an efficient base for cross-border activities is highly desirable. 

Reduced indirect tax rates would mean slightly cheaper prices of goods and services for customers, making them more inclined to spend. But there are other factors to consider including inflation, supply and demand and the VAT gap – the difference between the amount of VAT that should have been collected and what is actually collected by the tax authorities. 

Romania has recorded the largest national gap of 35.5 per cent of missing VAT revenue. Reducing indirect tax rates would simply make that gap even bigger.

Streamlining tax collection would ultimately be more effective for governments than the carrot or stick approach. Tax authorities globally can be much more efficient and effective in their practices.

Getting your money back – from the tax people

Businesses are being hindered by the burdensome bureaucratic procedures of local authorities. The penalties they impose are sometimes so high as to be uncollectable. Penalties that effectively shut down businesses diminish revenues to the State.

Spain, Italy and certain Central and Eastern European tax administrations have a reputation for being extremely bureaucratic and imposing tremendous tax penalties. Their requirements and processes often take so long and tie taxpayers up in so many knots, that they find the tax debt or penalty is rendered irrecoverable.

Many businesses struggle to get refunds from tax offices. This worsens cash flow and may force suboptimal commercial decisions to be made. 

Some tax offices hold on to VAT credits beyond the allowed period. The threat of incurring interest does not seem to faze them. In France and Italy, VAT credit refund processes should take no more than a year, but the work required to get the refund train in motion can be painfully slow.

In stark contrast, Germany’s tax authority typically undertakes very straightforward audits. It doesn’t request onerous amounts of paperwork and communicates with taxpayers by timely emails. The country’s penalties for non-compliance are also generally fairer, more flexible and show understanding.

Will COVID-19 put planned tax reforms on ice?

Tax practitioners are keeping a close ‘fiscal policy’ eye on planned tax reform – domestic, cross border and throughout the EU. The EU’s e-commerce One Stop Shop, due for implementation in 2021, will extend its cover from telecom, broadcast and e-services to e-commerce sales of goods.

Multiple VAT registrations across the EU would become unnecessary. The effect will be reduced compliance costs and businesses selling goods online no longer having to register and make returns and payments in, quite often, more than 20 jurisdictions. The ‘home’ tax offices would receive the VAT return showing all EU-wide sales and the cumulative liability, receive the proceeds and then distribute them among other EU states.

As most e-commerce businesses have thrived during the pandemic, will governments be ready to part with their capacity to scrutinise them? Will they be content with this new, single online portal format as their only insight into the activities of businesses with track records for either underpaying VAT, or “forgetting” to do so?

Some measures to use digital marketplaces to limit VAT loss are already in place and more should follow. What will governments make of them in the wake of the impact of COVID-19? Will they be enough, or will we see greater pressure on the tax levels of the richest global companies, given these businesses facilitate the trading of smaller companies?

The EU could make the laws governing post-Brexit trade with UK businesses in the bloc straightforward but the administration around them onerous and complex. Fiscal representation, bank guarantees and/or letters of credit, increased risk and greater scrutiny are now all on the table.

Could the EU be preparing a Pandora’s box for post-Brexit Britain? The love-hate relationship between the UK and the EU, driven by the process of Brexit, is enveloped in an unspoken relative dependency over access to markets, trade and business cooperation.

Prepare for a post-pandemic tax world

Our biggest bet is on many countries choosing to take the carrot approach to fiscal policy after the crisis, along with significant steps to improve their tax collection methods. Big e-commerce platforms should expect to be made liable for the debts of small sellers, with stronger tax compliance enforcement.

To be ready to trade after COVID-19, here are some steps that all businesses should take now.

  • If trading in goods, review and reorganise your supply chain. Remove unnecessary tax registrations and identify other cost efficiencies.
  • Don’t procrastinate on payments. If you’re capable of paying your VAT on time and in full, do it, rather than applying for any possible extensions. The last thing businesses want is to kickstart post-pandemic operations with a tax debt. There will likely be enough other debts to deal with.
  • Chase your VAT credit refunds, but also be prepared for a tax audit. It’s not uncommon for tax authorities reviewing credit refund requests to check your file. If you have a record of late payments or extension requests, your business may be higher on the audit hit list.

These steps are just the tip of the iceberg. Be as prepared as possible for the reality of government fiscal policies in the post-pandemic tax world.

Find out what tax relief and government support schemes are available where you do business.

Need more information? Contact us today.

Written by

Jacek Szufan and Sylvia Petkova

VAT Assurance Director and VAT Technical Manager, TMF UK

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