Reporting and Trust
Tax reform may well be top of government agendas to help cope with COVID-19 spending, but every move could require trade-offs.
In the face of COVID-19, governments around the world have taken on levels of debt not seen for decades.
More debt is the obvious short-term option with interest rates so low, but tax will be important in rebuilding national balance sheets in the long run. The perennial question remains: what should be taxed, and how? Even before COVID-19, debates about tax were fractious. Mounting fiscal concerns haven’t helped, and discussion seems stalled at both the national and the international level.
I took up the role of global leader of tax and legal services at PwC mid-pandemic. We advise companies and individuals across the full spectrum of tax issues, working to understand the obligations within the tax system and ensure they are met. This gives us a rare insight into broad-based concerns and priorities. Looking at this landscape, my concern today is the confrontational nature of many discussions of tax systems.
To ease these frictions, I believe we need to embrace the idea of compromise in the spirit of Bretton Woods. Compromise is likely to yield a more stable tax equilibrium that will engender the certainty executives yearn for. More than 1,000 business leaders who attended a series of regional symposia we hosted on tax towards the end of last year said uncertainty—not rates—was their single biggest concern. They’re more likely to get certainty if they strive to shape the tax system in collaboration with policy-makers, who also must work with one another to harmonise national and international interests.
2021 should be a year of building back better. Tax systems can help address the crucial concerns of governments, businesses and citizens, if they are predictable and easy to comply with. Near-term priorities include a better balance between national and global interests, a fairness agenda to help us recouple social and economic progress, and smart digital taxation.
Tax can be seen as a largely domestic issue; after all, most tax rules set by a government apply to individuals who live in that state and businesses that operate there. But governments always have an eye on the international landscape. They may want to attract investment, encourage people to work, or use tax policy to influence cross-border trading patterns by either encouraging or discouraging certain transactions.
Understanding how a country’s tax system is seen internationally, the impact it has on other countries and its potential to create harmony or division is critical to having a tax system that generates trust and promotes certainty. Some of the thorniest tax issues relate to cross-border trade and companies that operate in different jurisdictions. The taxes in question generate outsized media and political attention compared to the revenues they raise, and achieving compromise here would increase the capacity of negotiators and those at the table to concentrate on more strategic areas that have greater potential to increase revenue.
Short-term policies by one country can end up doing more harm than good in a hypermobile world. Discussions about aligning tax systems internationally have been going on for decades, and now more than ever as we start to recover from the multifaceted effects of COVID-19, there is merit in compromise to improve trust and certainty for individual and corporate taxpayers around the world. Frankly, looking at national tax policy through an international lens might bring a more clear-sighted approach to policy-making.
Fairness, and the perception of it, is vital in designing tax systems for the future. If taxpayers do not view taxation as fair, they are less likely to comply voluntarily with their tax obligations. This increases the time and effort that has to be spent on enforcement and deprives governments of tax revenues.
The amounts of tax companies pay and where they pay them is already an emotional issue. The evidence shows that the long-term effective tax rates of many large enterprises are approximating statutory corporate tax rates in OECD countries. Still, perceptions remain among the public that corporations aren’t paying their share, to the detriment of schools, hospitals and other underfunded public goods.
Many people believe the debt levels created by the pandemic could create a political environment more amenable to making significant changes to tax systems. Responding to the pressure to be more transparent about tax is one area where progress can definitely be made, particularly when it comes to environmental, social and governance (ESG) metrics. And greater transparency will help towards building trust. Although there is no common global standard for how businesses should report their ESG metrics, the World Economic Forum, with support from PwC, Deloitte, EY and KPMG, recently published a universal set of stakeholder capitalism metrics that includes tax contribution reporting.
More than 135 countries are coming together under the auspices of the OECD to tackle international corporate income tax issues, but it is only a start. The matter of how to tax in a digitalising economy is still hotly debated, and showcases the obstacles and tensions inherent in tax policy discussions.
If implemented, the OECD plans could raise up to US$100bn worldwide. This sounds substantial, but it is a drop in the ocean: the US, to name just one country, spent more than US$3tn on COVID-19 stabilisation and relief in 2020. Nevertheless, global consensus about a redesign of the system is key if we are to avoid tax chaos. The OECD just completed the latest round of discussions on this redesign, and there still is considerable debate and uncertainty.
Tax is complicated and interconnected. Balancing competition and consensus is hard. And governments have significant incentives to undertake short-term actions that are driven by local demands at the expense of international collaboration. Nonetheless, the spectre of years of wrangling over tax should serve to bring people together. Heavy-handed tax rises in one area can lead to problems in the future. Better to compromise now and stop the patchwork of isolated actions that lead to tit-for-tat tariff wars—which undoubtedly hurt people more than companies and slow the rate of progress.
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Global Tax and Legal Services Leader, London, PwC United Kingdom