Within the last few months, we have seen that many tax offices around the world have implemented fiscal measures not only on the individual level but also on the business level, to provide support to a struggling economy.
It goes without saying that it is a challenging time for taxpayers but also for tax offices.
The easiest way to boost a struggling economy is usually to create new and higher tax rates. However, introducing new taxes or increasing existing tax rates will definitely threaten what will be a very fragile recovery.
In this article, I’ll explore how tax offices around the world might have to come up with newer and more creative fiscal measures in the future to respond and protect the economy.
FISCAL MEASURES IN RESPONSE TO COVID-19
# Increase of sales tax, VAT, and GST
There is a possibility that sales taxes, Value-added Tax (VAT) and Goods and Services Tax (GST) rates around the world will start to increase.
Sales taxes, VAT, and GST have been around for decades and now more than ever, it appears to be time for tax offices to review and adjust them accordingly.
It seems that individuals are more likely to be obsessed with personal income tax rates and corporate tax rates. However, when it comes to consumption and sales taxes no one asks too many questions.
So, it might just be one of the ‘easier’ tools to regulate and raise for tax offices without getting too much attention from the public. It is an easy measure that brings in immediately money.
The risk with increasing sales tax, VAT and GST is that it’s a regressive tax for low-income earners, which means it will affect low-income earners the most.
It might also have the adverse effect to slow down spending in general once the public realizes the impact of the rise in tax.
# Impose a Wealth Tax
Instead of raising taxes on the lower-income earners, tax offices could try and raise taxes on wealthy people.
The idea of a wealth tax exists in several countries such as Spain, Norway, Belgium, and Switzerland. A one-off or ongoing tax on personal wealth could definitely rebalance the wealth distribution and provide a significant boost to government revenue.
However, the discussion around a wealth tax is always a very heated political debate and not very popular amongst those in power, as they are likely to be the ones that hold wealth.
# Increase of Capital Gains Tax (CGT)
Capital Gains Tax is the tax you pay on a disposal of an asset if you make a capital gain. Selling assets such as real estate, shares, or managed fund investments is the most common way to make a capital gain (or a capital loss).
However, since CGT only arises when disposal is made, raising this tax might have the reverse effect and result in people holding back on selling their capital assets in order to avoid higher taxes.
# Impose an Environmental Tax
Environmental taxes have been around for a while. However, the way that countries collect Co2 taxes varies from country to country.
The majority of EU countries still haven’t introduced country-specific Co2 taxes. Certainly, after the Coronavirus crisis is over the environmental tax agenda will come back up into discussion.
The discussion around an environmental tax usually involves different stakeholder groups such as politicans, environmentalists, farmers, the car industry, etc.
That’s the reason why environmental taxes can be so varied ranging from being an aiding tool for farmers to transition to a greener economy but also to tackle emissions in the transport sector and rising congestion and vehicle emissions charges. Another measure could be to increase the waste disposal levy.
MODERNIZATION OF FISCAL MEASURES
Rather than increasing ‘old’ taxes, tax offices are now looking at ‘modernizing’ old consumption taxes and instead widen the scope of their applicability.
For example, there have been rumours coming from various tax offices that Value-added Tax (VAT) may be extended to apply to financial services.
Other tax administration offices have suggested that sales taxes, VAT, and GST should also be applied to food services.
# Microtax on Payment Transactions
A professor from Switzerland has suggested imposing a tax on every payment transaction with a micro tax and instead abolish altogether sales and consumption taxes.
In his research and predictions it was established that if Switzerland were to charge a micro tax of 0.1% on each payment transaction conducted, Switzerland would generate CHF 100 billion per year.
The current VAT in Switzerland brings about CHF 23 billion per year. The micro tax could potentially be paid equally by the sender and the receiver of the payment.
One of the big advantages for the taxation offices around the world seems to be that the micro tax could be collected directly by the banks.
This would provide tax offices with more control over the tax collection as tax evasion would become significantly difficult because it wouldn’t depend on an individual declaring its taxes.
# Global Financial Transaction Tax
There are already countries that apply a Financial Transaction Tax (FTT) such as Belgium, Italy, Switzerland, the UK, and others.
FTTs are levied on the trade in financial instruments such as stocks, bonds, or derivatives. Under an FTT, a percentage of the asset’s value is paid in taxes when it is traded.
The FFT was implemented and designed after the Global Financial Crisis in 2008. There was an attempt to make a Global FTT at that time as it is pretty easy to avoid paying an FTT.
However, the attempt failed. Right now might be a good time to start rethinking and redesigning a universal FTT. It will be interesting to observe whether the objections to a universal FTT are overcome by the tax office’s need for new sources of revenue.
# Digital Services Tax
If something became clear during the Coronavirus Crisis it is that not all sectors of the economy are struggling.
The demand for online tools has increased significantly – especially during lockdowns. Never before have we seen so many people working from home and spending so much time in front of their screens.
That’s why the talk around implementing a Digital Services Tax might be more accurate than ever. This tax would for most countries be a completely new source of tax revenue.
The UK is a pioneer when it comes to the Digital Services Tax (DST). The DST is a 2% tax on the revenues of providers of social media platforms, search engines and online marketplaces.
It only applies where global digital services revenues exceed 500 million GBP, and UK digital services revenues (being the proportion attributable to UK users) exceed 25 million pounds.
The DST has been in the design stage in many other countries for several months and the timing couldn’t be any better. The UK government expects a 280 GBP boost to tax revenue per year.
This statistic will certainly be an incentive for other countries to follow the UK’s lead as this new tax targets sectors that will have certainly survived the covid-19 crisis.
As of March 2020, Austria, France, Hungary, Italy, Turkey and the UK have implemented a DST in Europe.
Another positive aspect of this new tax is that the public support will be high as it targets big tech companies such as Google, Amazon, Facebook, etc. as opposed to other taxes that usually affect lower-income earners.
RADICAL MEASURES
# Changing the basis of the taxation system altogether?
No one really knows the implications of COVID-19 on the economy and countries’ financial systems. But by now you should have realised that in the long-term, countries will have to raise somehow revenue and this will without a doubt be done through taxation systems.
But how far will governments go in order to raise revenue? If we look at Canada it appears that governments are not shying away from implementing radical measures.
A parliament member of the Canadian government publicly declared in April 2020 that ‘the case for citizenship-based taxation has been building for years, but with huge budget deficits to come, fairer taxation is all the more needed.’
If this statement were to become reality in the near future, this would imply that there would be a radical change in the Canadian tax system.
In fact, Canadians would get taxed just like their American neighbours – based on their citizenship and not on their residency.
As a consequence, unless you would give up your Canadian citizenship, you would forever be taxed in Canada (the same ways as Americans currently get taxed forever in the US unless they give up citizenship).
Might be a good time to start thinking about a second residency or citizenship as I’ve previously discussed in THIS article.
# Attracting people by designing new immigration laws?
Will countries go as far as to design new immigration laws and visas that will attract certain people that can bring in significant added value to a country by consuming goods and services and thereby having a positive impact on the overall local economy?
If you were to ask Estonia they certainly believe that by designing a visa specifically targeted towards Digital Nomads and Remote Workers they’ll be able to add revenue to the government. Click HERE if you want to find out more about the first Digital Nomad Visa.
Estonia isn’t the first country to design new immigration laws in order to attract specific people. In fact, there are several European countries that have introduced Golden Visa programs that lead to citizenship.
These Golden Visa programs have been targeted in the past to wealthy individuals that are able to make a significant investment by buying real estate or government bonds in exchange for residency.
In a time where we’ve come to realize that governments are able to shut down borders as they please, I would argue that designing new visas and immigration laws that will allow people to hold multiple residencies and potentially citizenships, is a very clever move.
If you hold multiple residencies or even citizenships you’ll be able to basically pick and choose where you want to settle down for a while if a lockdown occurs ever again.
Therefore, I would argue that Estonia’s move to design a new visa that will attract a new rapidly growing sector of the population – Remote Workers and Digital Nomads – might just be the step in the right direction to attract people into a local economy.
# Lowering tax rates altogether?
Is it possible that tax offices might reduce tax rates such as corporate tax rates in order to attract foreign investors and thereby, raise government revenue?
It might be possible that some tax offices might take this avenue. However, it has been shown in the past, that simply reducing company tax rates does not necessarily lead to a spike in foreign investment.
For example, the two reductions in the company tax rate in New Zealand (from 33% to 30% in 2008 after the Global Financial Crisis and from 30% to 28% in 2011) did not cause an increase in foreign direct investment into New Zealand.
Other factors such as the country’s economic landscape, innovation sector, immigration restrictions and general market trends seem to have a much more direct impact on whether or not a country is attractive enough for foreign investors.
COMMENT
It seems that whilst certain countries around the world are starting to ease down on lockdowns, other countries are still in the middle of the Coronavirus Crisis.
What remains certain is that in the period after the Coronavirus Crisis a lot of economic uncertainty will appear. The response from tax offices around the world and the measures they might design can be anything and everything.
But one thing is certain, we will see an outbreak of fiscal changes from governments in the months and years ahead that will radically alter the tax landscape.
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