“Keep government support in place and signal a planned wind down1”
On 4 May KPMG International convened a virtual roundtable with 14 participants from a broad range of backgrounds―from academics to policy advisors to economists to tax professionals2. The challenge: to consider the tax measures being enacted by governments globally to address the immediate implications arising from COVID-19, and whether or not there was more which could be done, either immediately or to the extent that lockdowns continue. The discussion was also about how this reaction phase could best impact on the next recovery phase.
The roundtable is part of an initial series3 of three which discuss short-term and medium-term measures as economies emerge from lockdowns, and the longer-term impact and implications. The meeting was held under the Chatham House Rule. Where attendees are mentioned, it is with their permission. The summary below seeks to draw out the key themes – and tensions – which emerged, but does not necessarily reflect a unanimous agreement nor the opinion of any KPMG Member Firm.
Context for the discussion
“Different sectors and different economies will emerge at different speeds and in different ways”**
Quotes are not attributed to anyone participant
Chris Morgan, Head of Global Tax Policy KPMG, introduced the discussion. He noted that KPMG is looking at the response to the COVID-19 situation in four phases―which apply both to how governments are reacting and the impact on companies. These are:
- Reaction - which is the need for immediate response as the crisis hits
- Resilience - which is how to maintain stability as lockdowns continues
- Recovery - what is needed as lockdowns are removed
- New Reality - what will things look like and what fundamental changes will have occurred or will be necessary once we emerge
Different countries will enter and leave these different phases at different times and, of course, they overlap. Broadly speaking there are currently many countries in the Reaction and Resilience phases while some are now moving into the Recovery phase. When looking at the first two phases, governments across the globe are (mostly) taking three types of tax-related measures: addressing social welfare; protecting jobs; protecting business and the economy. While different countries are taking different measures depending upon their particular situation, measures include:
- Protecting jobs: providing reductions in social security payments, increasing employee related tax credits; and taking on part of the cost of wages for employees placed on temporary redundancy programs. In some countries there are similar schemes for some self-employed persons.
- Protecting businesses and the economy: Assistance with cashflow – e.g. delaying payments of various taxes, reducing non-profit based taxes (eg business rates); allowing more generous use of losses; and providing various forms of government backed loans. There has also been moves to reduce the administrative burden and provide greater certainty – such as reducing audits and providing interpretation on how rules (eg on company residence) should apply in these extraordinary circumstances.
- Social Welfare: increasing sickness or redundancy payments and increasing and extending welfare payments. What we are not seeing generally is reductions in VAT and sales taxes.
Economic and Social Backdrop
“The world was already in economic trouble when this began…”**
It was noted that the current situation is very different from the financial crisis of 2008 in that there has been a shutdown of both supply and demand. Prior to COVID-19, the IMF had suggested that global GDP growth would be around 3%, but now there are predictions that it would fall by 3%4. In some countries, central banks have implemented quantitative easing which can be instrumental to protecting the economy. However, this is expensive and has the effect of protecting a relatively small constituency of investors, which in turn raises questions about how investor capital gains should be taxed.
Some participants suggested that the impact of the COVID-19 situation would not be borne equally amongst stakeholders or countries, and that this could ultimately result in greater inequality overall, potentially with young workers and women workers particularly affected. Further, emerging from this environment could create greater inequalities: intergenerational divides, inter-career divides (those who can work at home being less affected than those who cannot), and inter-regional divides.
There was general agreement that, at least as regards the UK and much of continental Europe, the years of austerity following the 2008 financial crisis had not put countries in a good position to addressCOVID-19, and thus that a return to austerity would not be the best approach to recovering from the current climate.
What more can governments do to help address the Reaction and Resilience phases?
“It is important that measures are adequate in terms of scope and duration”**
During the discussion, an example given was of the UK furlough scheme, under which the government will pay 80% of wages for workers who are effectively put on leave for a limited period. The scheme helped to reduce the number of employees that could potentially be made redundant; it therefore provides social welfare, helps protect businesses from cashflow difficulties and potential insolvency, and should better enable businesses to be ready to recommence economic activity once lockdown is lifted. However, as it only covers 80% of wages, there are a significant number of workers previously on the national minimum wage who are now falling into poverty. As such, it was suggested in the conversation that such schemes should have a floor to protect a minimum income.
The scheme is also expensive in terms of government finance and there are concerns that it will be ended abruptly. This is possibly one of the reasons why some businesses have preferred to make workers redundant rather than apply for it. Participants noted that it should be clear that such schemes will continue during the Resilience phase and should be unwound slowly.
Should “aggressive tax avoiders” be treated differently?
Some participants expressed the view that public funding should not be provided to companies that have been involved in aggressive tax avoidance. Reference was made to some countries such as Denmark, Poland and France, which have indicated that assistance will not be available to companies headquartered in defined “tax havens.” There was no disagreement with the sentiment, but equally, there was no discussion of how “aggressive tax avoidance” should be defined and how such rules could be implemented.**
Some participants also suggested that greater tax transparency should be required as a quid pro for government support systems. Although there was no general consensus that this should be a condition of support, there was tacit agreement that companies will need to be far more transparent as regards tax reporting coming out of the crisis, especially in cases where they have received state funding.
A further question that was raised, but not fully discussed, was whether government aid should be restricted to companies that fail to meet certain societal standards such as regarding pollution, equal opportunities and executive pay.
This climate may drive a re-evaluation of how Big Tech companies should be taxed
“Some Big Tech companies are sitting on huge pools of cash and some are losing money at the moment. How can we have a taxation approach that works across this?”**
The roundtable participants noted that there have been calls in some jurisdictions and from some stakeholders to increase the tax on technology companies, whether they are providing immaterial services directly over the internet or engaged in distant sales facilitated by the internet. The current climate is demonstrating a crucial benefit of these technology-enabled companies. Large parts of the economy are able to function due to videoconference facilities and work-from-home technology. Online sales have increased in many sectors, particularly of groceries. On the other hand, it was noted that many organizations have had to invest in adapting their infrastructure to meet these new demands. There was agreement that data and technology are becoming even more important, for example with high-tech companies collaborating together with governments in order to produce COVID tracking apps.
There was a sense amongst participant that all of this raises a question about the value of data and whether or not there should be further attempts to tax the value of data―possibly where it is used in a monopolistic fashion. Some attendees commented that, equally, the current situation demonstrates the benefits of allowing market-led technology growth and perhaps underlines the need for a global agreement on the sharing of taxing rights in line with the work carried out by the OECD on the tax implications of the digitalisation of the economy.
The circumstances of the Global South
“Many African governments are caught between providing tax relief and concessions and consolidating their tax collection to be able to invest. Corporate income tax cuts are eating into severely constrained public coffers.”**
It was noted during the roundtable that there are particular considerations in the Global South. For example, jurisdictions that are reliant on commodities have been hard hit by the collapse in global prices. Many countries are spending 40% or even up to 60% of their revenue on servicing debt and therefore some kind of moratorium or even debt forgiveness may be required. In addition, as many people are employed through the informal sector in these regions, it can be hard to reach them through tax reliefs.
“We have to tread carefully out of the crisis, though not lose sight of the need for inclusion, multilateralism and environmental responsibility”**
As would be expected, the discussion also flagged a number of questions about tax policy as some countries begin to come out of lockdown (the Recovery phase); how to pay for COVID emergency investments; and to what extent the crisis will drive more fundamental and long-lasting reforms (the New Reality phase).
It was agreed that more discussion was needed, but some points of general consensus included:
- The idea that, long term, overall taxes would likely increase to pay for the COVID relief investments and probably for greater ongoing investments in healthcare and related public services
- Countries should not rush to fiscal consolidation, and this does raise questions about how much and for how longer greater government expenditure can be financed by borrowing.
In addition, the questions set out below were raised by participants, and these will inform the subject of future Roundtable discussions:
- Has the different tax treatment of debt and equity led to over-leverage and a lack of resilience in companies? Or do the facts that interest rates have been at a historical low and many countries have introduced debt restrictions for tax purposes mean that there has been no distortion?
- Given that green taxes and in particular carbon taxes have been rising up the political agenda, will the current crisis mean that this agenda will be put on hold in the interest of driving economic growth or focusing on immediate issues? Or is this agenda even more critical given the fact that traditional tax bases are likely to be lower in the foreseeable future and there is greater awareness of the negative impacts of external / environmental concerns?
- Is this the time to drive big tax reforms generally, given that many areas of the traditional tax base will be reduced for some time? Specifically, as regards the Global South, have these jurisdictions the capacity to focus on longer term issues such as environmental taxes or should they concentrate on immediate issues?
- As the COVID-19 situation is likely to exacerbate inequality, is it possible to think of tax measures aimed at situations that drive equality – for example only allowing a deduction for executive salaries which are X times the average salary of a corporate’s employees?
- Is there place for increased trade tariffs, especially in the Global South? These can raise much needed revenue and protect nascent industries – but could they reduce trade and provoke trade wars?
- Do we need a financial transaction tax – and if so should this be global?
These and other issues would be discussed further in subsequent roundtable discussions. Additional viewpoints, questions and ideas are welcome in the comment section below.
If you are interested in taking part in a future roundtable discussion, please email firstname.lastname@example.org.
by Chris Morgan
Chris became Head of Tax Policy for KPMG UK in 2011. In this role he was a regular commentator in the press, as well as on radio and TV, led discussions on various representations with HMRC/HMT. In 2014 Chris spearheaded KPMG UK’s Responsible Tax for the Common Good initiative. In September 2016 Chris took on the role of Head of...