Virtual Responsible Tax roundtable: The new reality
The long-term issues for tax policy in response to COVID-19 – Responsible Tax Roundtable recap
Building on the first two virtual roundtables held on 4 May, a third was held on 14 May, with 18 participants from a broad range of backgrounds1. The challenge: to consider the longer-term impact on tax policy of COVID-19. In particular, participants considered what the impact on the green agenda and environmental taxes might be, and whether governments may need to widen or deepen the tax base?
The roundtable is part of an initial series of three, which discusses short, medium2, and longer-term impacts and implications. The meeting was held under the Chatham House Rule. Where names are mentioned it is with express agreement. The summary below seeks to draw out the key themes – and tensions – that emerged, but does not necessarily reflect a unanimous agreement nor the opinion of any KPMG member firm.
Context for the discussion
We began by outlining a number of tensions which have emerged from the first two roundtables. These are:
- The need to stimulate the recovery versus fiscal consolidation to pay off deficits
- Multilateralism versus countries and territories needing to act quickly and according to their situation
- The opportunity for fundamental changes versus the need to focus on the immediate short term
- The opportunity to shift to a greener economy versus putting green issues on hold to concentrate on growth
- Expert advice versus political possibility to implement measures
Participants in the first two roundtables had counselled against rushing to fiscal consolidation in order not to impede a recovery once lockdowns are lifted; but it was recognized that, longer term, many governments may have to raise tax. It is also clear that many countries and territories have little room for maneuver and different countries and sectors will emerge from the crisis at different times and speeds. Accordingly, any shifts in tax policy will need a nuanced approach.
The need for a holistic view of the tax system and, especially in the Global South, a focus on domestic revenue mobilization
“We need to build holistic capacity across all stakeholders otherwise the power imbalance will increase”3**
Several of the participants raised concerns about inequality and noted that in many places it is people at the lower end of the pay scale who are losing their jobs. In many countries there is likely be a need for increased taxation but, particularly in the Global South, there are doubts about how this could be achieved. The IMF is carrying out considerable work on tax capacity in developing countries - for example assisting with digitalization.
More generally it was suggested countries should be looking at improving tax systems and working with tax administrations to create capacity and better compliance systems for virtuous and transparent taxpayers. A holistic approach was needed to create capacity across all stakeholders to maintain a balance of power. For example, in some jurisdictions the legal and judicial system needed strengthening to ensure issues are resolved properly in the courts. More equality should also come with simpler tax systems which are understood by citizens; messaging can become difficult where the system has become too complex.
Potential for a green recovery
“Green taxes are prescient - if we don’t do it now we won’t have enough time left to do it”**
A key question that came up in the discussion was whether the time will be right to focus on environmental taxes as economies start to emerge from COVID, or whether these taxes will be reduced or put on hold in the belief that they could slow economic growth. It was noted that Ipsos MORI carried out a poll globally and two thirds of the respondents thought that climate change was the priority after COVID and were in favor of a green recovery. There were, however, differences between countries―with some parts of the world showing strong support for climate change action and others less so.
Many of the participants in the roundtable were aligned to this view, and argued that there should indeed be a green recovery and that this would be the right time to utilize environmental taxes; no one thought that the green agenda should be put on hold. It was noted that, as well as environmental benefits, green taxes may be a way of supplementing government revenues given that it is likely that revenue from traditional income based taxes will be lower for some period. It was suggested that, given the drop in the price of oil, this may be an opportunity for countries to introduce carbon taxes and fuel taxes, as the impact on consumers will be lower than when the price is high. A question was raised to what extent taxes should be used to penalize “non-environmentally friendly” behavior and to what extent tax should be used to subsidize or encourage investment in green technology, and this was discussed but without strong conclusions.
Carbon taxes and developing countries
“The delay in putting the green economy at the forefront would be devastating to small island economies dependent on tourism and agriculture”**
One participant noted that climate change is having a huge impact on many poorer countries, especially small island economies, which are prone to hurricanes. From the perspective of many in these jurisdictions, it is important that the Paris Commitments on Climate Change are met. It was noted during the roundtable that introducing carbon taxes in low income economies could be burdensome on their manufacturing industries and may not be justified as they are not significant emitters. Therefore, it was suggested that carbon taxes should be focused on developed countries and the larger emitting countries rather than on low income countries. Nevertheless, some do have other environmental issues and have introduced levies such as plastics tax. A question was raised about whether there is the possibility to shift some of the tax burden from employment to environmental issues, but it was noted that in many developing countries there is a need to collect more tax overall rather than switching from one type to another.
Net wealth taxes were not generally considered to be efficient
“Wealth taxes historically have yielded very little revenue”*
In countries such as France and Spain, there is a debate about increasing wealth taxes. Currently, in France, wealth tax is charged in relation to real property and there have been suggestions that it should be extended to cover shares. However, several participants noted that general wealth taxes have not been successful in the past. Only three countries in the OECD now have them. If they are targeted at the richest members of society they raise little tax - less than 1% of GDP in most cases. Historically, they have proved relatively easy to avoid for those who wish to, although with increased exchange of information between tax authorities it may be easier to track and tax wealth now than it was in the past. Nevertheless, there was agreement that wealth taxes are difficult to administer - as they rely on the need to value assets. If the tax is charged on net worth, it can encourage increased leverage. One participant pointed out that despite their historic problems, wealth taxes can raise revenue and could be an appropriate mechanism in the developing world context. Taxing pockets of wealth is often difficult for political reasons, but the current crisis has increased a sense of solidarity in many nations, which could help build political support for increasing efforts to tax the wealthy more.
There was more support for examining the use of property taxes
“Property or site value tax should be less damaging than increasing taxes on labor, which could have a double impact as gross incomes are likely to fall too”**
Several participants noted that many wealth taxes are, in fact, property-based taxes, and this may be an area for countries to consider. In some jurisdictions, there is little correlation between the value of a property and the associated tax which could indicate the possibility to create differing bands or a surcharge on the most expensive properties. If designed properly, the tax should stimulate economic growth by encouraging the productive use of land. However, one participant pointed out that, in developing countries, real property is the only asset that most people will ever own, so care would be needed in designing any tax. Also, taxes on the transfer of land (as opposed to annual taxes) can be distortionary. For example, in Jamaica, land transfer taxes and death duties have been reduced.
Should there be wider reform of the taxation of capital gains and income from capital?
“A more rigorous approach to capital income and capital gains is more feasible and will get more tangible results - generating more revenue.”**
It was also suggested that a better approach to taxing net wealth would be to focus on the taxation of capital gains. In many countries, there are various exemptions and capital gains may be taxed at a lower rate than income. Changing the taxation of capital gains may be politically more acceptable than introducing wealth taxes and may raise more revenue. It was also pointed out that investment income is often taxed at a lower rate than income from work, and one participant wondered if there would be a move to taxing passive income more highly than active income―although it was noted that the argument against this is that capital is more mobile than labor.
VAT and sales taxes can provide a broad base but, in themselves, are regressive
“VAT is very efficient but can ways be found to make it more progressive?”**
While increasing VAT or sales taxes would be a relatively easy way to increase revenue, several participants raised concerns about the regressive nature of such taxes. This could be a particular issue in developing countries. It was noted, though, that what is most important is that the overall fiscal system is progressive when looking at all taxes and how revenues are spent rather than focusing on individual taxes. Effective spending, particularly investing in social protection to respond to shocks helps to build the social contract between citizens and the state, which in turn, can make increased taxation more acceptable. Some suggestions included removing VAT exemptions―in particular where this fits with other aims, such as removing the exemption on aviation―or creating higher rates of VAT or excise tax on luxury goods.
General support for the OECD Inclusive Framework work on tax and the digitalization of the economy
“This crisis confirms the fact that the OECD is moving in the right direction”**
As regards corporate taxation, one participant noted comments from an earlier roundtable concerning the taxation of highly digitalized companies and the fact that some are very profitable but others are loss-making. It was noted that the proposals being discussed by the OECD Inclusive Framework on the taxation of the digital economy (Pilar 1) address this issue. The proposals focus on taxing profits not turnover (unlike digital services taxes) and so would not impact loss-making companies. They are also aimed at those companies that are making residual profits above the routine return.
Some support was given for introducing minimum taxes on corporations, and it was noted that this is effectively the work of the Pilar 2 workstream. Some participants pointed out that, in some countries, there are investment incentives that are inefficient or unnecessary and revenues could be increased by removing them without increasing the headline tax rate. This may become easier to achieve if there is agreement on Pilar 2. One participant wondered if it would be possible to create a one-off tax on corporate profits held in low tax jurisdictions.
Is there any appetite for higher income taxes?
“Most people in the UK say that they will accept higher taxes for better public services”**
Reference was made to an Ipsos MORI poll in the UK which showed that people would be in favor of higher income taxes in return for improved public services. It was suggested that generally countries could look at increasing the progressivity in income tax, review the need for certain reliefs (it was noted there are around 100 in French income tax law) or introduce temporary solidarity taxes.
Thank you to all of our participants in this roundtable series to date. This seminar concluded the initial three on the short, medium and long term implications of the COVID-19 situation and the impact on Responsible Tax discussions. As ever, we welcome all feedback, questions and comments.
KPMG International and Jericho Chambers plan to host additional roundtables in the months ahead, looking at a deeper dive into some of these issues and tensions. We welcome participation from others with a view, as well as additional ideas for future topics. Please email firstname.lastname@example.org to learn more.
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...