Governments are also increasingly using tax policy as a tool to incentivize pro-growth behaviour, such as innovation and patent boxes and incentives for both research and development and broader business investment, according to London-based Chris Sanger, EY Global Head of Tax Policy.
In the view of many economists, a key feature of a good tax system is that taxes should fall on consumers rather than producers, according to London-based Nick Catton, Assistant Director, Economic Advisory, Ernst & Young LLP, United Kingdom, and former senior economist for the UK’s HM Revenue & Customs.
“If you tax something that’s part of the production chain, you introduce a distortion both into how goods and services are produced and also into what’s consumed, whereas if a tax just falls on consumption, there’s only the one distortion,” Catton says.
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It’s not surprising then that consumption taxes (such as VAT and sales taxes) were ranked low in damaging effect on growth by the OECD. Those levies have taken an increasing share of tax across the developed world in recent decades.
“We’ve seen a significant increase both in terms of rate increases and the adoption of VAT or a goods and services tax (GST),” says EY’s Sanger. “For example, China is replacing its business services tax with a VAT and India is fundamentally reforming its multi-state GST.”
The Bahamas, China, Egypt, Malaysia and Tanzania have all adopted VAT/GST in recent years, and in 2018 Member States of the Middle East’s Gulf Cooperation Council (GCC) are due to adopt a VAT.
Wait and see
Just as the OECD’s BEPS project has increased tax uncertainty for the foreseeable future, forcing businesses to wait and see how the recommendations will be implemented around the world, the use of taxes to improve economic growth will add another layer of uncertainty as policies shift.
The US is one of many nations rethinking its tax laws in the search for growth. Any tax reform by a major trading nation would change the business and economic landscape, and many countries are modeling these potential effects and assessing how they might shape their tax policies in response.
To a certain degree, businesses can address this uncertainty through monitoring and modeling to assess the impact of any tax reform. Organizations also need to engage with local and global leaders about possible tax policy changes and the impact on their businesses.
Those leaders are listening, since both businesses and countries have a major stake in the outcome.
“We have an extraordinary opportunity today to achieve transformational tax reform that could be a legacy to our children and grandchildren,” Lewis says with regard to US tax reform proposals. “It’s important to get it right.”
In a world searching for growth, it’s true for tax policy everywhere.
Key action points
Monitor developments — both actual and potential — in key jurisdictions. Model the potential impact of tax reforms that might affect any aspect of company tax strategy. Communicate and engage with local and global policymakers about the potential impact of tax policy changes to ensure that they understand the business implications of any legislation.
Culled from EY Tax Insights
Wole Obayomi
