Corporates need to prepare for increased tax scrutiny as governments the world over will focus on fiscal consolidation to balance their unplanned spending on Covid-19 relief measures.
Seismologists say that the aftershocks are often more damaging than an earthquake. This is because a structure, though surviving the quake, gets weakened and may well come crumbling down with the slightest tremor.
The Covid-19 pandemic has been nothing short of an earthquake for the global economic system. According to the World Bank Group’s projections, the best-case scenario is a 5.2% contraction in the global GDP for 2020. If the outbreak continues to spread at the rate it has, this contraction could well be 8%.
Governments around the world have been scrambling to prime pump economies by infusing liquidity and providing income and other support to individuals and businesses. At the height of the global financial crisis of 2008, governments of the G20 countries got together and announced a package roughly totalling USD one trillion to keep the wheels of the worldwide economy turning. The relief measures announced by various governments as a consequence of the Covid-19 pandemic have completely dwarfed this.
Estimates vary, chiefly because governments are continuing to announce new measures. Still, according to Centre for Strategic and International Studies, a think tank, by the end of April, G20 countries had announced $6.3 trillion in fiscal support, representing 9.3 per cent of 2019 G20 GDP. Of this, $3.2 trillion was in direct government spending and credit enhancements of $2.3 trillion and tax relief another $0.8 trillion. Germany’s support constituted 19.3% of its 2019 GDP; for the US it was 13.6% and the UK 13.7%.
At some point, in not too distant a future, governments will have to rein in this generosity and start a process of fiscal consolidation. The first step is likely to focus on taxation. While raising taxes may or may not be politically feasible, all governments will undoubtedly concentrate on addressing leakages.
According to a study by McKinsey & Co., a consulting firm, close to 20 per cent of government revenues worldwide, or about $5 trillion, go missing each year, either in dollars owed but never paid or in outbound payments gone awry. “In this era of growing demands for government services and pressing budget challenges worldwide, few fiscal opportunities loom larger than reducing these leakages,” the study said.
Governments in developed economies could increase total revenues by 1-3 per cent using big data and advanced analytics. The potential revenue gain in emerging economies was 10 per cent or more, according to McKinsey. Some time, perhaps in 2021 or 2022, governments that have doled out liberal handouts to businesses, are likely to start looking at this potential in their revenue generation efforts.
“Governments across the globe are forking out billions of dollars in the form of government grants, subsidies and loans. But there are no free lunches. The government is going to come back next year and recover all this unplanned spending. It could be in the form of increased tax or increased scrutiny of each and every aspect.”Neeraj Singhal, Chief Financial Officer (CFO), BCD Travel Asia Pacific a global corporate travel management company speaking at a recent webinar organized by Thomson Reuters
Once governments start doing such scrutiny, companies that haven’t automated their taxation and compliance functions, that are still reliant on manual processes and external consultants, are likely to face challenges with devasting financial and reputational risks emanating from non-compliance.
Take the Platform Approach
The only way global enterprises can prepare for such governmental scrutiny is by implementing the right tax technology. Irrespective of how a company’s tax department is organized – centralized, decentralized, onshore, offshore, outsourced, or a hybrid – executing a global tax technology strategy requires a coordinated effort. A well-implemented technology solution will consistently provide tax departments with increased accuracy, visibility, and transparency.
Tax Technology platforms are content-powered and integrate with an enterprise’s ERP. They come with built-in repositories of information on compliance rules and regulations and data such as tax rates which are updated real-time.
Such systems provide coverage for all tax types in the jurisdictions where a global corporation is operational. They can look at its business through the eyes of various tax authorities, and give trusted answers to stay compliant. Because they are scalable and flexible, they ensure that extensive ERP customization is not required every time a rate or rule changes.
By giving CFOs visibility into a company’s global operations, such tax technology platforms can balance the needs of regulators, auditors, investors, shareholders, and public perception. They eliminate repetitive processes and make updates and administration simpler, thereby enhancing the tax department’s efficiency.
The Covid-19 pandemic has shaken the foundations of the global economy. The aftershocks, in terms of increased governmental tax scrutiny, are sure to follow. To prevent further damage, enterprises need to take pro-active steps to prepare their tax departments.