Accounting

The Impact of COVID-19 on global tax revenue

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The Organization for Economic Cooperation and Development (OECD) has released a report that analyzes the initial impact of the COVID-19 pandemic on global tax revenue. The report, Revenue Statistics 2021: The Initial Impact of COVID-19 on OECD Tax Revenues, provides insight into how different governments responded to the global pandemic and the economic impact of such measures.

The report focuses on the policy changes put in place to assist both households and businesses. These changes included reducing tax rates, deferring tax liability, and enhancing tax credits. The report finds that the drastic reduction in economic activity as a result of lockdowns and other measures taken by governments across the globe has reduced labor force participation, household consumption, and business profits—all of which have had a negative impact on tax revenue.

The report notes, however, that government support measures may have indirectly preserved revenues to the extent that they reduced job losses and business closures overall. This observation is supported by data that shows the decline in tax revenues was less drastic than the decline that occurred during the global financial crisis of 2008-2009. One of the main takeaways from the report is that direct taxes on income were more significantly impacted than indirect taxes or property taxes. No change was seen with respect to national consumption taxes, such as VAT, as a share of GDP across OECD countries, but there was a widespread decrease in excise tax revenue, notably from gas and fuel use during the lockdown periods.

With respect to employee taxation, many countries introduced new measures to help households sustain throughout the pandemic. The most common tax reforms involved the full or partial deferral of personal income tax obligations and social security contribution payments, as well as the waiver of interest and penalties. Filing deadlines were also extended in many countries. In the United States and elsewhere, accelerated payments of tax credits or refunds occurred in conjunction with the deferral of tax liability and reduction in tax rates.

There was increased relief for specific industries, too. For example, additional provisions for the self-employed and small to medium-size enterprises were popular in many OECD countries. Labor force participation decreased in all countries, and the average number of hours worked by employees significantly declined. The report found that job losses and reductions in hours were most significant for low-income earners and less pronounced for higher-income workers.

The report also outlined the tax measures used to support business liquidity and cash flow in 2020, which impacted corporate income tax revenues.  The most widely implemented measures included deferrals of tax payments, filing extensions, and flexible tax payment plans. Along the same lines, deferrals of VAT liabilities were introduced in almost all OECD countries. VAT refunds were accelerated in 15 OECD countries to further enhance cash flow. Another mechanism widely employed across the OECD was a temporary change in VAT rates targeted toward the hospitality industry, restaurant services, and cultural and sports sectors.

Lastly, all OECD countries have adopted new rules and measures for the effective taxation of cross-border supplies of services and intangibles per the OECD’s International VAT guidelines. Given the volume of online sales and the percentage of transactions occurring on digital platforms, this is an area that may assist governments in making up for some of the revenue lost as a result of relief measures offered during the pandemic.

While it’s too soon to know exactly how effective these mitigating factors will be, there are a growing number of countries that are starting to remove their VAT relief regimes for imports of low-value goods because the volume of imports is once again starting to grow. This suggests that economies are beginning to return to normal and the analysis of the global impact of COVID-19 will become more detailed and accurate as the data collected in the years following the pandemic provides us with a more comprehensive picture.

Stay updated on all things taxes with a Becker CPE course. The 2022 Annual Federal Tax Update will provide an overview of new tax legislation, IRS authority, and recent tax-related court cases.

 

The content contained in this article is for informational purposes only and is not tax advice. You should consult a tax advisor for advice applicable to your situation.

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