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The future of global tax: 6 key predictions for 2021

2020 has been the most volatile financial year in decades, with the Covid-19 pandemic forcing governments around the world into unprecedented levels of borrowing.

As those governments now face up to the prospect of trying to repair their damaged economies and tackle the vast debts incurred this year, 2021 is set to be another unpredictable year. Each country has been impacted in different ways by Covid-19, so expect the response to vary significantly.

Here are six themes I expect to define the world of tax in 2021 – and perhaps even beyond:

1) VAT hikes will be used to meet Covid-19 debts

Governments around the world end 2020 counting the cost of Covid-19. In the UK alone, tax income is £100 million lower than anticipated due to increased unemployment, reduced business profits and lower consumer spending impacting on VAT revenue.

With borrowing spiralling in many countries, I believe 2021 will see many governments turn to VAT to balance the books. We’ve already seen this in Saudi Arabia, which increased its VAT rate from 5% to 15% over the summer to combat the economic effect of the pandemic.

In many countries, a VAT increase is seen as less inflammatory than a rise in income tax. I therefore expect plenty of governments to opt for VAT hikes in the first half of next year.

2) While other countries will cut VAT…

Plenty of other countries are likely to do the exact opposite and lower VAT rates in an attempt to drive consumer spending to stimulate their economies.

Helen Dickinson, Chief Executive of the British Retail Consortium, and Boris Johnson’s former economic adviser Gerard Lyons have both called for the UK to cut its VAT rate from 20%.

Whether increasing or decreasing VAT rates is the right thing to do remains to be seen – and the answer is likely to differ between each country – but what is clear is that there will be an abundance of rate changes for global businesses to manage in 2021.

3) US states to take different approaches  

Following the onset of the Covid-19 pandemic, sales and use tax collections fell by over 17% in the US in the second quarter of 2020 as consumer spending was restricted by shutdowns and economic uncertainty.

Many experts believe the only way for the US to bounce back will be to increase existing rates and/or create new taxes in 2021. And with state budget shortfalls for 2021-2023 estimated to be over $500 million, any tax hikes could be severe.

However, early signs suggest the future is not as clear cut as this. Indeed, four states – Idaho, Massachusetts, Connecticut and Vermont – have recently unveiled their budgets for the next financial year without any provision for tax rises.

Different areas of the US have been affected to varying degrees by Covid-19 and I therefore believe a range of approaches to sales and use tax will be taken by state authorities in 2021 and beyond, underlining the importance to businesses of having a tax determination solution capable of complying with the specific rates, rules and regulations of every single state.

4) Oman VAT and the Brexit fallout: Major events increase risk of non-compliance

It may be difficult to look beyond Covid-19, but there are other big challenges hurtling down the track towards businesses in 2021!

At the very top of the list is Brexit. The UK will formally leave the EU’s single market and customs union on 1st January. Unfortunately, we know there are still businesses out there that are not in a position to comply with new import and export duties from Day 1 and face a frantic start to the year.

And it’s not only Brexit that provides businesses with a strict deadline to manage. Oman is due to implement a VAT system from April, following in the footsteps of its neighbours Saudi Arabia, the UAE and Bahrain.

If your organisation trades in or with Oman, you’ll need to get systems in place in the first quarter of the new year to ensure compliance with what could be a very complex set of regulations.

Major developments such as Brexit and the arrival of VAT in Oman will pose a serious threat of non-compliance to businesses that fail to prepare.

5) Online businesses will race to comply with European e-commerce VAT update

New regulations will come into effect on 1st July 2021 that mean e-commerce businesses operating electronic marketplaces or platforms will be liable to collect and pay VAT on sales made to customers in the EU.

It will mark a significant move away from the current import scheme; and with e-commerce set to grow by almost 20% in 2020 the new rules will soon apply to billions of euros worth of sales.

I expect online businesses will face a race to comply with the new legislation prior to its implementation next summer.

In the medium term, companies will enjoy a reduction in cross-border VAT compliance costs and a greater ability to compete with non-EU businesses that do not charge VAT.

But in the first half of 2021 at least, all the talk will relate to implementing processes that allow VAT to be determined and calculated correctly in accordance with the updated rules.

6) The return of one-off taxes

One-off taxes are not a new idea. They have been used before to help countries repair damage to public finances caused by major crises. For example, France, Japan and Germany imposed one-off taxes on citizens in the aftermath of the Second World War, while Ireland did so following the global financial crisis.

Earlier this month, Argentina passed a new tax on its wealthiest people to fund medical supplies required during the pandemic. People with assets worth more than 200 million pesos ($2.5 million) will have to pay the new tax.

We are living through unprecedented times and I predict one-off taxes will be used increasingly through 2021 and beyond. Watch out not only for taxes on wealthy individuals, but tax rises on items such as fuel and the expiry of reduced VAT for the hospitality industry.

For more information on how any of these trends could impact your business, get in touch with our team of tax technology experts.