The (In)direct (Tax) Fallout of COVID-19

Countries worldwide are continuing to take actionable steps toward mitigating the spread of the Coronavirus and economic fallout due to the pandemic, as well as provide a level of security to individuals and businesses. The COVID-19 crisis is likely to cause a significant hit on tax revenues in 2020. The major tax gap will be from transaction taxes, due to the sharp fall in economic activity, changed patterns in consumption following lockdowns and the forced closure of many businesses.

In the second half of 2020, countries continued to focus on indirect tax measures to ensure a smooth flow of essential medical items and household necessities. Most countries have enacted some degree of import relief for listed essential medical items and have invested in reduced indirect tax rates for sanitary equipment and personal protective equipment (PPE). Most of those consumption tax measures are temporary, to be extended depending on the state of the COVID-19 pandemic.

Only a handful of countries (Germany, Norway, Kenya, Ireland and Jamaica) have adopted a more generic approach by implementing a reduction in either the standard and/or the reduced indirect tax rates. Other countries such as the United Kingdom, Italy, Cyprus, Costa Rica and Mexico are considering a similar indirect tax rate cut.

Governments may need to explore tax base broadening options to restore lost revenues after the crisis. The surge in e-commerce following the COVID-19 outbreak has emphasised the importance of reform to ensure that VAT is properly applied to digital trade. Many countries with a VAT system have implemented or will be implementing legislation for collecting VAT on online sales of services and digital products. At the same time, countries are further expanding those e-commerce VAT regimes to include online sales of small parcels that are often imported from abroad by foreign electronic marketplaces and other digital vendors (i.e. EU VAT e-commerce package). Although turnover-based taxes such as the digital service tax were already finding their way to a significant number of countries pre-COVID-19, these initiatives are also starting to gain even more momentum. These taxes are typically designed as socially accepted tax measures to target specific industry segments and multinationals to cure the aftermath of difficult economic situations.

In addition to the economic fallout, businesses are confronted with more indirect consequences of the COVID-19 pandemic. The indirect landscape was already changing at an unprecedented speed and the pandemic has only served to accelerate this pace. In many cases, businesses had to scramble to react not only to the practicalities of managing remote working but also to ensure that all indirect tax changes were implemented in their ERP systems in a timely manner. The need to actively manage daily operations and tax changes, as opposed to “firefighting,” has become an ever-increasing concern for businesses.

In this way, COVID-19 has fast tracked an era of global indirect tax reset, prompting companies to embrace new technologies that will prepare countries to provide clear-cut answers to both expected and unforeseen landmark events.

We continue to help businesses worldwide stay compliant in this rapidly changing indirect tax landscape. And, as always, we’ll keep you apprised of global tax changes in response to COVID-19 as they unfold.