Are CEOs right to worry about tax policy uncertainty?

Nearly three quarters (72%) of UK CEOs are concerned about tax policy uncertainty, according to our 24th Annual CEO Survey. This doubtless owes much to the impact of the pandemic on public finances. But COVID-19 is far from the sole driver of uncertainty. Even before the pandemic, global issues such as digitalisation and climate change were influencing tax policy.

Digitalisation and globalisation have been putting pressure on the international corporate tax system for a while. After almost 10 years, the OECD seems to be closer to an agreement on the taxation of the digital economy and a minimum corporate tax system. Nonetheless, weeks away from the promised deal’s announcement at the G20 summit, we still don’t know which companies will be in scope for Pillar 1 or the minimum tax rate under Pillar 2, with rates between 10% and 15% being debated.

Another trend with implications for tax policy is climate change - a concern for 70% of UK CEOs. Tackling it implies internalising the costs of climate damage into prices of goods and services, and through taxation. Green levies are becoming an integral part of tax policy, often counterbalanced by incentives to encourage transition to cleaner technologies. And while 46% of UK CEOs are confident the Government will strike the right balance between growth and environmental goals, details of key measures such as a possible Carbon Border Adjustment Mechanism remain elusive - despite policy changes in the UK, EU and US.

In addition, the economic crisis accompanying the pandemic and intervention of governments has put pressure on national budgets. So tax policy will not only be influenced by structural changes in the economy, but also by national governments having to reduce their deficits via increased taxation. Currently it will be difficult to raise general taxation without raising business taxation too. One of the largest revenue raisers of the 2021 UK budget was an unprecedented six percentage points increase in the corporate tax rate to 25% which will come into force in 2023. Nonetheless, because business taxation is known to be distortive of investment, rate increases are often partially compensated by expanded incentives, such as R&D tax credits or more generous capital allowances such as the UK super-deduction for plant and machinery.

While the future of tax policy is uncertain, effective management of likely changes is possible. Two steps are crucial. First, in a volatile environment, it is key to keep abreast of policy discussions to identify challenges and opportunities early in the process. For example, in the current setting, policymakers are using incentives to boost and bring forward business investment and innovation. The second step is represented by modelling of the different, possible scenarios, especially when faced with complex changes. For example, modelling the effects of the OECD Pillar 1 and 2 on a group’s Effective Tax Rate generally allows businesses to focus on a limited number of risk areas.

The nature of technological progress and the pandemic implies that for the foreseeable future, tax policy uncertainty will play an integral part in tax risk, governance and planning activities.

If you are concerned, please do get in touch, we’d be happy to discuss this with you.