Global Tax Trends in 2021 and 2022: How to Manage Through an Era of Transformation

The first few years of the 21st century’s third decade will be remembered as a time when the global tax community committed to significant change. Although political and socioeconomic unrest continues, a behind-the-scenes agreement on a standard corporate tax rate and the move towards a tax regime better suited to the digital age has established new parameters for the future.

There are now continued efforts to respond to the digital economy by appropriately taxing in jurisdictions where consumers are located. This can happen either unilaterally by individual countries via digital services tax (DST), or multilaterally via the proposals being developed by the Organisation for Economic Co-operation and Development (OECD).

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Perhaps the most significant event in 2021 was the announcement of a major reform of the international tax system, which was made by the OECD in October 2021. This will ensure that multinational enterprises (MNEs) will be subject to a minimum 15% tax rate from 2023. The landmark deal was agreed by 136 countries and jurisdictions representing more than 90% of global GDP. Countries are aiming to sign a multilateral convention during 2022, with effective implementation in 2023.

“Today’s agreement will make our international tax arrangements fairer and work better,” said OECD secretary-general Mathias Cormann. “This is a major victory for effective and balanced multilateralism. It is a far-reaching agreement which ensures our international tax system is fit for purpose in a digitalised and globalised world economy. We must now work swiftly and diligently to ensure the effective implementation of this major reform.”

Setting the Tax Agenda

The OECD project will be top of the to-do list for tax authorities in the year ahead. But another source of change will be the environmental, social and corporate governance (ESG) agenda. The most important factor here–from a tax point of view–is that investors will look for higher levels of transparency in the way companies report their liabilities.

As KPMG reports: “Investment managers and portfolio companies are adopting sophisticated ESG practices as a critical part of risk management and as a means to differentiate their business. Tax is playing a critical role in these developments. Institutional investors are starting to use this information to make informed investment decisions. One large institutional investor vocally supports ESG issues, excludes companies it has determined as not ESG-compliant from their investment universe and has even publicly divested from companies with weak or no reporting related to tax and transparency.”

Managing reputational risk by being more open about tax policies will consequently become ever more important. Large companies clearly need to avoid institutional investors removing capital and potentially increasing the price of borrowing, which can in turn bring pressure to bear on stakeholder returns.

Another key event in 2021 was the United Nations Climate Change Conference (COP26), which saw at least 90% of the world’s economy now signed up to net-zero targets. It’s not yet clear how individual countries will respond with the carrot of incentives or the stick of carbon levies, or a mixture of the two. In any case, multinational entities need to be prepared for the change that surely lies ahead.

The Impact of the Pandemic Continues

Of course, all of these changes are happening against the backdrop of the pandemic, which has increased the appetite for governments across the world to seek their “fair share” of taxes from companies that they supported throughout the crisis.

PwC explains why this is an important consideration: “Given the unprecedented financial support governments have given companies during the COVID-19 pandemic and the massive debts incurred, further public scrutiny of corporate profits and tax arrangements seems inevitable. Companies will avoid unnecessary controversy by being transparent and making sustainable tax arrangements, rather than waiting until their hands are forced by regulators or legislation.”

Strong alliances between tax professionals and finance teams will be vital for MNEs moving forward, not least because of the need to explain yet unknown changes in country-level as well as international tax regimes to senior leaders.

“The bottom line is that your CEO, board and audit committee will want to know how tax policy will shape day-to-day operations, cash flow and investment decisions,” adds PwC. “They will also want to know how to best position themselves in this fluid tax rate environment. At the same time, because of the pandemic and other economic and social events, many companies are planning big changes — workforce, M&A and digital and supply chain transformations, for example — that may need significant alterations due to changing tax laws.”

Tax technology will play an increasingly important part in helping multinational enterprises (MNEs) cope with change and avoid reputational risk. Relying on manual or spreadsheet-based processes to gather data from subsidiaries and forecast tax liabilities will be even less tenable than in previous years.

Dedicated tax software enables teams to work on data that is automatically derived from core finance systems and constantly updated, before sharing reports with the wider business. This includes mid- and long-term forecasts, as well as “what-if” scenarios that help senior leaders prepare for the future, however unexpected that might prove to be.

As BDO Global explains: “There is huge pressure on businesses today to report large amounts of tax data and to do so accurately and on a timely basis. Technology is part of the solution to this but so is a proper tax governance framework. It is much better to get it right first time, than to be forced to correct it under investigation. The latter can not only give rise to interest and penalties but can also take up significant amounts of management time to deal with.”

Whatever lies ahead in 2022 and beyond, tax teams and business leaders will need technology tools that deliver an accurate, timely and transparent view of relevant data, together with insights into what that data means for the business.

Preparing for the Great Tax Reset: Transparency and Flexibility Will Be Key

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