On 21 April 2021, the OECD published Tax Policy Reforms 2021 giving an overview of the tax policy of around 70 jurisdictions, including the OECD and G20 countries and some members of the Inclusive Framework on base erosion and profit shifting (BEPS). The publication gives an insight into tax policy responses during the COVID-19 pandemic.
The report was prepared for the G20 Finance Ministers and Central Bank Governors and provides an overview of the tax measures introduced during the COVID-19 crisis in the surveyed countries. The report sets out some guiding principles on how countries could improve the targeting of emergency relief and implement recovery-oriented tax measures as they come out of the crisis and ease restrictions.
The extent of the recovery is varying greatly between countries, sectors and households. Differences in the pace of vaccinations and in the degree of policy support could increase this trend. Households on low-incomes, women and young people have borne higher economic costs.
Fiscal packages have included loan guarantees, job retention schemes, direct transfers, expanded access to benefits and tax measures. Many of the tax measures aimed to avoid unemployment; the temporary inability to pay suppliers or creditors; or business closure or bankruptcy. Countries also introduced tax measures to support households, combined with direct transfers and expanded access to social benefits which often played a greater role. Many of the tax measures introduced in the first period of the crisis have been extended and better targeted.
Recovery oriented measures
As lockdowns eased, governments began to introduce recovery-oriented tax measures, including corporate tax incentives for investment and reduced VAT rates targeted at sectors that were worse affected. Many of the countries in the Asia-Pacific have introduced stimulus-oriented tax measures.
Tax increases
An increasing number of countries have introduced or announced new tax increases. Some represent a continuation earlier trends, such as increases in fuel excise duties and carbon taxes, while countries have also introduced tax increases on high-income earners, including increases in top personal income tax rates. The UK for example has announced a CIT rate increase from 19% to 25% for profits above GBP 250 000 from April 2023.
Future tax policy
Tax measures should be temporary and targeted at the areas where equity requirements and fiscal multipliers are highest. Countries may need to set clear end-dates for these. The stimulus measures should be targeted at areas where they are most likely to generate additional consumption and investment.
Priority should also be given to measures supporting labour market recovery and business recapitalisation. Temporary and targeted reductions in employer social security contributions could be useful. Tax measures could also be used to support business recapitalisation, including temporary schemes an exemption for profits retained in a capital reserve aimed at rebuilding equity. These schemes could be capped and targeted at small and medium enterprises (SMEs) with provisions to prevent abuse.
Tax stimulus measures should be aligned with longer-term environmental and social objectives, such as targeted support for green technologies and greater carbon pricing efforts. After the crisis there will be an opportunity for countries to undertake a more comprehensive reassessment of their tax and spending policies and their fiscal framework. This should consider ongoing structural trends, including climate change, rising inequalities, digitalisation and demographic factors.
