The government’s taxation response to the Covid-19 pandemic

From IAFEI Quarterly Bulletin:

By Filipa Correia, chair of the IAFEI International Tax Policy Working Group, and Alessandro Valente, vice-chair of the IAFEI Ethics and Sustainable Development Working Group

This article aims to analyze the new OECD report, released on the 15th of April 2020, which explores the tax and fiscal measures introduced by governments in response to the COVID-19 outbreak and the future challenges that countries will face from a tax standpoint. The final remarks of the OECD report emphasize that, to look ahead and recover from this economic crisis, it is necessary to invest in multilateral cooperation among countries. Text cooperation will be crucial to address the tax challenges brought by the digitalization in the economy, to ensure support for developing countries and to construct new tax measures which will be able to restore both the public finance and the enterprises final position . Lastly, the article summarizes the main measures introduced by the Italian government to support businesses.

OECD report: Tax policy responses to COVID-19

as stated by the OECD, the COVID-19 outbreak has caused untold human suffering and major economic disruption

The world is witnessing the impact of COVID-19 on the economic activity, global supply chains and profitability across most industries. Such an unprecedented context is raising numerous tax issues.

As such, it is imperative to understand which impact may be exacerbated in the coming weeks from a fiscal standpoint and assess whether the tax measures that were previously provided by governments are sufficient to help businesses, support households and preserve employment.

To that end, on the 15th of April 2020, the OECD released the Tax And Fiscal Policy In Response To The Coronavirus Crisis: Strengthening Confidence And Resilience report, which provides a wide ranging overview of the efforts made by governments in response to COVID-19.

The report focuses on the tax policies already employed by governments who are facing the COVID-19 crisis, including a brief analysis on the economic and fiscal future challenges that may arise as a result of the pandemic.

Governments are already taking decisive action to swiftly and forcefully overcome the economic impact of coronavirus to protect the incomes of social groups and businesses during the virus outbreak. However, there is still much to be done, considering that the OECD estimates that for each month of containment it could be a loss of 2% of annual GDP.

The OECD observed that, for a full tax recovery from the crisis, it is necessary for governments to act together, in order to:

  • Avoid the tax disputes might trigger trade wars
  • Consider, under a multilateral collaboration approach, the possibility of revamping old tax tools or introducing new ones
  • Address the tax challenges connected to the digitalization of the economy.

If containing the epidemic and limiting its severity is the priority from a health emergency standpoint, it is also equally important to lead the majority of the taxation systems towards a coordinated taxation policy response, in order to help workers and industries worldwide, particularly with regard to SMEs, which are inherently less prone to benefit from implementing social distancing measures.

As such, the coronavirus pandemic is taking a particularly heavy toll on SMEs, which are suffering from a reduction of both supply and demand.

The latest OECD report, which describes how tax and policy can cushion the pandemics impact, outlines the most relevant policy reforms that will be needed to prepare for the recovery of public finances and does so by identifying 4 main aspects:

  • Detecting the short term fiscal measures that countries have introduced in response to the COVID-19 crisis
  • Investigating the ways in which short-term measures are performing
  • Suggesting new fiscal policy measures that might be needed to ensure economic recovery after the health crisis, such as focusing on the fiscal stimulus and strengthening resilience
  • Outlining options that could be explored by governments to increase revenues once the economic and health crisis has passed.

According to the OECD report government should increase international cooperation in response to the pandemic, since the individual fiscal dilemmas that countries are facing today against the virus suggest that a shared taxation plan is indeed required.

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