As chief tax officers manage spiraling complexity and change in the international tax world, it’s also important for them to consider the bigger picture. Major geopolitical events and macroeconomic trends are underway today that will drive the future tax policy decisions of governments and the business strategies of global companies. Chief tax officers need to understand these developments so they can anticipate — or even influence — the potential effects on the business.
In my view, some of the most important developments shaping the future of tax are as follows.
Invasion of Ukraine
We can only hope that the tragedy unfolding in the Ukraine can come to a resolution as quickly as possible. In addition to the terrible human toll, the assault is causing inflationary effects and global supply problems in many parts of the world. These will bring policy implications for global decision-makers, as well as business implications for international companies. Among other things, the conflict has highlighted the importance of supply chain security and sovereign capability, which may lead to changing policies on taxes, foreign investment and trade.
I suspect the situation may also prompt many governments to increase their defense spending. This could aggravate existing problems with public finances, which brings us to our next trend.
Reining in government deficits in the wake of COVID-19
Many governments, especially Western democracies, have started winding down the huge emergency spending programs they established to support their populations and economies when the pandemic was at its height. Now most of these governments are running structural deficits with high levels of debt. Now that inflation is surging, the higher funding costs on some sovereign debt is affecting government budgets, which may in turn lead to changes in tax policy and/or social spending programs.
To raise more revenues, I think it’s likely that governments will put more focus on personal income taxes. Governments already extract a greater percentage of taxes from labor, through income taxes, social contribution and payroll taxes, than they do corporate income. This gap is expected to persist even when the new global corporate income tax regime under BEPS 2.0 pushes corporate rates higher.
With a worldwide shortage of skilled workers, I think governments may set tax policies that attract mobile, highly educated people, helping to grow both domestic businesses and their tax bases. As the trend to work-from-anywhere takes hold, governments are also likely to put more focus on the location of value-adding activities from a personal income tax point-of-view to ensure they collect their share of tax from globally mobile workforces.
Rethinking the tax talent mix
The tight job market internationally is only one of the trends that is causing chief tax officers to rethink their resource models more broadly. With tax talent scarce and tax technology evolving, many tax leaders are looking to technology to automate compliance activities where possible, or to co-source or outsource them to a managed services provider.
Further, as tax authorities increasingly digitize their tax systems and more tax functions undergo their own digital transformations, chief tax officers are also thinking over what additional expertise is needed. Skills in technology, data and analytics, operations and project management are just a few capabilities that are increasingly essential for high-performing tax teams.
Championing the ESG agenda
As environmental, social and governance concerns have become top public priorities, the chief tax officers of many companies have played an important role in embedding ESG thinking across their organizations.
After the tax behavior of some large global companies came under fire for secrecy and insufficient contributions to tax revenues, chief tax officers have taken charge of tax responsibility within their organizations by helping to set appropriate tax policies as well as governance processes to ensure they are adhered to. Chief tax officers have also become important ESG champions, engaging in the debates at public forums such as the OECD and explaining measures being taken to improve tax fairness and responsibility within their organizations.
In fact, the work of the OECD and the Inclusive Framework is a great example of how geopolitics and tax can intersect, and how effective chief tax officers can be at these crossroads. Many tax executives of large companies were actively involved in the OECD’s work, contributing their business insights toward the development of more equitable, transparent international tax rules and overseeing their implementation across their own organizations.
While the BEPS 2.0 package of rules has not quite reached the finish line, I believe chief tax executives should take pride in their significant contributions to this policy-making process to date.
Topics like conflict in Europe, government finances and labor shortages may seem remote from the everyday concerns of tax functions, but it’s important for chief tax officers to read widely and stay abreast of such geopolitical forces and trends. Ultimately these developments will have implications for tax policy. Being up to speed will put chief tax officers in the best position to steer their organization’s response.