OECD report on tax impact of COVID-19

The 2021 edition of the OECD’s annual Revenue Statistics publication was released on 6 December 2021. The OECD’s latest report explores the initial impact of the global pandemic on member countries’ tax revenues, the relationship between tax levels and GDP and the types of taxes most affected by the crisis. This article covers the key OECD findings. In a separate article in this edition of Tax Matters Digest we discuss the implications for transfer pricing comparability studies.

Reduction in tax revenues

Tax revenues reduced in two-thirds of OECD countries as a result of COVID-19, according to the latest Annual Revenue Statistics report. The fall is attributed firstly to COVID-19 support measures provided through the tax system (for example deferrals or reductions in tax liabilities, enhanced tax credits and allowances and temporary or permanent reductions in tax rates) and secondly to the reduction in revenue caused by slow-down in economic activity.

Nominal tax revenues (across all countries for which data was available) fell by an average of $6.8 billion (-2.1 percent) in 2020 versus 2019. Italy reported the highest fall in total tax revenue of $42.7 billion (-5 percent) in the period. The UK reported the second highest fall in total tax revenue in 2020, down $38.2 billion (-4 percent).

Tax revenue as a percentage of GDP

In 2020, the average OECD tax-to-GDP ratio increased by 0.1 percentage points (p.p.) to 33.5 percent and increases in the tax-to-GDP ratio were reported in 20 out of 36 OECD countries. The UK ranked 23^rd out of the OECD countries in terms of tax-to-GDP ratio, reporting a 0.1 p.p increase to 32.8 percent in 2020.

Although nominal tax revenues fell in most countries, the fall in countries’ GDP was often greater, resulting in this small increase in the average tax-to-GDP ratio.

Changes in revenues by tax type as a percentage of GDP

Direct taxes on income were more strongly affected by the crisis than indirect or property taxes. Across the OECD in 2020 personal income taxes (PIT) and social security contributions (SSCs) saw an average increase in tax revenues of 0.3 p.p. Government support measures indirectly bolstered these revenues insofar as they were successful in reducing job losses. In many (but not all) countries, payments to employees under these schemes were also taxable, artificially pushing up PIT and SSC revenues for these countries.

Corporate income taxes saw the largest decrease of 0.4 p.p. on average. No average change was seen in property taxes or VAT as a share of GDP. Of the nine OECD countries where property tax revenues did fall, the UK reported one of the largest falls of 0.2 p.p. due to business rates relief.

A small but widespread average decrease of 0.1 p.p. was seen for excise revenues, particularly from fuel use due to mobility restrictions.

Cautions in interpreting findings based on preliminary data for 2020

The report caveats that its findings are based on preliminary data that may be subject to revision in future editions, as is normal.

It should also be borne in mind that the impact of the pandemic itself may lead to larger than normal revisions being required to the preliminary data. This is due to distortions created by pandemic support measures (e.g. tax deferrals and extension of filing and reporting deadlines). It is also because if tax revenues are recorded when the tax liability is determined, rather than when the economic activity takes place (i.e. the accruals basis of reporting as in the UK), there will be a lead time in the slow-down of economic activity negatively impacting tax receipts.

Nevertheless, the initial results of the report still present an important insight into the impact of the global pandemic across OECD countries, even if the scale of the conclusions may be revised in future editions.

For further information please contact:

• Tim Sarson
• Sharon Baynham