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Geopolitical volatility is shaping tax policies. Tax policies are shaping geopolitics.

While the world’s geopolitical environment is never stable, the volatility we see today is unprecedented, especially as geopolitics affect policies on taxation and trade. The uncertainty of the current political landscape is having a greater impact on businesses than they have seen for many years.

  • In Europe, the United Kingdom’s exit from the European Union will profoundly affect how businesses inside and outside the UK structure and conduct cross-border businesses.
  • The United States’ retreat from global trade and its introduction of protectionist tax and trade policies are changing the prospects for the foreign activities of US businesses and of non-US companies that invest or do business there.
  • Rising protectionism in the US and many other countries is diminishing the influence of multilateral projects and institutions.
  • The rising civil interest in how much tax large corporations pay and the global project to curb tax base erosion and profit-shifting has sparked a wave of tax reforms worldwide as countries seek to shore up their tax bases and improve their ability to compete for foreign investment.

Perhaps the most significant geopolitical force is the continuing rise of China as an economic and politically influential power, especially as multilateral institutions decline in power. In the future, China’s soft power will likely become increasingly important, and its state-owned enterprises is expected to have different objectives and operations than conventional multinationals.

For example, consider China’s massive Belt and Road Initiative (BRI) to promote investment in developing infrastructure and trade along the historic Silk Road trade routes. The BRI will likely spur significant cross-border economic activity between more than 70 countries across Asia, Europe, the Middle East and Oceania. It will open new trade routes and connections between China and many developing countries, especially in Eurasia.

So as some other countries focus inward and erect new barriers to investment and trade, China is investing enormous sums on an infrastructure that will likely put it at the center of a vast new web of business relationships.

One of the most jarring aspects about the current geopolitical situation is that, in many cases, rational economic logic is taking a back seat to other imperatives where tax and trade are concerned. This makes geopolitical analysis essential for today’s business.

Companies need to focus on how geopolitical trends will play out in the short, medium and long terms. Many companies are taking steps manage their exposure by consulting specialists to help them better understand potential threats. They are also spending more time on scenario planning – considering what’s likely, what alternatives are credible, what’s unlikely and what’s worst case – so they can chart their best course forward. Where broader geopolitical trends were once on the periphery of business thinking, they are now high on the radar.

Tax factors are an important part of geopolitical analysis. How a country establishes its tax settings – what and how much economic activities are taxed and whether and how the tax system delivers social benefits – are fundamental to the long-term fiscal stability of a nation. These settings need to be viewed in the context of demographics, cultural predispositions and the structure of the economy, including its international exposure.

The best settings are those that cohere with the international order. However, that cohesion is diminishing as multilateral institutions decline and unilateralism continues to rise. Countries are approaching tax reform in various ways, and, from the global perspective, pressures on national budgets will likely lead to businesses shouldering higher tax burdens.

However the future may unfold, businesses need to keep a close eye on geopolitical trends so they can be ready for the new strategic and operational challenges they may face in the years ahead.