Countries around the world have implemented and continue to implement emergency taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. measures to support their economies during the coronavirus (COVID-19) crisis.
Providing tax relief to the people and companies that are most affected, until the emergency abates, is welcome, as the health issue has created a substantial economic shock. Taxes that require regular payments impact the liquidity of businesses and households. Therefore, governments consider fiscal relief as a way of minimizing the economic impact from the health crisis.
In their initial response, countries delayed payments for consumption, corporate, or income taxes for different periods of time. For example, Sweden delayed business’ VAT payments by 12 months.
Some countries also responded with deductions and tax cuts on personal taxes. Norway reduced its employee payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. rate by 4 percentage points for two months, and Thailand cut the income withholdingWithholding is the income an employer takes out of an employee’s paycheck and remits to the federal, state, and/or local government. It is calculated based on the amount of income earned, the taxpayer’s filing status, the number of allowances claimed, and any additional amount of the employee requests. tax from 3 percent to 1.5 percent for six months. The United States also applied significant tax rebates for individuals. Austria and Bulgaria offered a tax reduction if taxes were filed and remitted on time.
First, some countries temporarily delayed social security payments. Mexico offered deferring social security payments for up to 48 months. In Switzerland and Hungary payments were deferred interest-free. In Iceland, employers could postpone up to three payments. The United Kingdom also offered direct support for the self-employed aimed at replacing 80 percent of their average earnings.
Second, carrybacks and carryforwards have been approved as they are a vital source of tax relief for struggling firms. Norway and the Czech Republic introduced a two-year loss carryback, while China approved an eight-year carryforward. In the United States, firms may take net operating losses (NOLs) earned in 2018, 2019, or 2020 and carry back those losses five years. Also, the NOL limit of 80 percent of taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. was suspended. Poland implemented a one-year carryback for corporate taxpayers whose revenue in 2020 will be lower by at least 50 percent when compared to 2019 revenue.
Third, accelerated tax depreciationDepreciation is a measurement of the “useful life” of a business asset, such as machinery or a factory, to determine the multiyear period over which the cost of that asset can be deducted from taxable income. Instead of allowing businesses to deduct the cost of investments immediately (i.e., full expensing), depreciation requires deductions to be taken over time, reducing their value and discouraging investment. was offered for different business investments. To support businesses for sticking with investment they had planned, and to encourage bringing investment forward to support economic growth over the short term, Australia allowed businesses with sales of less than $500 million (U.S. $297 million) to immediately expense equipment valued up to $150,000 (U.S. $89,177) and use an additional 50 percent accelerated write-off on other assets purchased over the next 15 months. Singapore approved accelerated tax depreciation for plants and machinery over two years and over one year for expenditures on renovation and refurbishment.
Finally, countries also approved temporary or permanent tax cuts for business. Indonesia cut the corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. rate from 25 percent to 22 percent for 2020 and 2021, and to 20 percent starting in 2022. The social insurance rate in Russia was reduced to 15 percent (from 30 percent) for salaries exceeding the minimum wage. Singapore approved a corporate income tax rebate of 25 percent of the tax payable.
Apart from delaying VAT payments, most countries also accelerated VAT refunds. Similarly, VAT was waived or reduced for supplies related to the coronavirus outbreak. The European Union waived VAT and tariffs for imported medical equipment. In the Netherlands, no VAT applies to the supply of medical staff and donated medical goods. In Austria, protective face masks are VAT-exempt. Ukraine also approved VAT exemptions for imports connected to addressing the outbreak. On the other hand, China cut VAT on supplies related to the coronavirus outbreak, while Greece reduced it from 24 to 6 percent. Both the United Kingdom and Russia waived import taxes and duties on medical equipment.
As it happened with business taxes, countries accelerated planned VAT reductions or temporally reduced VAT on certain goods and services. Norway’s reduced VAT rate of 12 percent was lowered to 7 percent retroactively to January 1, and from April 1 a 6 percent rate will apply through October 31. China also cut VAT from 3 percent to 1 percent for small businesses until the end of May. The United Kingdom accelerated a planned VAT reduction on e-books.
Most countries offered wage subsidies for workers in affected businesses under certain conditions. For example in Australia, distressed businesses are eligible to receive a $1,500 payment per retained worker every two weeks for up to six months. In Canada, a 12-week wage subsidy of 75 percent applies to all businesses and a three-month wage subsidy of 10 percent to small businesses. Elsewhere, subsidies go from 60 percent of wages in Bulgaria to 70 percent in Estonia to 90 percent in Denmark and Netherlands. Lithuania and Germany also offered wage subsidies for workers with reduced working hours. Finally, many countries expanded unemployment benefits and paid sick leave.
New stimulus packages are also continuing to be proposed and implemented. The Austrian government has approved a new coronavirus-related fiscal stimulus package that includes income tax cuts, VAT reductions for the food and culture sector, and tax measures to support investment. While accelerating the planned income tax reform will help people have more money in their pockets, a temporary VAT rate cut, even though it is industry-specific, is likely to deliver mixed results at best. The Czech Republic has recently approved a similar measure and reduced the VAT rate for accommodation services from 15 percent to 10 percent, while Germany adopted a temporary VAT cut to all goods and services.
The severity of the economic challenges faced by the OECD and emerging countries should cause policymakers to explore the most efficient ways of providing economic support and designing sound policies that will pave the way for economic recovery.
As policymakers navigate this crisis, they should hue to the following principles:
- Tax relief should be broad-based.
- Tax relief should be in keeping with good long-term policy. Distorting markets today will undermine the long-term recovery.
- Using refundable tax credits today should be designed to bring forward future credits or deductions.
- Policymakers should also use this opportunity to fix distortive tax policies that could impede recovery efforts.
Until now, countries have focused on short-term policies to provide immediate tax relief to struggling individuals and businesses. To mitigate the longer-term impacts of the crisis, countries should focus on long-term, pro-growth, and sustainable tax policies to help ensure a strong economic recovery.
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