In brief:
• Rapid changes in political leadership are reshaping global tax and trade policies, requiring businesses to become even more agile and proactive.
• Governments are intensifying efforts to enhance revenue collection amid rising tax controversies and economic challenges.
• The evolving landscape of tax priorities emphasizes the importance of cooperation and alignment among nations to address cross-border issues effectively.
Rapid changes in political leadership are reshaping tax and trade policies worldwide. An increase in tax controversies is prompting governments to enhance revenue collection efforts. As businesses adapt to the evolving tax landscape, agility and proactivity are essential for success.
Global government policies are rapidly changing. Leaders are continuously introducing new strategies and policy initiatives, often shared through social media, which sparks essential conversations about their implications. At the same time, trade tensions are impacting supply chains, and swift technological advancements are contributing to fluctuations in financial markets. Following a lengthy period of international tax collaboration, the risk of renewed tax competition is becoming more pronounced. The rapid evolution of tax policies is striking, creating an unpredictable environment where governments increasingly utilize tax as a key tool to achieve broader policy objectives.
THE SHIFTING POLITICAL LANDSCAPEOver the past 25 years, cooperative nations have collaborated toward shared goals, achieving significant advancements in various sectors, including science and technology. In taxation, initiatives like the Base Erosion and Profit Shifting (BEPS) project have established cross-border rules for tax reporting and dispute resolution.
While cooperative growth is feasible during prosperous times, it becomes challenging during economic strain. Today, countries are grappling with inflation, deficits, security risks, and climate change. A growing focus on national sovereignty and trade imbalances is evident, with nationalist policies promoting local investment and manufacturing. This shift is reflected in election outcomes worldwide, with new leaders advocating for local prosperity. As governments propose new budgets and policies, political uncertainty persists, which further complicates tax policy development.
THE IMPERATIVE FOR REVENUEGovernments are seeking economic growth while exploring new revenue sources. After years of emergency spending, many countries are facing significant deficits and inflation concerns. With high public debt and rising interest rates, governments must balance competing economic and political priorities. While addressing budget deficits is crucial, citizens are increasingly resistant to tax hikes, as seen in recent protests in countries like Kenya and Colombia. Consequently, governments are pursuing economic growth strategies and enhancing enforcement to avoid austerity measures.
Economic recovery from the pandemic has been uneven. Some nations, like Germany, have experienced contractions, prompting leaders to implement new growth policies aimed at simplifying regulations. A key theme of the European Union’s (EU) agenda is enhancing the prosperity and competitiveness of its member states. The EU’s Competitiveness Compass outlines a roadmap for growth focused on simplification and reducing barriers to cross-border investment.
Countries outside the EU are also leveraging their tax systems to stimulate economic growth through investment incentives. However, the introduction of Pillar Two taxes may diminish the effectiveness of these incentives, prompting governments to reassess their strategies.
ENHANCING TAX REVENUE COLLECTIONGovernments are adopting new tools to ensure compliance and maximize revenue. Tax authorities are intensifying scrutiny, not only across jurisdictions but also within integrated government agencies. For instance, the UK is increasing its tax compliance efforts by hiring additional staff to close the tax gap.
Transfer pricing remains a significant risk for businesses globally, with tax authorities focusing on various aspects depending on the jurisdiction. The traditional model of cooperative compliance is shifting toward mandatory compliance assurance, especially for larger companies. Digital advancements are also transforming tax collection processes, with many jurisdictions implementing e-invoicing to streamline operations and reduce fraud risks. Generative AI (GenAI) is being explored by tax authorities to enhance compliance efficiency and risk assessment.
Locally, there have been new laws passed to enhance and transform tax compliance while encouraging business growth, including Republic Act No. 12066 (Maximize Opportunities for Reinvigorating the Economy) or the CREATE MORE Act, which was signed into law in November. By introducing streamlining VAT processes, expanded tax incentives, and clearly defining eligibility criteria, the CREATE MORE Act aims to stimulate economic growth and position the Philippines as a prime destination for foreign direct investment (FDI).
In addition, Republic Act No. 12023, or the 12% VAT on digital services, took effect in October. The law applies to both resident and nonresident digital service providers (DSPs), including streaming and social media platforms. The law requires these providers to register with the Bureau of Internal Revenue (BIR), issue VAT-compliant invoices, and file regular tax returns. Marketplaces facilitating digital transactions are also required to collect and remit VAT on behalf of sellers.
Most recently, the government sought to invigorate capital markets through the Capital Markets Efficiency Promotion Act (CMEPA), or Republic Act 12214, which was signed in May. CMEPA aims to simplify taxation and reduce friction costs in the capital market, making it more accessible and attractive to investors. The act significantly lowers the stock transaction tax from 0.6% to 0.1%, harmonizes capital gains tax on unlisted shares to a flat 15%, and exempts mutual funds and unit investment trust funds from documentary stamp taxes. By fostering financial inclusion and enhancing the Philippines’ competitiveness in the region, CMEPA is expected to create a more dynamic capital market, boosting liquidity and economic growth.
THE FUTURE OF GLOBAL COLLABORATIONChanging political dynamics are impacting international negotiations. The BEPS 2.0 initiative is at a critical juncture, with nearly 50 jurisdictions implementing Pillar Two taxes. However, the lack of US participation raises questions about the future of these measures. As countries evaluate their tax policies, the potential for unilateral actions, such as digital services taxes, may lead to increased complexity and disputes.
Despite the challenges, global cooperation remains essential for addressing cross-border issues like climate change. Businesses thrive when they can plan, and complexity can hinder economic growth. Governments need to align on common issues to spur growth.
PREPARING FOR THE FUTURE OF TAXThe landscape of global tax priorities is undergoing significant transformation due to rapid changes in political leadership, economic challenges, and the introduction of new tax measures. As governments intensify their efforts to enhance revenue collection amid rising tax controversies, businesses must remain agile and proactive to navigate these complexities effectively. The ongoing implementation of initiatives like BEPS 2.0 presents both challenges and opportunities that require careful consideration and strategic planning.
As companies adapt to these changes, they should focus on aligning their tax functions with broader business strategies, leveraging technology to enhance compliance, and engaging with governments to share insights on the implications of proposed changes. The ability to anticipate and respond to evolving tax policies will be crucial for businesses seeking to thrive in this dynamic environment. Ultimately, fostering cooperation among nations and aligning on common issues will be essential for addressing cross-border challenges and promoting sustainable economic growth.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinions expressed above are those of the author and do not necessarily represent the views of SGV & Co.
Jules E. Riego is the tax leader of SGV & Co.
