How can tax agencies tackle the impact of Covid-19?

Throughout the region, countries must grapple with how to accommodate a declining tax base resulting from tax relief efforts and sharp declines in economic activity while preparing tax policy for the post pandemic recovery phase.

During the pandemic, tax relief and other policies should target small and medium-sized enterprises. Photo: ADB

The growth of economies in developing countries in Asia and the Pacific region may slow to 2.2% in 2020 as they struggle to contain Covid-19. This will have a significant impact on tax policy across the region. To address the challenges, countries in the region can take specific steps that will benefit their economies both during the pandemic and over the long-term.

Tax agencies should maintain the operation of essential business processes, including taxpayer registration, taxpayer services, tax return and payment processing, data and cyber security. All of this comes under an enterprise risk management framework, which is a systemic approach to manage risks in all aspects of the operations, at both the strategic and operational levels. The need to ensure the safety of staff to be deployed in the core business processes should be highlighted, including strict compliance with office policies on health and hygiene.

Government tax-related policies should be implemented to assist businesses and other taxpayers during the crisis. This includes taking a holistic approach to tax relief measures that will help stabilize the economy, with some countries deferring, lowering or temporarily waiving taxes.

These measures will have to be reviewed against the specific legal and regulatory operational framework, as well as the existing tax policies and incentives that vary from country to country. This should be done following the ‘Three Ts’ Principle: timely, targeted, and temporary. These policies should be combined with other financing/liquidity measures to stabilize the economy, in particular targeting small and medium-sized enterprises.

To ease the burden caused by the pandemic-induced state of uncertainty, delivering public services is vital. Tax administration should be flexible in the use of staff to manage peaks in service demand, and curtailing where necessary discretionary programs, such as field audits. To ease the business cash-flow situation of taxpayers, policy options include establishing tax debt payment plans in instalments and the prioritization of value added tax refunds to ensure quick payout. They should also seek to facilitate and further ease tax filing procedures.

The global economic impact of the pandemic could expand the informal economy, particularly among small business. It may also have a negative impact on tax compliance. These could trigger value added tax fraud or missing trader fraud. Tax agencies should be on the alert for these emergent risks. There may be trade-offs between the service demands and tax compliance, however, tax administrators should strike the right balance.

According to ADB research, as economies open up, economic growth in the region could rebound to 6.2% in 2021. In terms of debt sustainability and revenue mobilization, tax policymakers and administrators should consider what tax reforms are needed in the aftermath of the pandemic. For instance, to broaden the tax base, tax incentives will have to be reviewed in terms of effectiveness and efficiency. In addition, the profit tax of digital companies will have to be revisited under new international tax standards on digitalized transactions to ensure a fairer distribution including to developing countries under the G20 initiative.

Digital transformation is part of the drive to innovate to increase productivity growth. Middle-income economies in the region have observed the benefits of investment in research and development that is three times bigger than others in the region.

Similarly, digital transformation will also help tax administrations by promoting effective, timely, and corruption-free delivery of public services to support greater accountability. Maximizing the magnitude of digital innovation should be core part of tax administrative reform to increase taxpayers’ compliance level as well.

New ideas and strategies will be needed for tax agencies working in the post-pandemic environment.

Yasushi Suzuki is Public Management Specialist (Taxation), Sustainable Development and Climate Change Department, ADB.