The global landscape is transforming and has arguably never been more challenging. Tax has played a key role in helping the world to maintain an economic and social balance in the form of incentives, subsidies, and relief to tackle challenges posed by the pandemic in the past couple of years. As the world and a large part of Asia-Pacific emerges from the upheaval of lockdowns and restrictions, tax is at the centre of the confluence of geopolitical, economic, and social issues that are making governments and businesses rethink the best way forward.
The fiscal challenges facing governments, the globalisation and digitalisation of the economy, climate change, and the repercussions of the COVID-19 pandemic remain top of mind around the globe. These factors are leading to three key trends that carry substantial tax considerations for governments and businesses alike:
Global tax reform;
Web3 and the metaverse.
Government tax policymakers around the world are collaborating on proposals for significant changes to international tax rules in light of the globalisation and digitalisation of the economy. The G20/OECD project on addressing the taxation of the digital economy began in 2019, in the form of BEPS 2.0.
BEPS 2.0 consists of two pillars. Pillar one is about the new nexus and profit allocation rules, with the objective of assigning a greater share of taxing rights over global business income to market countries. Pillar two concerns the rules on a new global minimum tax, approved in December 2021 by 141 jurisdictions (about 90% of the global economy) participating in the BEPS 2.0 project.
The pillar two model rules provide for a global minimum tax of 15% applicable to multinational enterprise (MNE) groups with a global turnover of €750 million ($760 million) or more. The success of this reform relies on cooperation among tax administrations not only on the agreement on the details of the new rules but also on day-to-day coordination in how tax authorities apply these rules to prevent overlapping claims of taxing rights over global business income from becoming a barrier to cross-border investment.
In addition, being prepared for pillar two will require significant cross-functional coordination involving tax, accounting, legal, systems/IT, and business stakeholders.
A successful result may mean the beginning of a new era of multilateralism in tax, with the potential to pave the way for a more integrated global economy that benefits all.
Once a multinational organisation conducts a high-level impact assessment, an actionable plan for global minimum taxes in terms of compliance and management will need to be established. But as the clock is ticking, any challenges should be diagnosed as early as possible, so that they can be resolved before implementation.
Businesses affected by pillar two may have already started to assess the impact on their future effective tax rates (ETR), but this is just the beginning. The complexity around global minimum tax rules can be a major challenge for all. The EY Tax team is working with organisations to manage this complexity and be compliant with applicable rules, balancing cost, service, tax controversy, and tax risk.
Conversations around sustainability have intensified greatly in recent years. As many governments put environmental policies at the forefront of their agendas, sustainability and long-term value are top of mind for businesses. Spurred by intensifying environmental disasters, a growing global population, and an increasing carbon footprint, governments and businesses are examining their working practices and prioritising long-term value and value-led sustainability.
Governments and businesses have roles to play, and significant change can only occur when they work together towards common goals. The government and business sectors can use their respective spheres of influence to advance climate solutions. As always, collaboration will lead to the most meaningful progress.
Existing environmental, social, and governance (ESG) metrics are already shifting investment and organisational practices, but tax – in particular, tax incentives – has played, and will continue to play, a key role in driving sustainability initiatives globally. The tax considerations of sustainability might be less obvious than those relating to a changing global tax regime, but they are no less significant. And the OECD has hinted that an inclusive framework on carbon pricing could be next on the agenda after BEPS 2.0.
Governments have at their disposal a range of tax levers – credits, incentives, and carbon taxes – used to reward good behaviours while discouraging the bad. These tax policies are being deployed alongside non-tax regulations, mandatory reporting, and carbon markets to address critical climate issues.
Staying on top of the evolving sustainability tax policy landscape is critical for businesses that wish to take action on climate change, secure valuable incentives, or avoid costly surprises. Complex government policy and growth opportunities around sustainability mean the tax function must move beyond keeping up. It must take the lead in driving a corporate sustainability approach throughout your entire organisation. However, staying current as policies rapidly evolve can be a challenge, especially for global businesses.
EY’s globally connected EY Sustainability Tax teams are helping clients to coordinate domestic and cross-border complexities seamlessly and to present their tax story holistically, protecting and creating new value streams for this generation and beyond.
In the search for revenue and growth, the policy shifts require agility but also offer significant opportunities for organisations that prioritise sustainability in their strategy, operations, and supply chains around the world. With a business community driving towards net zero and addressing a range of social issues, it is crucial for governments to work hand in hand with the private sector when developing new proposals or accelerating existing policies to meet their own sustainability objectives.
Web3 is the next iteration of the Internet, representing new technology with the potential to improve societies. This innovative tech extends today’s Internet, but in a decentralised manner that relies on distributed ledger technology. Leveraging artificial intelligence (AI), Web3 has spawned blockchain platforms for the public and private sectors, as well as new digital assets such as cryptocurrencies, non-fungible tokens, and self-executing smart contracts. Add virtual and/or augmented reality to this potent tech mix and the stage is set for the creation of the metaverse.
Governments and businesses are already working to apply or adapt tax policies to these new concepts. Many governments have already adopted Web3 technology to better serve their citizens, protecting personal data rights and offering critical social services more efficiently.
As companies construct the metaverse, multinational brands are taking tentative steps to (virtually) set up shop. These brands may initially be taking modest steps, but their actions show they are alive to the metaverse’s potential and are eager to be in the vanguard, for very good reasons. A recent report by crypto investment company Grayscale, for example, suggests that the metaverse promises global annual revenues of more than $1 trillion, with opportunities in almost every economic sphere.
The tax implications of these technological breakthroughs will be enormous. The OECD is in the process of potentially creating a common crypto tax framework in an attempt to gain consensus among jurisdictions, but it remains to be seen how long this process will take and how many countries will sign up.
In the meantime, individual countries continue to take divergent tax positions, classifying assets in different ways and applying different tax treatments to transactions. This is adding a layer of complexity and risk for international businesses, which must carefully navigate this fast-changing tax landscape.
Powerful solutions to the metaverse tax challenge may also lie in the metaverse itself, or at least its Web3 infrastructure. On one hand, the metaverse may be a decentralised, widely unregulated, and pseudo-anonymous environment. On the other hand, blockchain is transparent and it is possible to ‘see’ transactions taking place in real time on distributed ledger networks. This means that real-time tax reporting engines can be built on top of blockchain transactions, which automatically share transaction information with tax authorities as they happen, doing away with the conventional reporting process.
The metaverse and its underlying Web3 technology may raise significant tax challenges. But they also hold the potential to place exciting new tools into the hands of tax practitioners, making it easier to collect the right tax at the right time and in a much more efficient and cost-effective manner for all parties involved.
Web3 and metaverse innovations will require broad policy regimes to protect citizens and organisations alike, underpinned with a commitment from governments to strongly consider tax implications. Many will benefit from a clear and globally aligned set of tax rules associated with this new digital economy.
Until such clarity exists, however, individual countries will continue to take divergent tax positions. In this scenario, understanding the technological and regulatory environment is a key starting point for businesses creating an individual metaverse strategy.
As these megatrends – global tax reforms, sustainability, and Web3 and the metaverse – gain traction across Asia-Pacific and globally, they will impact businesses across sectors and geographies. Moreover, the role of the tax function is set to broaden, with managing tax policy and administration developments gaining even more importance in this dynamic environment.
EY Tax teams are helping organisations to not only stay abreast with developments in these megatrends but also to thrive in this connected world.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
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