Governments have to strike a fine balance between creating efficient fiscal policies and administration, without raising taxes during a crisis.
As governments create new policies and revise old ones in response to COVID-19, this balance will be at the top of their agenda. Faced with the challenge of unlocking public spending in a tight fiscal period, decision makers will also need to ensure any measures also consider the long-term implications. To rebuild in a sustainable manner, fiscal policies should recognise today’s environmental challenges and prioritise digitisation efforts.
We discussed these challenges during e-TAXCON’20, the first online tax conference in Moldova. William Morris, PwC’s Deputy Global Tax Policy Leader and Chair of the Tax Committee at Amcham EU, spoke about efficient post-COVID-19 tax policy recovery measures in CEE countries at the conference, which was hosted by AmCham Moldova with the support of PwC. The event brought together 400 tax professionals from across the region (Hungary, Romania, Bulgaria, Ukraine and Armenia), as well as speakers from EU Member States, the UK and the US.
Following the conference, I had the opportunity to sit down with William Morris and discuss in more depth the tax climate and policy suggestions for Central & Eastern Europe.
Alexandru Gozun, PwC Moldova: Will, many thanks for joining us today. During the e-TAXCON event, you said tax policies are always a topic of political interest, an interest that has increased over the last few years since the financial crisis and Great Recession. Considering the current crisis and the limitations of the fiscal space, how can CEE countries and governments successfully unlock new sources of funding?
William Morris, PwC US: That’s a great question, Alex. A European official once told me, “You have to understand that tax, in the end, is almost the most political issue because it's about raising the money that governments need to spend.” It’s always going to be political, and it took me a long time to learn that.
But tax and revenue raising don’t make the world go around alone. We need to consider how we can create jobs and encourage investment. In the end, there needs to be a balance between this political need to raise the money that the government was elected to spend, and the need to build an economy where jobs are going to flourish, where people are going to do better, and where measures of wealth and public satisfaction all rise.
Many CEE economies have successfully attracted business over the past ten or 20 years, but each one as a result of different actions. We’ve seen the focus range from tax rate, to infrastructures to education. Obviously, all of those need to be paid for. As a result of COVID-19, we are now seeing a lot more government spending – hopefully to get us through a relatively short but very sharp period of economic decline when things need to be stabilised. We need to strike that balance between raising revenue and continuing to encourage foreign investment.
I think as CEE continues to look to transition to a more technologically based economy, then some of the incentives are important, for areas like R&D, patents, innovative activity. But across the region, we're also beginning to look at big changes in relation to climate change, and therefore to carbon taxes and a review in the EU of the energy tax directive. That’s probably the next big area where tax revenue is going to come from.
And that's going to be difficult in some cases. There are some CEE countries which obviously have different views on energy taxes to others. But focusing on the positives for a moment, the jobs which could be created from green energy initiatives are places where governments can both think about raising revenue and achieving that dual desirable goal of job creation and upskilling for the public.
Alexandru Gozun: Thanks so much, Will, for this answer. You mentioned climate change and energy taxes. Do you think we can see a tendency to include an environmental angle in the COVID-19 related policies that have already been adopted by the EU?
William Morris: The short-term COVID policies which the EU has been looking at are not particularly related to environmental issues. As you would expect, they focus on lowering various tax rates, extending various collection periods, taking indirect taxes off PPE, for example. These are issues directly related to the crisis and to enabling people to stay in jobs. But I think as we recover, you will almost certainly see more environmentally-based taxes being talked about.
Alexandru Gozun: So you have a positive view on the short-term measures you mentioned, already undertaken by the EU in combatting the effects of the COVID 19 pandemic, right?
William Morris: Yes, I always try to look on the positive side. But we'll have to see how it goes. Currently, significant parts of Europe are entering into a second wave of COVID, including some places that weren’t as affected in the first wave, like CEE. That's going to require more government support. This means there’s going to be more money, but discussions about fiscal measures and tax measures will be postponed. But that doesn't mean that they are going to go away.
Alexandru Gozun: As you mentioned, CEE countries vary in their degrees of economic development. Taking into account these differences, what should governments in CEE consider while designing their own recovery plans for the crisis? What would the OECD recommend for this process?
William Morris: The OECD has come up with a number of proposals that mirror what governments have been saying. At the moment, the emphasis is on preserving the economy in the hope that this is a short sharp shock for which we can recover quite quickly.
Obviously different economies are in different places,requiring different solutions. Some of the more developed economies in western and northwestern Europe, for example, proposals for carryover of losses could be valuable, since there are large corporations with multi-year operations. But this would be less valuable in CEE, where incentives or the short-term tax rate might have more benefit.
There’s clearly no ‘one size fits all’. While we may see other types of taxes in the medium to longer term, the OECD, the EU and governments are currently focused on supporting the economy with a realisation and explicit understanding that taxes should not rise before the economy has stabilised and indeed begun to grow. So I don't think that we'll see tax raises in the short-term and they shouldn't be part of the mix. Instead, current support in CEE should be focused on extensions to tax due dates, VAT rates and short-term stimulus measures.
Alexandru Gozun: Not raising taxes would implicitly suppose a better tax administration, which leads me to the digitisation of processes in tax administration. We see a large amount of investments in this in CEE. How much of a priority should digitising processes be for CEE countries, considering the expense and burden the transition process could also have on businesses?
William Morris: This is not the time to stop investing in digitisation measures. As taxes get more complex both inside and outside the EU, there's going to be a lot more complexity for tax authorities in a period when their budgets are already under stress and strain. It’s very important that this can be digitised.
Particularly in the indirect tax area, the more digitisation that can be done from the point of sale through to the government actually collecting it and being able to verify it, the better. It's important both for the burden on the taxpayer and critically important for revenue. It stops leakage, but also ensures that tax receipts get sped up. The same is true for income tax. Obviously income tax is different to VAT, particularly credit invoice VAT, and therefore the chain isn't quite as clear. But the closer you can get to digitising the process from the transaction point (where the money changes hands or is realised), then the less leakage there is. Assuming that the system works well, this should also make the government quicker and reduce disputes.
I really do think that it's win-win for taxpayers and for governments to continue this process of digitisation. And it would only be a short-term saving to discontinue that investment right now in the hope that we can pick it up in a few years time.
Alexandru Gozun: Very interesting. I have just one last question for you today, bringing it back to the CEE region as a whole. Drawing on your AmCham EU experience and perspective, what are your recommendations for how tax authorities across CEE can cooperate to emerge stronger from the crisis?
William Morris: That’s also a great question, and a very difficult one. One of the things that we've seen in this crisis is national borders becoming more important. And that's understandable, as populations have suffered from COVID, as governments spend on their own citizens and spend on their own economy. I think what is vitally important to remember is that we're all in this together. And that the region will do better if all of its members flourish.
There is going to be a temptation to enact national measures, which we’ve seen across the world as governments enacted national tax measures to try and boost their own taxbase. When we put up borders and create obstacles to investing in other countries, all economies lose. And that's a difficult message to get through.
But I think the most important thing for the CEE is to carry on trying to operate as a region, to not erect barriers against neighbors and wherever possible, to cooperate and encourage investment into the region. Not just necessarily into a single country, but actually into the region. And I know that's a counsel of perfection in some senses, but it is a very important thing to bear in mind. In the end, we can look back on the economic history of the past 100 years and every time that people have raised barriers to investment or barriers to economic growth, everybody has suffered.
Alexandru Gozun: Fantastic. Thank you very much for your time and insights, Will.
Global Tax Policy Leader, PwC United States
About William Morris
William Morris, PwC’s Deputy Global Tax Policy Leader, has been at PwC for 3.5 years. Prior to joining the firm in Washington, D.C., Morris worked for 17 years running the Global Tax Policy function of an American company and for the U.S. government. In his role at PwC, he focuses on digital tax issues. Morris is also the Chair of Business at OECD, a group that interacts with the OECD on digitalisation projects. He also spends time in Brussels as the Chair of the EU American Chamber of Commerce (AmCham) Tax Committee.
Alexandru Gozun
About Alexandru Gozun
Alexandru leads PwC’s Moldova office, where he has worked for 9 years. In his 16 years of professional experience, he has worked in both the public and private sectors. Since 2004, he has been actively involved in the development and implementation of public policies, especially those relevant to the European integration process of the Republic of Moldova. Gozun is a member of the Board of Directors of the American Chamber of Commerce of Moldova (AmCham) and the European Business Association (EBA).
