Episode 2: Tax and Regulatory Environment

Full transcript

Peter Englisch: Hi everyone. I'm Peter Englisch. Welcome to our second episode of our podcast series, Up Next for Your Private Business. In our first episode, I discussed PwC’s EPB Heatmap with Agnieszka Gajewska, our Global Government and Public Services Leader. Examining what makes up an enabling environment for private businesses.

Now we are going to drill down into the seven specific Heatmap categories. First up, the tax and regulatory environment. Here to discuss our Heatmap findings on this area is Barry Murphy, EMEA Tax Clients and Markets Leader.

Barry looking at the Heatmap, what strikes you?

Barry Murphy: The Heatmap for me, well a whole bunch of things struck me, but if I pick out two or three of them, first of all, Peter, when I was exploring the Heatmap with you, the range of sources that were used to bring the data together.

You're trying to bring a pretty rich picture of what's going on in different territories together and explore what are all the factors relevant to private business,who may be operating or thinking of operating in those territories. And what I really like about that is it sets up for a great conversation on what's important for different people.

The second thing that struck me that I liked is the way that the categories are then subranked in the Heatmap. So for instance, on education or technology and skills, you can look at that particular aspect, if that's what's most important to you. And again, talking through the Heatmap with some clients, it was interesting to hear different perspectives on things like that.

So for education, some wanted to go straight to where the best education was, where they could tap into ready-made talent. Interestingly for one or two others, they said, I want to take the opportunity to work somewhere that's further down the ranking, because I think I can help develop on that front, in that territory.

And that's a win-win for me, for my business, for the country. So really good conversations come out of that. On education and skills when I look at people taking advantage of that type of opportunity. Think about our recent Building Tomorrow's Workforce Survey, that identified skills needed for the future.

Technology change was one of the top three concerns, but actually one of the ones for business probably hadn't got as many scenario plans together as we might think. And again, it was the Heatmap that expanded and opened up a great conversation and really gets into the heart about what businesses are looking at and trying to plan for the future.

Peter: So Barry, this is very interesting. We will consider all of the aspects that you mentioned for the Heatmap going forward.

But let me start with another important question. Why is tax such an important consideration for private businesses?

Barry: Peter, it's a good question. And, you know, there are some of the obvious aspects to it around what are the tax rates you're going to pay, whether it's on employment or profit. But I think more broadly if we think about tax, you know, what's it there for, it's there to pay for the social infrastructure for social goods, for health systems, for education systems, all of which actually, to have them functioning well is critical for business.

And really it's looking at what's the overall shape of taxes and therefore, what does that do for the business environment? And if we look at, for example, OECD collated data, the average tax take to GDP ratio in OECD countries, and actually some other regions has remained relatively stable, for instance, from the period 2010 to 2018.

Now, inevitably, we're going to see some change coming up because every country has to repair its balance sheet post COVID. We've had huge amounts of pump priming going in. We're going to need more of that. So tax is going to be one of the levers that governments and countries pull, and that obviously is going to set the context for business going forward.

Now, what I hope we don't see is massive fluctuations up and down and very volatile tax systems, because you do need a bit of certainty. If you're going to attract business and set the right conditions. And that's obviously something that people are aware of. And I think, you know, as we look ahead, particularly for private business, fostering entrepreneurialism is going to be a big challenge and how you use the tax system to kind of shape what you want to achieve there is very important. There's a recent article, Peter, by our colleagues, Blair Sheppard and Sabrina Fitzgerald on the importance of entrepreneurialism in the post COVID world. And again, tax has going to play a role there.

I think tax is also important in terms of the current focus on the ESG agenda. And I would say, yes, we are going to see more things like carbon taxes, whether they're called prices or levies, but we're definitely going to see taxes coming out. And again, you know, there's a lot of discussion about that. Our own report for the World Economic Forum talked about how some further cabin pricing could pay for itself, but expect if you're a private business to see a lot of specific changes in that arena.

But in the big picture, I think we ought to be looking at a relatively steady overall tax picture in terms of the size of tax being collected in a lot of countries. The constituent part of it might change. And I think for those reasons, the Heatmap focuses on particular aspects of tax at the moment. I know Peter, you want to build that into a richer picture as well over time.

And I think we're going to see a lot of movement on the tax front, both in terms of rates. Different types of taxes that may or may not emerge but also tax administration and how tax compliance and regulation develops. So there's a lot for private business to keep an eye on. I think that's why tax is so important.

It sets the context for the environment you're going to work your business in, the social goods piece, and it sets the context for how much are you paying in tax towards that broader social good from your business and its activities.

Peter: I think this is a very important angle to look at taxes. It's not only a tax or a cost factor.

It also pays for other categories of the Heatmap. And obviously as a basis for other things that the government and public services need to deliver, infrastructure and the like. I find it very interesting when you said, what are the factors that can unlock the entrepreneurial potential? You mentioned ESG for instance, and I'm pretty confident, and we see that currently with the EU taxonomy and other regulations coming in, in general terms, it's more increase of tax and regulation than decrease, which makes it not easier for entrepreneurs but rather more difficult to grow and flourish.

So from your perspective, what is it that entrepreneurs are really looking for when they look at tax and regulatory regime?

Barry: Yeah, that's a good question. And Peter you're right. Directionally, I think, you know, tax is going to go up. Regulation is going to go up. I think it's to what degree and where and the most consistent thing I hear private businesses talking to me and you and, and our colleagues about is, well, first of all, actually, certainty.

The level of tax. I always laugh when we think about how much tax, everybody always thinks more taxes should be paid by somebody else, never themselves. That's always what happens. But actually what I hear more is can we have a consistent forward looking agenda where we know what the tax system is going to be.

We know what's going to be happening. And indeed, that's what we see at an international level at the moment, in terms of the OECD working on the other global minimum 15% tax rate, the pillar one, pillar two proposals, which is about trying to maintain some level of international consensus. So business, big and small, can plan for the future and avoid a very big fragmentation on the tax agenda. And we know from our own CEO Survey that in the top 10 concerns again in 2021 over-regulation, tax policy uncertainty, increasing tax obligations. So that whole thing about planning with certainty is important. And we see that coming in, in some countries, about advanced consultation and the opportunity for business, families, asset managers to contribute to what a good tax system would look like.

And I think the other bits maybe that are going to become even more important on the agenda ,when we think about private business and family business, is what does each generation want and how does that then play into tax policy? So if we look at our own PwC Hopes and Fears Survey, what the next generation of employees and business partners are looking at, they want to work with companies that are following a purpose and a sustainable purpose.

They won't sacrifice, interestingly, too much of their income for that, but it's a changing focus on what people may be looking for going forward and how that might change the shape of the tax system. But I think at the moment, in summary there is, to the largest extent possible, certainty and stability rather than volatility in tax rates and systems is one of the key asks and then ways of fostering entrepreneurialism, particularly for private business at cutting through red tape, making it simpler.

And some of that might well come from new ways of managing tax administrations. There’s a big move to digital for tax administrations, similarly with other regulators. So it's not going to change things overnight, but maybe we'll see some help for private business there in terms of new ways of getting things done.

Peter: Now, this is very interesting. So, often we hear that the absolute tax rate is the one and only effective measure for success and GDP growth, which is obviously not the case, but a set of different categories and different aspects, which need to come together to create the enabling environment that private businesses need.

So I think tax stability, predictable conditions to work and to manage. I think it's very interesting that you are saying that. So there's not the absolute tax rate, but the conditions. To that end, you mentioned briefly generational transition. We have another hot topic for sure, which is the taxation of wealth.

We have an increasing wealth inequality on the planet and it seems that some of the ultra high net worth individuals are becoming richer and richer and on the other hand, we have more poverty, which triggers, of course, the discussion about intergenerational wealth transfer taxation, estate, inheritance, tax, and the like. So this is obviously a very difficult discussion, especially if entrepreneurs have invested their wealth in a company.

So, where do you see the responsibility to find, and to strike the right balance between a fair estate and inheritance tax, or also serving, you mentioned tax pays for infrastructure and the like, and striking this right balance, and who is in charge to further develop this tax and regulatory environment? Is It only the governments or is this a core responsibility of others?

Barry: Wow. That's a big question. Actually, two big questions in there. How do you manage fairness? And who's responsible for setting the rules? So I like that you're getting easier in the questions during this podcast.That debate, particularly around wealth and intergenerational transfer of wealth and the tax system.

It's been one that's been around for a long time. It's certainly, I think, going to rage over the next few years. But what I hope is that we see some positive dialogue on that. Now there are a number of, well, you could say people like me,the nerdy tax geeks, thinking into the future, actually the OECD have done the work of international corporate taxes.

I'm okay, there's still more to do, but actually there's a big question out there that some very good work is going on around. What's the level of taxation on labor versus capital? And where do we want to see that? Now you will get as many views, Peter, as you know, on that question, as you ask people.

But that's where, in terms of the responsibility to try and get that right, both on the intergenerational level, but also on the global level, in terms of some of the inequality that we're seeing and the unrest that that can cause if left unchecked, that requires everybody to come to the table and figure out what is the way forward. You can't just leave it to government because they don't have all the answers and I think would say that. And that's what we see in open consultations: the government runs around tax policy.

Academics won't have all the answers either. Business won't have all the answers. But when we start to have good productive dialogue around what's actually needed to create the societies we want to live in, and therefore, how do we then start to set tax systems that deliver that, that's a far more productive conversation. And that obviously requires everybody to get involved. Now, large companies obviously have many routes in, and that would be true of large international listed companies, as it would be of private businesses to governments to enter into some of that debate.

Smaller, medium sized enterprises have got trade associations and others who are very active on this front. And I think it's key that everybody gets their voice heard. But I think we all have to recognise, Peter,that when it comes to tax, there's not just one, right answer. It's as much an issue about your philosophy, your politics, but as long as we can have a reasonable debate, and understand what's happening. But do it, as we said earlier, in a way that gives some stability and certainty and time to plan.

And I think that's the key thing. If we're going to bring in changes no matter where, and we're seeing huge tax changes, as I said, in the international corporate system, big changes in Poland recently, Singapore is seeing some change there, Ireland, the US, UK, the list goes on. But in all cases, where you get business being able to deal with it. Being able to plan knowing what's coming, whether you like what's coming or not is different. But if you know what's coming, you can plan it. Sudden knee-jerk changes where problems occur. And it's if the international system fragments and every country is just going its own way, that becomes really difficult for business to manage.

So, I think contributing not only to local discussions about taxation, but how the international system works, I think is very important because even the smallest business can go international very quickly today in the digital age. So I think keeping an eye on all of that, I don't think it's down to any one party, we all have to accept our responsibility in it and not look to blame others.

Peter: No, I like that. That it’s a co-responsibility and I a hundred percent agree to that statement. And hopefully everyone is working towards the same goal and direction towards more prosperity, more fairness and a society, which is great.

Nevertheless, taxation and regulation can be used to influence corporate behavior, companies’ behaviour, and where they invest and where they act and react. For instance, with the carbon taxation, EU Green Deal on the one hand side, but the companies and entrepreneurs we are talking to on a daily basis, they also would like to see some tax incentives when trying to bring more work to people and create more jobs.

So how to find here the right balance? And what do you think is coming up next on the international agenda of new taxation? And what do you think is needed to foster and support a behavior which creates more well-paid jobs on the one hand, and also influence corporate behavior or private business behavior towards more sustainability? Again, how to find here the right balance and what do you expect is coming next?

Barry: There's a lot coming next, Peter, and it's a balance of, I suppose, it's got to be a balance of carrots and sticks as we try and shape what people might call the new economy and the more sustainable economy. And the carrots and sticks will come in, in various forms and sizes. But I think we can expect, if you like, on the sticks on the new taxes side, we're certainly going to see more environmentally driven taxes, such as plastic packaging taxes that are now coming in many countries, such as levies on pollution in different forms.

We've got landfill taxes, aggregate levies in many countries. And actually, if you look at our own PwC Green Tax and Incentives Tracker, and you look at the number of different green taxes and green incentives already in 88 countries that it tracks, there's a huge amount in there, Peter, and there's more developing.

But I suppose one of the big shifts would be around carbon pricing. And how does that feature more prevalently? We've done work with the World Economic Forum, as I said, on international carbon price floors and how that could be done in a way that pays for itself. Rather than it adding and taking away from GDP, an international carbon price floor, if done properly, could spur the right type of investment, move finance to the new jobs, the green jobs, the green industries of the future. So I think there's cause for optimism there, rather than just thinking, it's going to be lots more taxes and that bigger take. And particularly on a lot of environmental taxes, they're behaviourally driven.

So the faster you react, the less the incidence of that tax. On the incentive side, I think that's critical. And we're definitely going to see more incentives coming down in terms of skills development. Skills that we're going to need for the new economy. We are definitely going to see more incentives around capital investment as people, either reorganise their supply chains, or invest for the first time in new types of facilities. You know, and that could be anything Peter, from expanding modular housing solutions in different territories to the vast investments and the incentives we're seeing around renewable energy. So I do think we're going to see a lot more of that and a change in the shape of the tax system that comes with that.

And as I say, the one to keep an eye on that might be more about changing who pays what tax, as opposed to it being more tax, is the capital versus labor type issue. So I think those are some of the things that we ought to watch out for, and it's going to be a very, very busy agenda. You might say, Berry is a tax advisor, you'll always say it's a busy agenda and people need help, but I think it's going to be incredibly busy keeping on top of what's happening. And keeping heads up on the developments is probably more vital than ever.

Peter: That's interesting. And of course the tax systems will never become easier, and it will never become less complex. But let's think beyond taxation, obviously the role of regulation has evolved going forward, trying to also influence behavior of entrepreneurs, capital allocation, corporate behavior, and so on.

So, from purely protecting the tax base in a certain country into something different influencing behavior. How do you see the role of regulation overall evolving, going forward?

Barry: Well, I think we're certainly going to see more regulation before we see less. And now, why do I say that? Well, we've got plenty of new regulations coming in around the aspects of climate change and we probably need them.

We're going to have the new EU Sustainability Reporting Directive. If you want to call that a regulation, that's going to impact about 50,000 or more businesses in the EU alone, or who do business in the EU. I do think, Peter, we're going to see more circular economy regulations about what's expected about the repairability of the recyclability of products that are brought to market.

And we're seeing some of that already. I think we're going to see new regulations around employment and human rights around the world, in various supply chains. We're going to see more regulations around, in particular, cyber aspects of the economy. Now, at some point, as you bring new regulations in for a new economy, there ought to be a wave of regulations we can then retire, so that we're not completely adding to the pile of red tape and regulation all the time, Peter. And I think that's one of the bigger issues, how do we find a way of regulating that doesn't continually increase the burden? And how can we do things in new digital ways that create the ability to drive the answers regulation is looking for, but in a far slicker and more efficient way.

And I think we're seeing some of that with some of the new digital solutions around the world. But I think, yeah, again, a very, very busy agenda. You know, we had a piece of work recently looking at just the new circular economy regulations coming in with regard to electronics across about 20 territories, mostly EU, some outside. The volume of what was expected to land in those territories over the next three years in terms of new regulation was huge. So I think that's going to be a challenge for private business. But hopefully we'll find new ways of being able to comply with regulation. As I say, in slicker and more efficient ways.

Peter: Now that’s interesting and I fully agree. So, there's a challenge going to happen. Maybe digital, or further digitalisation can help to manage all the complex issues and regulatory requirements going forward for business owners.

So looking at the Heatmap, what kind of message do you think governments should take from it?

Barry: Well, I suppose for governments, Peter, one thing from the Heatmap would be, you know, where do you rate on certain aspects? Are you happy with the rating? Do you want to move? How might business be looking at those ratings and how it impacts your country? What's needed? And actually, what can you learn from some others?

That would be one thing from the Heatmap. I think overall, one thing governments maybe should be thinking of too is, be in more listening mode than ever before. If ever there's a time for the world to take time, to understand each other a bit more, to understand the tradeoffs, and that they are really complex tradeoffs, to make sure we have a sustainable planet for the future.

Now is the time to have that ability to listen and understand. There are some really tough discussions to go through, but we need them to happen. And I think coming out of COP26, that was very recently, that was one of the big themes for me. Yep. There's some very tough decisions to make, but if you want to throw mud at each other all the time, that's probably not going to get us there.

So listening mode would be one for me. And again, that brings me back to the earlier theme, Peter, is the more we can consult and consult openly about changes that are needed, the better the dialogue, probably the better the final solution that we can get to that makes life easier for everybody trying to run a business.

Peter: Excellent and very good messages here.

But one final question. So, I can't resist asking you that question because it is so obvious. What kind of impact do you think will the OECD minimum tax rate have? Because in the past it was always the criticism that private businesses, on average, pay higher taxes than the big corporates who were in the past able to better find tax havens to bring the overall tax rate down.

And this seems to turn into a competitive disadvantage for private businesses who could not easily build international structures to avoid taxes. Will the OECD minimum tax rate create more fairness or take the competitive corporate tax rate disadvantage away from private businesses.

What is your outlook?

Barry: I think there's a few parts to that question, Peter.

And actually we probably need six weeks to discuss it, but I think on the, if we look at the broader OECD, the BEPS project, Base Erosion and Profit Shifting Project, the minimum tax rate, 15%, and where that's coming from. It was part of a bigger challenge the OECD were looking at in terms of stability.

And yes, you could say fairness, other people use different words for it, in the international tax system. I've always thought that the private business aspects of comparison to let's say listed multinationals. It was more about big company, small company, than privately owned or institutionally owned when it comes to the large company end.

And I do think one of the challenges that we still have in many places is when private business seems to be taxed differently depending on your corporate form. And that creates some disadvantages for private businesses in terms of the cost of starting and doing business, the cost of the return you take.

And there is some good work going on with that. And I think that's a pretty important one for us to still address. So the OECD project, has it moved us along? It has, is there still more to do, particularly with regard to private business and how they're structured and making that simpler to move forward? There is.

Peter: This is a fascinating and very good closing word.

Thanks so much, Barry, being with me in this podcast here today. It's very fascinating listening to you. And I think our audience has gotten great insight and that it's beyond pure taxation rates. It's part of an ecosystem. It's part of a broader regulatory environment, which will move and evolve fast. And it's not a single responsibility of the government.

It's a responsibility of many different stakeholders to find the right way going forward. So I found our discussion fascinating today, and I hope our audience does too.

Barry: Thank you, Peter. Thanks for having me on the podcast.

Peter: Please watch out, dear distinguished guests and listeners of this podcast, for our next episode we will focus on public health. Another very important topic. But for now, wishing you a happy new year. Goodbye.