2013 tax policy outlook for EMEIA

June 7, 2013

A number of lessons can be drawn from the responses of the 28 countries of EMEIA covered in Ernst & Young´s review of tax policy in 60 countries in 2013.

First and foremost is the assumption that, while many countries are now rethinking their strategy in regard to austerity, the macroeconomic situation would seem to indicate that a heightened tax burden is here to stay for at least five years.

And with a couple of years of trends data now available to review since the height of the financial crisis, it is clear to see that the bulk of consolidation efforts continue to occur within personal and indirect tax classes.

Of course, corporate taxation has not and will not be immune.

Although an earlier trend of introducing corporate tax rate surcharges seems to have slowed (and, unless they are extended, measures such as France’s two-year surcharge will expire at the end of 2013), according to our country respondents, the underlying trend of slowly but surely whittling down various deductions and exemptions (especially around the payment of interest and other financial expenses) continues to traverse the region.

Another trend that is either slowing or is perhaps taking a pause is that of rapid and profound reductions in headline CIT rates. Of the 26 countries that levy CIT, only the United Kingdom is anticipated to move in that direction in 2013 and then, only by a single percentage point.

Countries such as the Netherlands, which had traded base expansion for rate reduction in pursuit of tax competition, have now seemingly reached the point where further base expansion to fund such rate reductions is either unattractive or politically unachievable. In terms of setting out their stall as a headquarters location, bets have now largely been placed.

Within the region, countries such as Portugal, Ireland, Italy, Greece and Spain (the so-called PIIGS grouping) may have had the full levers of sovereign policymaking confiscated in the short term and should therefore be viewed through a different lens. To a degree, and judging from the number of active or proposed tax policy changes, France may be judged via a similar lens.

But whatever policy measure contemplated and whichever area of tax impacted, one thing is clear: much can be learned from the experiences of countries that have already traveled in one particular direction.

The sovereign debt picture: an important barometer

The sovereign debt picture in the 28 EMEIA countries covered by this report is very mixed, reflecting the wide range of experiences at country level. Of the 26 countries for which IMF data is available (data was not available for Libya or Pakistan), 10 are projected to see an overall contraction (improvement) in sovereign debt levels between the years of 2011 and 2017, while 14 are projected to see an overall expansion (deterioration) of gross debt during this period.

France and Italy are projected to see overall net change of less than 1% during this period. Of the 26 countries, Luxembourg is projected to see the biggest expansion of gross debt (101% expansion between 2011 and 2017) while Botswana (-53%) is projected to see the largest contraction.

In the PIIGS countries, Portugal, Ireland and Spain are projected to expand their sovereign debt, Greece is projected to contract, and Italy is projected to see a marginal change of less than 1% (from 120.1% of GDP in 2011 to 120.6% in 2017).

Annual deficits also drive policy decisions

While only 10 of the 26 EMEIA countries for which data is available are projected to see a contraction of gross sovereign debt between now and 2017, 20 are projected to see their annual deficit contract (or, in a limited number of cases, their surplus expand), while 6 are projected to deteriorate. As before, data was not available for Libya and Pakistan.

Sweden sees the largest annual expansion of surplus, moving from a projected surplus of 0.1% of GDP in 2011 to a projected surplus of 2.4% in 2017. Turkey sees the largest percentage contraction of the 26 countries across this period, moving from a deficit of 0.2% of GDP in 2011 to a projected deficit of 1.3% in 2017.

Of the 26 countries for which annual data are available, 4 were projected to be in a surplus position in 2011; this number rises to only 6 in 2017. Overall, this data would seem to indicate that while the overall annual deficit situation continues to improve over the medium term, both short-term positions and underlying gross sovereign debt levels will continue to have a strong influence on tax policy and therefore the overall tax burden experienced by taxpayers.

This is especially true of sovereign debt, which remains stubbornly high though annual deficits are indeed contracting in a majority of countries tracked. All PIIGS countries are projected to see their annual deficits contract between 2011 and 2017, perhaps not surprising given the baseline from which they will travel.

While none are projected to move into a surplus position during that period, Italy is projected to come closest, ending with a (projected) annual deficit of 0.7% of GDP in 2017. Spain, the worst performer, is projected to end with an annual deficit of 2.8% of GDP.

Survey respondents predicted whether the overall tax burden would rise or fall in 2013 for CIT, PIT, and taxes on goods and services (including VAT, GST or other sales taxes). While their responses are purely subjective, they paint an interesting picture.

If all three tax types are considered across all 28 countries, the overall assessment (for countries that levy tax on those classes of income — countries such as Bahrain do not) is that there will be an increase in tax burden in 2013 across 28% of all tax types, no change in 51% of all tax types and a decrease in tax burden in just 21% of all tax types tracked.

After such strict austerity in earlier years, it is notable that almost half of all tax types tracked are anticipated to see no change in 2013. This indicates that while austerity measures have not been abandoned altogether, they have certainly slowed somewhat as countries strive to replace strict austerity with more growth-friendly, targeted policy measures.

This picture is somewhat different in the PIIGS countries, where the picture is one of significant (but not exclusive) increases in the tax burden across all tax classes. Perhaps of more interest to the readers of this report is that although four of the five countries report projected increases in PIT and VAT burden through the course of 2013, CIT seems to retain some form of protected status.

Portugal (limitation of financial expenses) and Spain (depreciation limitations, losses, deductibility of financial costs) report potential increases in CIT burden, while Italy and Ireland project no major changes to CIT in 2013. Greece, meanwhile, reports a 6% increase in headline CIT rates in 2013 but more than tempers that increase with a significant reduction (from 25% to 10%) in withholding on dividends.

It remains to be seen whether that reduction will form a long term mainstay of Greece’s policy stance. Indirect taxes (VAT, GST and sales taxes) seem to be the most popular choice of revenue raiser for countries polled, with the perceived burden being raised in 20 of the 28 EMEIA countries tracked that levy such taxes.

PIT is a very close second most-popular revenue raiser (16 of 28 countries), followed by CIT (13 of 28 countries). On the counter side, PIT also seems to be a popular way for governments to reduce the tax burden (16 countries decreasing, the same as the number decreasing the overall PIT burden, showing how this tax is used at either end of the income spectrum to effect policy change).

Three-quarters of reductions in the PIT burden will be delivered through increased personal allowances to taxpayers, while only the United Kingdom is reducing the top rate of PIT, moving away from its 50 pence top marginal rate, reducing to 45 pence in 2013 as a result of both policy criticisms and the fact that revenue figures demonstrate that it was not meeting policy objectives.

The outlook for CIT

In the area of corporate income taxation, of the 28 countries tracked that levy CIT, 7 project an increase in CIT burden in 2013, while more than half (15 of 28) project no change in burden.

Just 6 of the 28 (Denmark, Finland, Greece, Netherlands, Sweden and the United Kingdom) project an overall decrease in CIT burden for the year, with only the United Kingdom actually reducing the headline statutory CIT rate. This leaves Greece’s more unusual situation: a refocusing and increased support of tax incentives, including the use of patent and innovation boxes, which seems to be behind much of the stimulatory activity as it relates to CIT.

In fact, even countries such as Belgium, France and Luxembourg, which are all projected to pursue a higher CIT burden in 2013, note that business incentives will be one area where government will continue to expand investment. Only the United Kingdom, which also sees a significant change to its research and development incentive in 2013, seems to be continuing down the path of aggressive headline CIT rate cuts (from 24% in 2012 to 23% in 2013, 21% in 2014 and 26% in 2015).

The Portuguese Government is reported to be trying to negotiate a reduced 10% CIT rate for new investments made in the country with the IMF, European Union and European Central Bank, but the future of that measure is not yet certain.

Greece and the Slovak Republic both report planned CIT rate increases in 2013, while the former’s rate increase (from 20% to 26%) is more than tempered by a reduction in the tax on distributed dividends from 25% to 10%, in the hopes of spurring growth.

Almost all countries report the growing use of tax enforcement (including new or strengthened GAAR, SAAR and disclosure requirements) as a method of further expanding the tax base, and this will be a key area for business to monitor in 2013. The raft of limitations and restrictions to interest deductibility passed in 2011 and 2012 looks to slow in 2013 though Finland, Portugal and Spain all report ongoing developments in this area. Switzerland and Luxembourg report measures around minimum taxation levels.

Luxembourg’s 2013 budget law contains the introduction of a minimum tax regime on corporate entities, while in Switzerland plans to abolish the status of “domicile company” to adjust the cantonal holding privilege to meet international standards and to introduce a minimum tax rate for holding and mixed companies.

Elsewhere, policy measures in 2013 look to focus on the continuing trimming or removal of various exemptions and deductions, or more subtle expansions to the corporate tax base. Hungary will see Controlled Foreign Company definitions expand in 2013 while Spain will see a range of measures related to restricting amortization.

The outlook for PIT

In the area of PIT, the most significant increases in tax burden tend to focus on high net worth individuals. Special surcharges on higher-earning taxpayers (sometimes referred to as “solidarity surcharges”) will be in place in the Czech Republic (7% surcharge), Finland (2% surcharge) and Portugal, with the latter’s comprising a surcharge of 3.5% for all taxpayers and an additional tax of 2.5% for those paying the top marginal rate of tax.

India and Kenya note the potential for an increase in top marginal rate of PIT during the course of 2013, while the Slovak Republic has already announced such a measure, moving away from a purely flat tax system (levied at 19%) to one where the portion of gross income exceeding €3,311 per month will be taxed at 25%. Greece, meanwhile, consolidates the number of taxable bands from seven to just three, and Portugal moves from eight bands to five.

Luxembourg and the Netherlands report plans to limit the deductibility of consumer interest, seeing that trend bleed over from corporate taxation into the PIT space. France, Portugal and Spain have either implemented or plan to implement a wide-ranging set of changes designed to raise additional revenues from PIT.

While difficult to establish which of the three may be more punitive, France’s changes merit mention because they included a new top rate of PIT of 75% (which was later abandoned), a new 45% rate, the taxation of capital gains and dividends at the taxpayers marginal rate, and increased social taxes. As noted, the four countries projected to reduce the PIT burden all do so through more generous personal allowances to taxpayers, with only the United Kingdom reducing its top marginal rate of PIT.

The outlook for VAT, GST and sales taxes

The Czech Republic and Finland see a 1% increase across both standard and reduced VAT rates, while the harmonization of both rates at 17.5% is expected for the Czech Republic on 1 January 2016.

Italy will see a 1% increase in the main VAT rate (to 22%) on 1 July 2013, and Kenya anticipates a potential increase in VAT rates from 16% to 18%. India is likely to increase Central Excise Duty and service tax rate from 12% to 14% in 2013, and the Netherlands, where the VAT rate was increased from 19% to 21% in 2012, sees insurance tax and excise duties also increase in 2013, adding to the indirect tax burden.

Are there key events in 2013 that will influence tax policy?

Major tax reform efforts or policy shifts driven by political change are not anticipated in 2013 — at least notwithstanding deterioration in the European theater. That said, some events do merit evaluation, including Germany’s election in September, alongside tracking of the success (or otherwise) of the country’s 12-point tax action plan first unveiled in 2012.

Greece is likely to see reform of the tax legislative framework in the first six months of 2013, while the Indian Government’s decision on whether to adopt the Shome Expert Committee recommendations on the indirect transfers of assets will be a key event of the year for multinational companies.

Read more: The outlook for global tax policy in 2013

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