Tax tools for smoothing the negative consequences of the COVID-19 pandemic: foreign experience

Introduction. The past year 2020 was marked by the COVID-19 pandemic and the growing crisis phenomena in the global economy. According to a report published by the International Monetary Fund (hereinafter the IMF) at the end of January 2021, global GDP in 2020 decreased by 3.5% compared to 2019 ^[1]. The IMF, in its October edition of World Economic Prospects: A Long and Difficult Recovery, calls the national self-isolation regime introduced in most countries in the first half of 2020 "great", emphasizing the scale of the economic consequences. The IMF, using an impressive database, conducted a correlation analysis aimed at clarifying the relationship between the degree of severity of the self-isolation regime and the level of economic activity. In Figure 1, you can see a trend line that demonstrates a direct relationship between the index characterizing the severity of the self-isolation regime (the abscissa axis) and the magnitude of the error in the GDP forecast (the percentage deviation of the actual GDP value for the first half of 2020 from its forecast value calculated in January 2020) ^[2].  

Fig. 1. Assessment of the impact of restrictive measures on the decline in GDP

Source: World Economic Outlook, October 2020: A Long and Difficult Ascent. International Monetary Fund.

The study concluded that the countries that introduced stricter restrictive measures experienced a more serious drop in GDP compared to the forecast estimates made before the pandemic. The most stringent self-isolation regime was introduced in developed countries, which have the most significant decline in GDP, equal to 4.9%. In the group of developing countries and emerging markets, where restrictive measures were not so long and large-scale, GDP decreased by 2.4% ^[1]. 

The self-isolation regime, introduced in order to prevent the spread of coronavirus infection, necessitated the development of a package of measures aimed at smoothing the negative consequences, in connection with which the governments of many countries provided unprecedented fiscal support measures. The total amount of financial support provided in different countries of the world in 2020 is estimated at $13.8 trillion, or 13% of global GDP (developed countries account for $11.8 trillion). In addition, the IMF report indicates that $7.8 trillion is transfers and shortfall in budget revenues due to a decrease in effective tax rates and the effect of tax deferrals ^[1]. This article presents the results of a review of the world practice of using tax instruments. At the same time, tax instruments were divided into two groups. The first group includes tax measures adapted to the new socio-economic realities, which, despite the reduction of the tax burden, are not tax expenditures.

The second group of tax instruments is tax expenses. The study of the experience of different countries allowed us to develop the following classification of tax expenditures used to offset the negative consequences of the COVID-19 pandemic:

– tax expenditures stimulating the import of personal protective equipment, medical products and food;

– sectoral tax expenditures for those types of economic activities that were more affected by the economic crisis caused by the COVID-19 pandemic;

– tax expenditures that stimulate the attraction of private savings to special organizations that finance programs to prevent the spread of coronavirus infection;

– tax expenditures stimulating the implementation of private donations in kind to combat COVID-19;

– tax expenditures that stimulate the attraction of savings of individuals to finance the activities of small and medium-sized businesses;

– tax expenditures that encourage enterprises to fulfill their tax obligations in a timely manner;

– tax expenditures that stimulate investments in non-current assets.

Tax measures adapted to new socio-economic realities. During the pandemic, many enterprises suffered losses and faced the problem of lack of funds to fulfill tax obligations, obligations to counterparties, credit organizations and employees. Therefore, a number of countries have decided to introduce the concept of "transferring losses to past tax periods" (Czech Republic, Austria, France, Belgium). This measure provides an opportunity to return previously paid taxes in a short time to maintain the liquidity and solvency of enterprises. Thus, past tax liabilities become an additional source of funds. Let's take a closer look at the current procedure. In the Czech Republic, there are two possible options for transferring losses to past tax periods. At the same time, the amount of the loss is limited to 30 million Czech crowns ^[3]. According to the first option, the taxpayer declares his right only in 2021, when the actual losses are determined and the tax return is filed. In this case, he is granted the right to use the 2020 tax loss to reduce the corporate income tax base for two previous tax periods at once (2019 and 2018). According to the second option, taxpayers could deduct the estimated amount of losses for 2020 from taxable income only for 2019 and receive compensation already in 2020. that is, before filing a tax return. However, choosing this option involves risks and additional costs. If the taxpayer overestimates the losses, he will have to file an additional tax return and pay penalties.

In Austria, in general, the same procedure applies as in the Czech Republic, but there are some peculiarities. If a taxpayer submits an application for a tax refund in 2020, that is, before the tax authorities approve the amount of the loss, then the estimated amount of the loss that can be deducted is limited not only to the absolute amount of 5 million euros, but also 60% of the taxable income for 2019. ^[4] If the taxpayer receives compensation in 2021, then, as in the Czech Republic, more preferential conditions apply. Firstly, only the limit of 5 million euros remains, which means that the taxpayer can return the entire amount of income tax paid in 2019. Secondly, if the tax base in 2019 was insufficient to cover the permitted amount of the loss for 2020, then the remaining amount of the loss (no more than 2 million euros) can be used to reduce the tax base for 2018. Thus, just as in the Czech Republic, it is allowed to cover two previous tax periods at once (2019 and 2018) in order to receive compensation.

In France, tax losses for 2020 can also be used to reduce the tax base for corporate income tax for 2019. However, unlike the Czech Republic, where there are 2 options, it is possible to receive a refund only in 2021. In accordance with the new rules, it is allowed to submit an application as early as January 1, 2021, that is, before filing a tax return (according to the legislation, the declaration is submitted no later than May 2021) ^[5]. Since the tax return has not yet been filed and the declared amount of tax losses has not been formally confirmed, that is, it is of an estimated nature, there is a risk that the taxpayer has not quite correctly determined the amount of losses. Therefore, if the amount of compensation received at the beginning of the year exceeds the amount of compensation finally approved by the tax authority by more than 20%, then for each month (starting from the month of crediting the refund and up to the month of the end of the tax audit)  a penalty of 0.2% will be charged for the amount of excessively received compensation. In addition, the taxpayer will be required to pay a fine of 5%.

The Belgian Parliament also approved the introduction of a loss transfer regime for past periods. Compensation, as in the Czech Republic, can be obtained as early as 2020, for this the taxpayer declares the estimated amount of losses and reduces the tax base for 2019. At the same time, the amount of the loss is limited to 20 million euros. ^[6]. As in France, the permissible deviation of the compensation actually received from the amount of compensation finally approved by the tax authority on the basis of the submitted declaration is provided. In Belgium, it is 10%. If the deviation is greater than 10%, then in 2021 the taxpayer will be subject to additional tax on a progressive scale: the larger the deviation, the higher the tax rate, but not more than 40%.  

The self-isolation regime announced in many countries resulted not only in the emergence of liquidity problems, but also in an increase in employee costs. Therefore, individuals who were forced to work remotely were allowed to deduct expenses for the organization of a "home office" when calculating income tax. For example, in Canada, these costs are defined as a share of the annual cost of paying for home Internet, the cost of maintaining a condominium, electricity, water, heating, rent ^[7]. They also include postage and cartridge purchase costs. In turn, the share is calculated as the ratio of the number of working days spent at home to the total number of days in a year. To receive a deduction, an employee must work at home for more than 50% of the working time for four consecutive weeks.

In this regard, two methods have been developed for calculating these costs, which are valid only in 2020: the "fixed rate" method and the "detailed" method. According to the "fixed rate" method, which assumes both a smaller amount of tax deduction and less serious requirements, employees can claim a daily deduction of $2. The total amount of the tax deduction should not exceed $400. The taxpayer fills out the form "Report on the costs of working at home in connection with COVID-19" and does not prepare additional documentation. If the choice is made in favor of the "detailed" method, then the employee has the opportunity to receive a more significant amount of deduction, but additional requirements are put forward here. They include the preparation of supporting documents, as well as the provision of a completed and signed by the employer form T2200S, which confirms that the employee actually performed work duties at home and had to bear expenses.

In Ireland, there is a similar scheme consisting of two options. Only unlike Canada, according to the first option, not a fixed amount of daily expenses is deducted, but the employer pays a daily allowance of no more than 3.2 euros to cover the increasing costs of electricity, heating, broadband Internet access ^[8]. At the same time, this benefit is exempt from taxation. According to the second option, the employee receives a tax deduction, which is defined as a fixed percentage of the actual expenses incurred by the taxpayer during remote work at home. Expenses related to remote work are calculated conditionally the same as in Canada, with the only difference that they additionally include expenses for mortgage interest, property taxes, telephone services, capital expenditures. However, as already noted, in Ireland, the tax deduction is not equated to these expenses, but is calculated as a percentage of eligible expenses. For electricity and heating – 10%, for broadband Internet access – 30% (see Table 1).

Table 1 — Example of calculating the tax deduction for individual income tax in Ireland

Source: Ireland: Updated guidelines, tax treatment of expenses and benefits for remote workers (COVID-19).

In South Africa, a similar tax regime was introduced with respect to additional expenses incurred by employees as a result of switching to remote work during the pandemic. The peculiarity is that when calculating the tax deduction, a wider list of expenses is covered than in Canada and Ireland. For example, it is allowed to include expenses for the repair of residential premises, the wear and tear of computers and office equipment. It is worth adding that the list of expenses varies depending on whether the taxpayer receives a fixed salary or commission income. In addition, in South Africa, a different approach is used to determine the share of costs associated with remote work, for which total costs are adjusted. This share is calculated as the ratio of square meters per "home office" to the total area of the apartment (house).

At the end of the consideration of this block of tax measures, we will give two more examples of how tax legislation "adapts" to the new conditions of activity of organizations and employees during the COVID-19 pandemic. Her Majesty's Tax and Customs Service has issued a guide explaining the tax consequences of choosing employees and shareholders in favor of giving up part of wages or dividends in order to support the company in crisis conditions. According to the agency, many individuals give up part of their income. The Tax Service confirmed that the individual income tax and insurance premiums will not be charged on the part of income that the employee voluntarily refused. However, to do this, a number of requirements must be met.

First, an agreement must be reached between the employee and the employer, which is signed before the time when income tax and insurance premiums are calculated ("tax point"). As a rule, the "tax point" precedes the date when employees are actually paid wages. Otherwise, all accrued income will be taxed, even if the employee actually received less. Secondly, these agreements are not part of a broader agreement that provides for the targeted use of funds. As for dividends, the refusal is also duly executed before the right to dividends arises, namely, before the dividends have been declared and approved ^[9].

Government regulations on self-isolation and a number of other restrictive measures, which were mandatory, led to the fact that many firms had to suspend their activities or significantly reduce its scale. Consequently, it is unfair and economically irrational to tax factors of production that did not bring income due to restrictions imposed by the state. Adhering to this logic, the Belgian Parliament approved amendments to the tax legislation concerning the reduction of property taxes. The general principle is as follows: the amount by which the tax is reduced is directly proportional to the duration of the "unproductive" period, that is, the period when non-current assets were not used and, accordingly, did not generate income. In order to receive tax relief, the duration of the "unproductive" period of immovable property must be at least 180 days, for movable property – 90 days. The Tax Service has published a guide that regulates the procedure for reducing property taxes ^[10].

Tax expenditures that stimulate the import of personal protective equipment, medical products and food. The second part of this article is devoted to the consideration of tax expenditures provided in different countries of the world to mitigate the negative consequences of the COVID-19 pandemic. We suggest starting the review with this group. For example, in the United Kingdom, the United Arab Emirates, Nigeria, Bangladesh, a temporary exemption (6 months) was in effect in 2020from payment of import VAT and import duties when importing personal protective equipment (masks, gloves, antiseptics, disinfectants) ^[11]. In other countries (EU countries, Lebanon, Qatar), the import of medical and laboratory equipment was exempt from paying import duties ^[12]. It is worth noting that in developing countries, it has become a fairly common practice to exempt food products from paying import VAT and import duties. For example, in South Africa and Qatar, these are essential goods according to a special list, which includes goods imported to alleviate the plight of the population in case of famine and other national disasters ^{[13, 14]}. In Pakistan, an additional customs duty for the import of soybean, rapeseed and sunflower oil was abolished.

Sectoral tax expenditures for those types of economic activities that have been more affected by the economic crisis caused by the COVID-19 pandemic. The most popular tax measure is a reduction in VAT rates, but the validity of reduced rates varies. In Hungary, for less than 3 months (from 11/14/2020 to 02/8/2021), VAT rates were reduced to 5% when selling takeaway food. In the Czech Republic, for the whole of 2020, the VAT rate was reduced from 15 to 10% for the sale of hotel business services, sports clubs, saunas, ticket sales for cultural and sporting events. In Bulgaria, the reduction of the VAT rate to 9% for restaurant and cafe services has been in effect for a year and a half (from 1.07.2020 to 12/31/2021) ^[15].

Here are some examples of tax expenditures on other taxes. In Oman, it provided exemption from the payment of tourist tax for travel agencies and municipal tax for restaurants from 1.01.2020 to 31.08.2020. In Croatia, exemption from paying all taxes, except VAT, excise duties and import duties, for a period of 3 months (from 1.04.2020 to 30.06.2020) was granted to enterprises whose activities were suspended and which were seriously affected by the introduction of restrictive measures. The following conditions have been put forward for granting benefits. Firstly, taxpayers with an income of less than 7.5 million kuna receive a full exemption. Secondly, the income received from 20.03.2020 to 20.06.2020 should be at least 50% lower than the income earned by the firm for the same period of 2019 ^[16].

In Peru, increased depreciation rates are provided for taxpayers, especially those affected by the COVID-19 pandemic, during 2021 and 2022. Such taxpayers include enterprises that provide services for temporary accommodation of people (hotels, inns), travel agencies, transport organizations. The accelerated depreciation rate is applied to the residual value of all fixed assets that are on the company's balance sheet as of 31.12.2020, while enterprises can write off 40% of the property value in two years. Quite interesting tax rules have been adopted in South Africa. From March 26 to April 16, 2020, a three-week self-isolation regime was declared throughout the country, as a result of which mining companies were forced to stop underground work. According to the President of South Africa S. Ramaphos, the extractive sector has already suffered from the volatility of world commodity prices, and the temporary suspension of activities is expected to further worsen the financial and economic situation of companies in the extractive sector. Enterprises need to make additional costs in order to minimize the negative consequences of self-isolation, in connection with which new tax rules have been developed ^[17].

Usually, current costs are written off immediately to the cost of production. However, in accordance with the new regime of recognition of current expenses, certain expenses incurred during the absence of production activities will be included in capital expenditures for tax purposes. Such expenses include management expenses, maintenance and repair of fixed assets, interest on loans attracted to finance core activities. At the same time, these expenses can only reduce the income received from mining. The peculiarity of capital expenditures is that they are transferred to the cost of finished products in parts. In the context of the implementation of tax measures aimed at supporting the extractive sector, capitalization of the above-mentioned costs means that enterprises can deduct current expenses not in the tax (reporting) period in which they arose, but in subsequent tax (reporting) periods when sufficient taxable income is received. That is, if the company has received a loss or taxable income is close to zero, then the above expenses can be fully or partially transferred to future periods in order to reduce tax liabilities for corporate income tax.

Tax expenditures that stimulate the attraction of private savings to special organizations that finance programs to prevent the spread of coronavirus infection. In Oman, tax deductions are provided for individual and corporate income tax if the taxpayer makes donations to special funds, one of the purposes of which is to smooth out the negative consequences of the COVID-19 crisis ^[18]. In March 2020, a specialized Solidarity Fund was established in the Southern Arab Republic in order to provide funding for initiatives to combat COVID-19. Individual and corporate income tax deductions are also provided if the taxpayer makes donations. However, there are some nuances here. First, donations to the foundation must be made by July 31, 2020. Secondly, in 2020, the tax base can be reduced by no more than 20%. Nevertheless, the amount of donations actually made in excess of the established limit can be transferred to future periods (2021 and 2022). But the amount by which it is allowed to reduce taxable income will already be limited to 10% ^[19].

In Belgium, a list of organizations has been identified, the transfer of donations to which makes it possible to save even more on corporate and individual income tax payments. The share of donations that can be deducted from taxable income has been increased to 60%. At the same time, as in South Africa, the tax base can be reduced by only 20%.Donations in kind are also allowed: 1) medical products (masks, respirators, antiseptics) that were transferred to medical institutions in the period from March 1 to June 30, 2020. 2) computers that were transferred to schools for distance learning from March 1 to December 31, 2020. 

Tax expenditures that stimulate the attraction of savings of individuals to finance the activities of small and medium-sized businesses. Such tax expenditures are applied in the USA, Canada and a number of European countries; Belgium is an example. According to the current legislation, individuals who purchase shares of small and medium-sized businesses that have experienced a sharp decline in turnover receive a tax credit for income tax. They are given the opportunity to reduce the tax liability by the amount of expenses incurred, but not by more than 20%. There are also special criteria for enterprises: 1) the number of employees is not more than 50 people; 2) the drop in turnover from 14.03.2020 to 30.04.2020 amounted to more than 30% compared to the same period in 2019 ^[6].

In addition, in 2020, a loan financing program was launched in the Walloon region, which provides a tax credit for individuals. To receive tax benefits, individuals must become a participant in this program and conclude a loan agreement with a small (medium-sized) enterprise. The tax credit is 4% of the loan amount for the first four years, 2.5% – for subsequent years. The loan term should be equal to 4, 6 or 8 years. Early repayment of the loan is prohibited, the loan is returned in one payment at the end of the term. The amount of the borrowed capital should not exceed 50 thousand euros, and the interest rate is 1.75%.

Tax expenditures that encourage enterprises to fulfill their tax obligations in a timely manner. In many countries of the world, as a retaliatory tax measure, a delay in the payment of taxes without the accrual of fines and penalties was chosen. For example, in Saudi Arabia, from March 18 to June 30, 2020, there was a preferential regime for all taxpayers, consisting in the cancellation of penalties and fines, which are usually accrued if a tax return is filed later than the deadline.  At the same time, tax measures have been taken in a number of countries to encourage taxpayers to replenish the budget in a timely manner, which is especially important in the context of growing public spending and budget deficits. In this case, the following advantages were provided: either the amount of the tax liability is reduced, or an interest-free loan is provided for the amount of taxes paid on time. For example, in Romania, during 2020, a "discount" was provided for taxpayers who promptly transferred quarterly advance payments on income tax to the budget (income – for microenterprises). For large enterprises, the "discount" is set at 5%, for small and medium–sized businesses - 10% ^[20].

In Denmark, companies with an annual income of less than 5 million Danish crowns that paid VAT in full for the second half of 2019 before March 2, 2020, as well as companies with an annual income of 5 to 50 million Danish crowns that paid VAT in full for the fourth quarter of 2019 before March 2, 2020, they could return this amount of tax in the form of an interest-free loan. The same scheme applied to taxpayers who are exempt from VAT, but are subject to payroll tax (passenger transportation companies, medical services), if they paid tax for the first quarter of 2020 no later than April 15. At the same time, the amount of a possible loan increases by the amount of the quarterly share of taxable profit for 2019. Taxpayers could request a loan from May 4 to June 15, 2020, the loan amount was limited to 35 billion Danish crowns ^[21].

Tax expenditures that stimulate investments in non-current assets. Enterprise reports indicate a reduction in investment costs due to the coronavirus pandemic. For example, McDonald reduced capital expenditures worldwide by $1 billion, and MGM Resorts postponed about 33% of planned domestic investments in the United States in 2020 ^[22]. For this reason, temporary investment tax incentives are being introduced around the world. The expiration of the tax benefit in a pre-announced time period encourages firms to accelerate their spending programs. Temporary tax breaks are designed as counter-cyclical fiscal instruments and are not aimed at long-term growth. The effectiveness of temporary benefits will depend on the structure of the national economy and the level of development of the country. For example, in countries where sectoral corporate income tax exemptions are widespread, temporary benefits are not able to stimulate investment by firms that already enjoy tax preferences. Temporary tax breaks are more acceptable for middle- and high-income countries.

As world practice shows, the most common forms of tax expenditures used during an economic downturn are a reduced income tax rate and accelerated depreciation, in particular, a depreciation premium. The economic crisis caused by the COVID-19 pandemic was no exception. Germany's second stimulus package includes accelerated depreciation for machinery, equipment and vehicles. Movable assets acquired from 1.12.2019 to 1.01.2022 for tax purposes can be amortized using the method of the reduced balance. The depreciation rate is determined based on the useful life of the asset and an increasing coefficient equal to 2.5. However, no more than 25% of the original cost of the asset can be written off annually. According to the Austrian tax legislation, only the linear depreciation method is applied to buildings and structures. However, from July 1, 2020, the value of real estate is allowed to be written off in an accelerated way. In the first year of operation of buildings, the depreciation rate is 7.5%, in the second year – 5%, and starting from year 3, the company returns to the linear method ^[23].

In addition, in many countries, an increased depreciation premium has been introduced for newly acquired movable and immovable property. The amount, conditions, and period of application of the depreciation premium are set out in Table 2.

Table 2 — Size, conditions, period of application of the depreciation premium in different countries of the world during the COVID-19 pandemic

Source: compiled by the authors based on ^{[23],[24],[25]}.

There are two main advantages of a depreciation premium over a reduced tax rate as a tool to stimulate additional investments during a recession. Firstly, the reduced tax rate represents benefits only for profitable firms, while during a recession many enterprises suffer losses. Therefore, the depreciation premium is a more preferable tool for stimulating investments. For companies that suffer losses, the benefits of the depreciation premium are transferred to future periods: the depreciation premium increases expenses and, as a consequence, the amount of the loss, which will be used in the future to reduce the tax base for income tax and, as a consequence, tax liability.

Secondly, a significant difference between the reduced tax rate and the depreciation premium is that the reduced rate increases the net profit that the company receives mainly from the use of existing non-current assets. When calculating profit, income is reduced by expenses, one of the components of which is depreciation charged on fixed assets already in operation. That is, the tax burden on profits generated by past investments is reduced. On the contrary, the depreciation premium is applied only to new investments that represent the main purpose of tax instruments.

It is too early to judge the effectiveness of the above mentioned tax expenditures. At the same time, in the conclusion of this article, we present the results of some studies. In 2017, Zvik and Mahon conducted a study to assess the effectiveness of the introduction of a temporary depreciation premium in the United States in 2001-2004 and in 2008-2010. The study showed that with a decrease in the cost of capital by 1% due to a decrease in the tax burden, investments increased by 7.2% ^[22]. At the same time, the strongest response was observed among small enterprises. In addition, in 2019, Maffini, Sing and Devereux published the results of a study on the effectiveness of the temporary depreciation premium applied in the UK during the global financial crisis. The coefficient of elasticity of investments by the cost of capital was about 5% ^[22].