Dealing with an economic downturn
Slow growth and an increasingly protectionist global environment make for challenging times ahead for economies and businesses around the world.
Many economies are expected to face challenging headwinds for the foreseeable future. Tax cuts and new infrastructure spending are expected to boost the US economy and hopefully do the same for the global economy. However, that may not be enough to counteract the impact of the slowdown in the Chinese economy and reduced consumer demand in developed markets.
In response to challenging economic conditions Governments often step in with fiscal stimulus measures to limit the effects of a downturn. It can be the momentum economies and businesses need, especially in the vulnerable SME sector.
Indirect taxation approach
Governments need to finance fiscal stimulus somehow – usually by increasing taxes. But in many countries where households and businesses are already struggling, income and corporate tax increases can be unpalatable and complicated to impose. So, what can governments and the private sector do to help businesses survive a potential looming downturn?
Recent decades have seen a shift in emphasis towards indirect taxation at the point of consumption rather than at the income or profits level. This benefits governments as they can reach revenue targets by taxing a broader tax base at the same time as maintaining competitive income tax rates which are crucial for encouraging business activity and attracting foreign investment.
Recent examples include Malaysia’s introduction of a goods and services tax regime, and Japan’s announcement of a 2% increase in its consumption tax rate from 2019. This type of approach is appealing as capital needs to be allocated towards its most efficient use and investors will look at net returns after-tax when deciding where to invest.
Tax incentives also continue to play a key role in stimulating economic activity, incentivising companies to keep their business operations in a host country and survive economic downturns.
Singapore, for example, has introduced tax incentives, such as the Headquarters Programme and Global Trader Programme, which grant attractive concessionary corporate tax rates to companies that meet certain criteria. There is also a range of grants and measures such as the Productivity and Innovation Credit scheme.
Many countries offer such incentives, and companies should take full advantage of them to help with growth, scaling-up or overseas expansion, and indeed cushion the impact of any downturn.
For more information, contact:
Nexia TS, Singapore
T: +65 6534 5700