S&P Downgrades "Unlikely" to Impact Long-term Tax Policy

The raft of credit downgrades implemented by Standard & Poor’s (S&P) across the eurozone has not only highlighted the significant income problem possessed by these jurisdictions, but also the sizeable gap in competitiveness between themselves and other countries in the EU, according to tax specialists Taxand. The company advises these countries to renew their focus on creating economic stability and resist the temptation for snap changes to their tax policies, as this could have a far greater impact on investor and multinational sentiment than the minimal reactions to the downgrades that have emerged in the markets to date.

“In the past, snap reactions to such developments have instead acted as a barrier to attracting investment,” said Frédéric Donnedieu de Vabres, chairman of Taxand. “Germany has previously overhauled tax policy – through the business tax reform of 2008 – in reaction to schemes used by non-German investors in order to lower their German liability, only to see foreign investors shy away from the country, fearing instability in the long term tax environment.

“There are other examples of inconsistency in tax policy that have decreased a jurisdiction’s favourability in the eyes of foreign investment. Hungary has for many years positioned itself as an attractive tax location yet, more recently, a number of multinationals have been scared off by rash changes to policy that have come to fruition at very short notice.

Donnedieu de Vabres added: “With fragile governments’ learning from such examples, the downgrades are unlikely to spark an overhaul of long-term tax policy across the region. Still, perhaps waiting to be convinced of long-term intentions with regards to tax regimes, multinationals are likely to hold fire for some time before committing to significant investment. The reaction we’ve seen from clients to date is very much a ‘wait and see’ philosophy. That said, there are no doubt opportunities for those companies with cash to spend, as depressed prices – particularly as a result of the downgrades and the uncertainty caused by the prospects of changes in EU tax harmonisation – can present opportunities for substantial strategic growth.

“Recognising that multinationals have grown fed-up of short-term reactive change, the recent downgrades are likely to leave most governments sticking to their guns and concentrating on the creation of a more stable tax investment environment for companies which they harbour,” he concluded.


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