Know What’s Coming – Estimating Future Tax Costs
Tax law, when enacted, generally applies until lawmakers pass a new law to replace it. With the primary purpose of imposing tax to fund governments’ spending, many governments use their budget process to deliver such changes. These changes typically become effective at the start of the coming tax year, unless extraordinary events occur. For example, Poland passed legislation in November 2021 to alter certain brackets’ thresholds in the personal income tax table. These changes became effective January 1, 2022, and Equus delivered them in the Tax Engine v.22.1 release.
Due to the war in neighboring Ukraine, the Polish government subsequently enacted another change to the tax table, reducing the 17% bracket rate to 12%. Rather than waiting until the start of the next tax year, the new change will take effect from July 1, 2022. Equus will deliver this update in the Tax Engine v.22.4 release, planned for July 28, 2022. This scheduled release is the nearest to the effective date of this new law, which will apply for all AssignmentPro Cost Estimates calculated after the release upgrade.
Sometimes, governments enact tax laws which become effective several years later. They may do this for a variety of reasons, ranging from providing budget certainty to giving advance warning to taxpayers. A phased approach over multiple tax years can smooth the transition, such as easing the financial burden on taxpayers by avoiding a sudden “cliff-edge” effect when a tax relief is taken away. For example, in 2018, China announced a phased approach for the removal of tax relief on relocation benefits and allowances for inbound workers over a 3-year period. This approach gave businesses and their employees time to adapt to the resulting tax increase. After enactment in 2018, Equus updated Tax Engine v.9.6 to 1) calculate the exemption in Cost Estimates for years up to 2021 and 2) omit the relief from 2022 onwards.
The Tax Engine thus reflected this tax law change in multi-year Cost Estimates spanning the different effective dates. In 2021, China’s legislature extended this transition period by a further year to support businesses struggling due to the pandemic. Accordingly, Equus updated the Tax Engine in v.22.1 to calculate the relief for an additional year.
The Equus Tax Engine reflects tax legislation not only for current years, but also for enacted changes scheduled to take effect in the coming years. Users can have confidence that Cost Estimates spanning multiple years will automatically apply those enacted future changes to the relevant periods.
Contact us to find out more about the Equus Tax Engine or Cost Estimates.
