Tax & Accounting Blog

Natural Disasters: A Trigger for Tax Changes

Blog, Indirect Tax, ONESOURCE May 3, 2016

Natural disasters will unleash a chain reaction of challenges causing economic disruption and difficulties.  Governments typically react by increasing certain taxes on a temporary basis in order to create extra funding for medical supplies, food, shelter and other basic services in the affected areas and eventually, to address the reconstruction process of damaged public and private property. These emergency tax measures should be taken into consideration when conducting business in regions prone to costly natural disasters. Below are some examples of governments reacting to natural disasters with tax measures:

Ecuador

On the 16 of April 2016 Ecuador was affected by a deadly earthquake with a magnitude of 7.8 on the Richter scale. There were numerous deaths and injuries, buildings collapsed and a state of national disaster was declared by the government.

The government announced that in order to face this disaster it will increase some taxes on temporal basis, apply for multilateral loans, sell assets and may issue bonds in international markets.

The tax measures to be adopted are contained within the Solidarity and Stewardship Citizen Act (Proyecto de Contribucion Solidaria) that has been sent to the Parliament, which includes temporal taxes on wealthy people, an additional contribution of profits and a 2% increase in the VAT rate (from 12% to 14%) for a period of one year. The VAT increase would be effective on the first day of the month following the publication of the law in the Official Gazette.

Queensland, Australia

Many areas of the Australian State of Queensland were affected by heavy rains and floods between 2011 and 2012 and a temporary tax denominated Flood Levy was introduced to help raising funds for the reconstruction process.

The Flood Levy was in place between the 1st of July 2011 until the 30th of June 2012, levying incomes between $50,000 and $100,000 Australian Dollars with a tax of 0.5% and incomes over $ $100,000 Australian Dollars with a tax of 1%. Exemptions to this levy were granted to people that were victims of the flood disasters.

Maharashtra, India

In 2015 the government of the State of Maharashtra, India, increased the VAT rate applicable to certain products in order to face the adverse effects of a prolonged drought that affected farmers across the region.

For the referred purpose, the government of Maharashtra temporarily increased the VAT rate on cigarettes, liquor and beverages by 5% . Also a surcharge of Rs 2 on diesel and petrol was introduced.

In other cases, the government may reduce certain taxes or postpone the entry into force of tax increases to give economic relief to the victims of such events. A recent example of this is in Japan, where the government is considering the postponement of an increase in the VAT rate from 8% to 10% in April 2017 following the 2 earthquakes that affected the country last month.

Governments typically react to natural disasters by raising certain types of taxes or by creating targeted tax breaks. When doing business in areas with a high propensity to disaster it is advisable to be well informed and have a firm grasp on how the events could affect your tax liability, especially when your firm is not vested in the rebuild effort structurally.