With more than 70 million young people currently unemployed globally and the global youth unemployment rate continuing to rise, G20 governments need to consider supporting young entrepreneurs by providing targeted tax incentives and administrative simplification. This is according to a new EY report, Smart taxation for young entrepreneurs: navigating tax rules and planning for growth.
- New EY report recommends four ways G20 governments can facilitate tax compliance and support business education for young entrepreneurs
In the context of the G20 Young Entrepreneurs’ Alliance 2018 Summit, which took place last September in Buenos Aires, Argentina, the report outlines how smart taxation and, more broadly, competitive regulation can support, rather than hinder, young entrepreneurs in their journey to growth.
Recommendations for simplifying tax compliance
The report includes four key recommendations for removing the obstacles to tax compliance, as well as ways to provide access to tools and education for effective tax planning:
Introduce an optional turnover-based threshold for indirect taxes, typically VAT, for companies run by young entrepreneurs. As young entrepreneurs begin their journey and if their company is not yet profitable, there is no direct tax burden, but there are indirect costs and compliance obligations related to determining and collecting indirect taxes, which may negatively impact cash flow of the underlying business.
Support business education for young entrepreneurs. Countries that do not explicitly allow education expenses to be deductible in calculating corporate income taxes should make some legal provision to do so. This would allow a deduction of reasonable expenses incurred for business education of both staff and contractors of business run by young entrepreneurs irrespective of whether the underlying education or training is provided by certified educational establishments or individual business consultants.
Simplify and digitize tax compliance process and strengthen tax education. Allow cash rather than accrual accounting for both revenues and expenses, eliminating the need to keep separate tax and accounting books. Additionally, issue and receive invoices via certified apps, or digital tools, designed by the revenue authorities and provided for free. These will automatically produce tax returns for both direct and indirect taxes, which can be filed electronically via secure channels. Regarding tax education for young entrepreneurs, countries should use digital formats at their revenue service websites, such as webcasts, voice or online chat help.
Taxation policies to improve companies’ cash-flow. Capital inflow is a very important factor for new businesses. The introduction of a favorable tax framework for the inflow of capital – in the form of remuneration – to a business by both young entrepreneurs and its employees would greatly strengthen the business, with a positive impact also on society by creating new jobs. The tax incentive could take the form of exempting individuals from capital gains or other similar taxes on equity sold, if the equity was issued when the company was below a certain revenue cap that would be determined at the discretion of each G20 country. Additionally, a provision could be made requiring equity to be held by an individual for a certain period of time to qualify for an exemption and that a total amount of exempt capital gain should not exceed a certain threshold.
Commenting on the report’s recommendations, Philippos Raptopoulos, Head of Tax Services at EY Cyprus, noted: “Many of the innovative proposals included in this report could be adapted and applied to Cyprus. They would help create an ecosystem friendlier to young entrepreneurs, promote growth and, ultimately, lead to the creation of new jobs. These proposals are also in line with EY’s new corporate responsibility program, EY Ripples, which aims to help drive sustainable inclusive growth, by supporting, among others, the next generation.”