The great lockdown: A tax perspective

As a result of this pandemic, the IMF is predicting an economic downturn that will make the Global Financial Crisis of 2008 seem benign. A fall of 3% in global growth in 2020 forecasted by the IMF assumes the containment strategies adopted by most countries in Q2 are effective in “flattening the curve” so that relative normality can be resumed in Q3 this year. However, as Q1 economic data from different countries becomes available, this prediction seems decidedly rosy. In response, governments and central banks worldwide are attempting to counteract the disruption through sweeping and substantial fiscal and monetary stimuli. These assistances will come at a cost which in the melee has rarely been discussed or debated. With the International Centre for Tax and Development estimating that tax receipts account for more than 80% of total government revenue in about half the countries in the world and more than 50% in almost every country, it is safe to assume that taxation will play an important role in the aftermath of this crisis.

In this article we will therefore explore from a tax perspective how the governments of four different countries have approached this pandemic and how we think they may change their tax regime in its aftermath. We will first look at UK and France, two advanced economies, followed by the Republic of South Africa (RSA), an emerging economy. All three have similar populations and diversified economies. Finally, we will also look at Mauritius, another emerging though non-diversified economy, for a different perspective.

The Cost of COVID-19

COVID-19, like life, happens in stages. Thus far, the world at large has contemplated Stage One – the move to Lockdown. Some countries are now contemplating Stage Two – the move from Lockdown, arguably the harder of the two stages. To assuage public fears and mitigate the economic impact of this pandemic, most governments have issued bold statements on programmes to soften the impact of COVID-19 to the general population. For some governments, this meant paying a percentage of payroll for businesses or enabling companies to furlough employees, facilitating business loans and/or grants to companies impacted by the pandemic (underwritten to various degrees by the government), and wholesale aid package to industries severely impacted by the pandemic (e.g. airline industry). According to the UN’s trade and development agency UNCTAD the global cost of COVID-19 is estimated to be at least $1 trillion, while the Asian Development Bank estimates the global cost to range from $2 trillion to $4.1 trillion which is equivalent to 2.3% to 4.8% of the global GDP.

The COVID-19 pandemic is currently wreaking havoc across global economies. While the principal focus of policy makers to date has been to protect public health, the threat of sustained economic damages is already causing governments to adopt mitigation measures that many would have thought politically inconceivable a few months ago. Self-isolation and social distancing practices have thus become the main measures embraced by most countries facing this unprecedented health and economic crisis, which the International Monetary Fund (IMF) has dubbed “The Great Lockdown”.

John Snow

Once the health crisis has been contained, the focus of governments will inevitably move to the economic fallout generated by the Great Lockdown which many experts have predicted will be worse than the Great Depression. The parallels are clear – the Great Depression was a massive and complex global economic emergency and the only one in modern history likely to rival in scale to the devastating social and economic consequences generated by COVID-19.

United Kingdom

Once the health crisis has been contained, the focus of governments will inevitably move to the economic fallout generated by the Great Lockdown which many experts have predicted will be worse than the Great Depression. The parallels are clear – the Great Depression was a massive and complex global economic emergency and the only one in modern history likely to rival in scale to the devastating social and economic consequences generated by COVID-19.


With a similar GDP and population size to the UK, France has a much higher tax revenue of €1.14 trillion (£993 billion compared to £623 billion in the UK in 2019). It is estimated that France will spend €345 billion to help businesses and households during the pandemic – around 20% of its 2019 GDP.

Once the health crisis has been contained, the focus of governments will inevitably move to the economic fallout generated by the Great Lockdown which many experts have predicted will be worse than the Great Depression. The parallels are clear – the Great Depression was a massive and complex global economic emergency and the only one in modern history likely to rival in scale to the devastating social and economic consequences generated by COVID-19.

South Africa

With a similar population to the UK and France, RSA’s GDP is only a tenth of the two advanced economies. Despite the start of its first case being a month after the U.K.’s, the country went into lockdown shortly after the UK. So far, the number of cases has been relatively low. The experience with HIV means the country started the test and trace strategy early, but harsh living conditions in townships means social distancing is at times difficult to achieve. Due to a limited number of intensive care beds, if the number of infections explode it may have a more profound impact on its economic future than the number of infections today would suggest.

The South African government has so far pledged Rand 500 billion ($27.5 million) or 13% of its 2019 GDP (close to 40% of its 2019 tax revenue) to help those impacted by COVID-19. Like France, South Africa was already in a technical recession before COVID-19 and in Q1 of 2020, its GDP dropped by 1.4%. The IMF estimate that the country’s GDP will drop by 6% for the year 2020. Unemployment is another concerning factor; prior to the pandemic, its unemployment rate already stood at almost 29%. The IMF now predicts it will increase to 35% for 2020.


A country with a population of 1.3m, Mauritius has thus far very few reported COVID-19 cases. The government reacted quickly by putting the country into lockdown shortly after the first case was announced. It has pledged 14 billion Rupees (+/- $350m or about 3% of its GDP) of which a portion is loans from the IMF, to help businesses and households during this pandemic. However, with an economy for which 25% of its GDP derived from tourism, economically this island nation will nevertheless feel the economic impact of COVID-19. The IMF forecast a drop in GDP of just under 7% for 2020 and the government is expecting unemployment to increase from 6.7% to 17.5%.

A country-by-country comparison on tax policy measures to COVID-19 crisis

The way governments have reacted to supporting their populations can be divided into developed and emerging economies, with France – a more socialist government than the UK – providing support on benefits entitlements as well.

How will governments pay for it all?

In a moment of national crisis, the thought of how all these programmes will be paid for rarely form part of the discourse. We are witnessing countries printing money to fund government stimulus packages and postponing the fight against potential inflation which may come later. The ratio of public debt to GDP is expected to jump by 10 to 20 percentage points. At some point the issue of debt will need to be addressed and governments essentially have three well-trodden paths they may follow. The first is to default on the debt. The second option is to roll the debt over until growth appears. Finally, the third option is to repay the debt through taxation.

Defaulting on the debt may eventually be a last resort option for emerging economies but is a highly unlikely option for advanced economies because of the inevitable increase in the cost of borrowing. The second option will be tolerable so long as interest rates remain low and economies return to something approaching normality within a reasonable timeframe. Otherwise governments are still left with finding revenue to inject into a comatose economy. This leaves us with the third option: using tax revenue to repay public debt.

Until the dust settles, it is difficult to estimate the total cost of COVID-19 to economies resulting from a mixture of government aids, economic stimuli and loss tax revenue. However, we have attempted to estimate this for the four countries mentioned based on widely available data. For the UK, France and South Africa, the estimated cost per capita in the fight against COVID-19 ranges from 15% to almost 30%. For Mauritius, the cost per capita seems palatable so long as the infection rate continues to remain low. However, as the country is heavily dependent on tourism, an industry hugely impacted by the pandemic, there is bound to be downward pressure on wages in the short to medium term.

Findings from research conducted by the OECD demonstrate how different tax policies have varying influences on economic growth with some being more harmful and some less so. Any policy solutions for economic recovery and growth will most likely target the tax treatment of capital investment, which is least harmful to economic growth and moves away from individual income-based taxes as they negatively impact work incentives and entrepreneurship. Some countries may even take the opportunity to restructure their revenue base to rely on those less harmful taxes and put effort into expanding consumption tax and property tax bases. Governments will also need to adapt their tax rules to be friendlier to new trends, such as remote working, which may help any sustainability programmes they might have.

Below is our analysis on how governments might adapt their taxation strategies to raise revenue as a result of the COVID-19 economic fallout:

Real Estate/Property tax

Real estate and properties being immovable are one of the least harmful taxes to economic growth. Property taxes can be levied on the market value of the asset without netting off amounts due to the mortgagor. This practice is widespread in the US where several states (e.g. Florida) levy real estate taxes on the annually assessed market value of the property.

In countries where there is a significant number of residential properties as second home, a property tax can be levied on the second residence. This may include properties owned by a company or a trust. For example, a property tax that mirrors the UK’s tax on second residence and on properties owned by companies and trusts known as ATED (Annual Tax on Enveloped Dwellings), where high value properties owned via a corporate, trust or collective investment scheme structure are subject to an annual tax, may be considered. This would be relevant in Mauritius where it is popular for foreigners and wealthy Mauritian families to have second residences.

To stimulate growth via taxation, governments may consider environmentally friendly schemes such as reduction in VAT for home improvement projects that enhance energy efficiencies (e.g. Belgium, UK), or offer deferred tax credit effectively enhancing consumption and employment today and paying for it over time by way of tax incentives. This type of policy is likely to work only in developed economies.

Likewise, to stimulate growth, in countries with strict foreign ownership control such as Mauritius, this could be relaxed to encourage foreigners to invest hence stimulating property development and employment – so long as employees are from the local market rather than imported.

Personal income tax

Despite being one of the more harmful taxes in the taxation toolkit, we are likely to see an increase in tax rates especially for the high earners (those in the income tax bracket of 40% and above) which will have the benefit of not impacting the average workforce and their purchasing power. This is likely to be implemented in all four countries, though with Mauritius and South Africa there is a higher likelihood. However, in a country such as Mauritius where there is a significant variance between income tax and capital gains tax, this method may not be effective in raising revenue as the wealthy can simply structure profit to be deemed as gain.

Another possibility is the introduction of worldwide taxation. This could apply in Mauritius where non-Mauritian earnings are currently non-taxable. The UK government may consider doing away with the non-domicile status for foreigners. South Africa may also adopt the UK’s foreign trust taxation regime in order to effectively tax all trust income and gains. Although France and South Africa already have worldwide taxation, the exemptions, like for French residents who upon returning after a period abroad are granted similar exemptions to expatriates, could be curtailed.

Wealth tax

Historically difficult to administer, with the advent of CRS and digital reporting, wealth tax may well be back on the cards for many countries. In countries where wealth tax is applicable, governments may widen the scope to exclude the deduction of debt on property thus effectively making it into a property tax. As examples, in France the government may amend its wealth tax and consider taxing on the gross instead of the net value of the property, or in South Africa a new wealth tax could be introduced. The tax may follow the lines of the US where it is disguised as a property tax again excluding any deduction for debt. It is conceivable that governments may introduce tax on multiple car ownership, perhaps if not electric or low emission, relative to its value, again a form or wealth tax.

Inheritance tax (Estate or Succession tax)

A direct increase in inheritance tax at a time when you have a virus that is adding significantly to the number of deaths is probably not a wise political move. Whereas France, South Africa and the UK have inheritance taxation (either the donor or the beneficiary), Mauritius does not. The thresholds in both the UK and France are low and the marginal tax rates high, whereas in South Africa the threshold is low, but the rates not as high. All three jurisdictions have exemptions, which could be curtailed.

Capital gains tax

We expect this to be unlikely to change for France and the UK. For Mauritius where currently there is no capital gains tax, certain capital gains exemptions could be lifted and be taxed at a lower rate than income tax in order to encourage investment.

Health tax

This pandemic has certainly shone a spotlight on the importance of health, and it is not inconceivable for governments to implement a health tax or a top-up scheme to help reduce government funded health services. This may take different shapes between advanced economies and developing countries. In the UK and France where universal health coverage is considered sacrosanct, there may be more of an appetite to contribute to the health system on top of the amount currently contributed through national insurance. This may be in a form of insurance or levy. In South Africa and in Mauritius, where the pandemic has not yet hit as hard and where the geopolitics are different, the appetite for such a kind of tax or levy may be much less.

Corporate tax

The past decade has seen governments around the world reduce corporation tax as companies become increasingly mobile. Rates in the UK and Mauritius are 20% and 15% respectively, hence any tax advantages in redomiciling are increasingly small. As an example outside of the countries mentioned, Hong Kong’s rate is 17% but with a territorial exemption, so it would be fair to assume governments are unlikely to raise corporation tax over and above 1% or 2%.

Dividend tax

Dividends in certain jurisdictions are not subject to withholding tax. Governments may look at introducing the concept of withholding tax to include interest in order to raise revenue (e.g. Russia). However, this would require amending agreements for the avoidance of double taxation and could lead to companies redomiciling so in our view, this is not an area where we would expect significant changes. Currently the UK and Mauritius do not have withholding tax on dividends whereas France and South Africa do.

It seems inevitable that globally we will have to live with a level of debt that is beyond comfortable. The optimistic scenario is that growth bounces back exponentially to compensate for the loss in productivity during the Great Lockdown. However, based on recently released economic data from Q1, this seems unlikely. The more realistic, and therefore best case, scenario seems to be some level of economic growth to hold down the increase in tax that will no doubt come with governments’ needs to balance the books.