2017 has seen quite its share of natural disasters. Hurricanes Harvey, Irma and Jose have caused billions of dollars in damage. Mexico City’s 7.1 magnitude earthquake last month wreaked havoc that will take years to rebuild. Mudslides and landslides around the world have killed over 2,000 people and displaced countless others. While natural disasters are predicted to become more frequent and costly, there has been little focus on the links between taxation and natural disasters.
According to Thomson Reuters, natural disasters are actually a major trigger that affects taxes. They often cause a chain reaction of challenges that lead to economic hardships, which in turn cause governments to temporarily raise certain taxes to fund necessary recovery operations, including medical supplies, food, shelter and other basic services in the affected areas. Eventually, these emergency taxes are utilized to fund the reconstruction process of both damaged public and private property.
Some examples of natural disasters that prompted tax hikes:
Earthquake in Ecuador: In April of 2016, Ecuador was hit by a 7.8 magnitude earthquake that brought untold destruction and damage in its wake. Almost 700 people lost their lives, over 10,000 were injured and the total cost of the damage was estimated at close to 2 billion dollars. After the government declared it a state of national disaster, they also announced that in order to finance the response they would need to raise taxes, take out loans and sell some assets. Included in the tax hike was a one-year increase in VAT from 12% to 14%.
Drought in India: In 2015, Maharashtra, a western province in India with over 100 million inhabitants, experienced severe droughts due to a lack of rain that affected almost 30,000 villages in the province. The major Kharif crop industry like rice, soya bean, cotton, and sugar cane were severely devastated, leading to over 3,000 local farmers committing suicide. The Indian government temporarily raised taxes on Tobacco and Spirits by 5% to finance new crops.
In the flip side, not all governments respond in kind. When faced with a natural disaster, some countries elect to find alternative ways to finance their reconstruction efforts. Some examples:
Earthquakes in Japan: Japan has suffered a number of severe earthquakes in recent years. In response to these disasters, Prime Minister Shinzō Abe postponed the planned VAT hike from 8% to 10% that was supposed to go into effect in early 2017 in order to extend some economic relief to the many victims of these earthquakes.
Cyclone in Fiji: When Cyclone Winston hit Fiji in early 2016, it was cited as the most intense tropical cyclone ever experienced in that region, leaving 25% of the island homeless and causing over a billion dollars in damage. But instead of raising the VAT on an already poor economy, the island relied on the goodwill of larger, neighboring countries like New Zealand and Australia to provide relief packages and monetary aid.
Proactive steps to take before the next disaster hits
Since government’s approach to taxation following natural disasters differs widely, both for individuals as well as businesses, enterprises should keep up to date on emergency tax measures. This information should also be taken into consideration when planning to do business in regions hit directly by Mother Nature. Always have a solid grasp on the local economies that could affect your tax considerations.
In addition, businesses should consider what would happen to vital tax and financial information in the event of a casualty event. Disaster recovery plans must be in place, and data must be backed up and stored out of harm’s way. The IRS recommends eliminating the use of paper invoices and backing up all data to the cloud. More information can be found in the IRS’ Disaster Relief Resource Center for Tax Professionals.
The following resources can help in the planning process:
- The AICPA’s Casualty Loss and Disaster Relief includes a Casualty Loss Practice Guide for members of the Tax Section.
- The American Red Cross’s Disaster Recovery Guide includes information on recovering financially.
- Ready.gov’s Business Continuity Plan includes a business continuity impact analysis.
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