Tax resilience amid global disruption

The spread of COVID-19 is disrupting businesses around the globe. As the crisis continues, businesses need to be agile in managing the tax effects on their business. While tax filings and payments may already be front of mind, other international tax areas require consideration.

Multiple sectors have been impacted with some businesses completely side-lined due to widespread labour and supply chain interruptions. The credit markets are only beginning to see the effects of cash strained borrowers struggling to meet their obligations. Consumer demand has all but evaporated as countries continue to encourage limited interaction to control the spread of the virus. Unemployment is sharply increasing in many places with governments stepping in, and in some cases guaranteeing incomes.

Multinationals are especially challenged with a complex web of legal and administrative changes happening around the globe. Operating in what was already a complex environment, businesses are now trying to do more with less as the public health situation weighs on the economy. As the crisis continues, businesses need to be agile in managing the tax effects on their business. We have highlighted a few of the areas below that businesses may look to address as they look to be resilient amid the global disruption.

Cash tax minimisation

With the onset of the economic downturn, businesses must immediately re-evaluate any upcoming cash tax payments. Several taxing authorities have extended payments deadlines while others have enacted incentives that may negate the needs for some or all upcoming estimated tax payments. More likely, companies bottom lines may be significantly different on a projected basis due to the crisis. Given the importance of liquidity, companies would be smart to immediately inventory their upcoming cash tax payments for evaluation.

Key questions to now consider include:

• Do I have a full global inventory of upcoming cash tax payments?
• Have there been legal or administrative changes that impact my obligation for payments?

Corporate tax residency

Emergency measures introduced by Governments and altered travel plans may mean that company directors and strategic thinkers may be unable to travel for a prolonged period. That may mean that company board meetings are unable to go ahead with directors being physically present. Where directors or other decision-makers are not in the jurisdiction of tax residency of an entity, this could draw into question the tax residency of the company.

Key questions to now consider include:

• Will ongoing board meetings shift the management and control of a company?
• Could other strategic decisions made separately from home shift the management and control of a company?
• Have Governments or taxing authorities released helpful precedent to reduce this as a risk area?
• Can amendments be made to board members, procedure or attendees to reduce residence risk?

Permanent Establishment (PE)

In addition to company directors, many businesses will now have large numbers of workers that do not attend work in their usual office location. This may not create additional tax risk if workers are performing duties within the same taxing jurisdiction or state. However, to the extent that workers are performing their duties from other taxing jurisdictions or states, there is an inherent risk that a company could create a new taxable presence due to those activities.

Key questions to now consider include:

• How can you manage and control employee home-working, with a careful understanding of the location of workers?
• Where there is a need for a worker to be overseas, have you considered their role and responsibilities to determine the level of risk they may create (for example, whether the activities could be deemed preparatory or auxiliary in nature)?
• Have Governments or taxing authorities released helpful precedent to reduce this as a risk area?
• Have you created protocol to manage worker requests?

PE questions may extend further than home working, for example delays to construction or installation projects could create a fixed place of business or installation PE. Adjusted areas of doing business will need to be considered in the round.

Treasury tax matters

As an international business reacts to the impact of the disruption, there is likely to be a greater need for cash in certain jurisdictions. Methods to repatriate excess cash or pay intercompany balances may be considered, as well as addressing external cash needs.

Key questions to now consider include:

• Can tax instalments be reduced or eliminated if local legislation permits a rebasing of instalments based on projected income or loss
• Where is there a need for cash, and what strategies could be applied to make best use of group funds?
• If there are distributable reserves available from an accounting perspective, can cash be repatriated? Consideration of participation exemptions and dividend withholding taxes would be required.
• If the terms of intercompany agreements allow for altered payments, have you considered their nature?
• What are the tax implications of altered lender relationships / security arrangements and new loans?
• How are exposures to interest rate and foreign exchange changes being managed?
• Has an altered treasury need changed key calculations relating to thin capitalisation, or other interest deduction restrictions?

If any of these areas have raised concerns, or you would like to discuss in more detail for your business, please contact your local Grant Thornton member firm or one of the contacts listed below: