Frédéric Barat, Partner, France
The economic downturn resulting from the Covid-19 pandemic is likely to negatively impact the profitability of many MNEs, making it very difficult for tax authorities to compare 2020 taxable basis to previous years. As many MNEs structure their transfer pricing policies based on the taxable basis of their subsidiaries around the globe, the allocation of the 2020 tax losses through transfer pricing policies could become the foundation of their tax strategy for the coming years.
For example, allocating any 2020 losses through transfer pricing would impact on future effective tax rates, have consequences on cash tax payments, and allow the recognition (or not) of deferred tax assets. Therefore, MNEs should define an appropriate and efficient transfer pricing strategy in 2020.
Throughout 2020, MNEs will need to take the following immediate action:
- Avoid future double taxation resulting from TP audits of the year 2020 by adapting TP policies to share the loss.
- Adjust the remunerations of manufacturers, distributors and service providers with a low risk profile.
- Allocate restructuring costs.
- Price new and existing supply chains as well as any intra group financing.
- Set an appropriate renumeration for the licencing of any IP.
- Re-think how to construct and use comparable studies.
- Assess and perhaps renegotiate the position of any APAs (advanced pricing agreements).
MNEs may also want to revise their TP policy in 2020:
- Rectify any outstanding inconsistencies in their TP policies, e.g. deploy TP policies consistently around the globe.
- Review any inconsistent profit levels in certain countries.
- Reconsider and perhaps update their TP policies.
Corporate Income Tax
Marcus von Goldacker, Partner, Germany
Many industry sectors have been badly impacted by Covid-19, resulting in the forecast of negative taxable income of many MNEs and subsequent widespread tax losses. These expected losses enable MNEs to release built-in gains and thus increase their taxable income without making immediate cash payments, because the losses incurred shelter the
increase of taxable income (although please note the utilisation of tax loss carryforwards might be restricted by specific country rules).
MNEs should consider taking the following action to ensure their tax policies and structure is appropriate and aligned with their future growth plans:
- Tax risk management
- Review the tax positions taken in the past to see if any need amending.
- This also applies to any uncertain tax positions (UTPs) to see if they can be resolved.
- Review of the group structure
- Consider any group reorganisation which could result in the increase of taxable income and thus immediate cash tax payments.
- Review the group structure to detect and address any known/unknown tax inefficiencies, including any (withholding) tax leakage.
- If any M&A activity is ongoing, determine whether an asset or share purchase remains the appropriate deal structure or if it needs to be re-considered due to changes in the value and tax positions of the parties as a result of Covid-19.
- Review of the group financing
- The pandemic has led to a decrease in profits and therefore the EBITDA (earnings before interest, tax, depreciation and amortization) of MNEs. As several thin-capitalization and interest restriction measures are based on the tax EBITDA, MNEs may face the issue that the interest deduction on shareholder loans (also potentially bank loans, depending on the jurisdiction) will be disallowed, unless the rules are relaxed (e.g. in the US).
- MNEs should review their financing structure to investigate whether there is any risk of interest disallowance. If so, the finance structure could be re-developed to ensure the tax deduction of the interest disallowed in future years or the full interest deductibility in the respective years themselves.
VAT and Indirect Tax
Birgit Juergensmann, Partner, Germany
MNEs typically move through three phases in their reaction to Covid-19: survival, settling, and future planning. Within each, there are a number of important considerations with regards to VAT and indirect taxes.
- Phase 1: Survival
- Focused on cash flow and liquidity, key actions include applying for tax deferrals, reimbursement of VAT prepayments and postponing of enforcement measures including underlying data for substantiating the applications to achieve a positive assessment of the tax authorities.
- In some countries, there is also the opportunity to make use of additional measures provided by case law, e.g. ECJ and/or national High Courts. As an outcome, the cash situation of businesses is closely connected with the payments received from their customers, a great opportunity instead of postponing the pending payments into the future.
- Phase 2: Settling
- In this phase, the focus turns to resolving any indirect tax issues and establishing a risk management concept.
- Tax authorities are currently extremely cooperative in assisting companies with their tax matters, however pressures arising from the significant awaited tax losses of governments mean this cannot last. The number of tax audits will increase, periods will be shortened, and application of rules during tax audits will become stricter. It is key to get your strategy in place and any cases closed. This also provides an additional opportunity – Tax Risk Management Concepts safeguard the position of the management in terms of being compliant with the regulations.
- Phase 3: Future Planning
- The pandemic will have had an impact on the supply chains of MNEs. Where a supply chain is amended, VAT and customs tax obligations will change.
- MNEs should review their business model and supply chains, make use of simplification rules and reduce administrative burdens resulting from VAT registrations and customs clearance which would ultimately lead to cost savings.
- In addition, Brexit has and will continue to lead to significant changes in the current European VAT system. MNEs should be aware of the impact of the Quick Fixes (January 2020), E-Commerce-Package (January 2021) and final VAT system (January 2022), and make any necessary amendments to their business plan and supply chain to be prepared for the future.
Alexander Rasink, Partner, Netherlands
Many MNEs will be forced to re-evaluate their worldwide staffing due to the current and future restrictions on international travel as a result of Covid-19. Businesses will need to adapt to working with employees from a distance, which impacts hiring processes, employment contracts and employee benefits. These changes may become the “new normal”, which then impacts existing processes on meeting tax and social security obligations for employees.
Global mobility planning is particularly challenging in the current exceptional situation. It requires a lot of flexibility from both employers and employees to properly manage tax and social security compliance, immigration and employee benefits, knowing that these obligations vary for every new assignment, for every employee, for every country.
MNEs can stay ahead by addressing the following topics:
- Tax risk management
- Tax authorities have the power to review past tax years, which could expose businesses to compliance risks, particularly in cross-border work situations which have not been set up or monitored properly.
- While employees are currently limited in travel, take the time to review existing and past assignments for any potential compliance risks.
- Review global compliance structure
- Depending on the type of business, we anticipate work location to become less relevant and distance-working to become normal.
- This will decrease traditional long-term assignments and frequent business travel and increase direct hiring of staff in the desired location.
- Any changes in travel patterns impact the compliance risks for a business.
- MNEs will need to review if they are properly set-up to meet tax registration and withholding in new locations, how salary split situations are affected and to look for opportunity to simplify complex setups.
- Tracking and planning ahead
- Employment-related tax obligations are all connected to a place of residency and place of work. It is crucial for MNEs to understand their obligations in the locations and movements of employees.
- It is important to track immigration issues, whether travel is aligned with business requirements, and any expense and travel-related policies.
- When MNEs have a better understanding of the benefit and necessity of travel, they can adapt their policies accordingly.
By reviewing their tax obligations and strategy throughout the Covid-19 pandemic, MNEs can help position their business to be in the best possible position to recover quickly after the crisis.