Article written by:
Ellen Bloch, CPA
Director, International Tax & Business Advisory Services
We don’t have to tell you that COVID-19 is presenting significant challenges to people and organizations around the globe – and these disruptions continue to evolve. For multinational companies, such disruptions will impact cash flow and earnings in 2020, but will likely have longer-lasting effects on global value chain; ability to generate revenue in certain markets hit more heavily by the outbreak; and value of key tangible and intangible assets.
In the short term, multinational companies are facing several potentially significant tax challenges to which will require immediate attention. Taxes that require regular payments will impact the liquidity of businesses and households very quickly. Providing tax relief to the people and companies that are most affected, until the emergency abates, is urgently needed.
Many countries around the world are implementing emergency tax breaks to support their economies in response to COVID-19. Similar to those we have seen rolled out in the US, such global measures being implemented include:
- extended 2019 tax filing and payment deadlines,
- delayed VAT remittances to give businesses a cash flow boost, or
- reductions in indirect tax rates to help the worst affected industries, such as consumer, tourism/hospitality, or in respect of medical supplies.
Companies with foreign operations should seek to understand the types of tax relief available in each of their jurisdictions.
For many multinational companies, the economic disruptions from COVID-19 will also create challenges in the booking of profits and losses among related parties. Transfer pricing rules followed by multinational companies require that assets bought and sold between related parties be valued in the same way unrelated parties would—acting at arm’s length, based on examples of comparable transactions. In many value chains, more profits are commonly allocated to headquarters companies – entities that take on more risks, perform critical functions, make investments, or develop or hold intellectual property.
With economies around the world now paralyzed, companies may see their related parties experiencing losses instead. The question arises whether those losses should go to the company headquarters or be spread across the multinational group, which could increase the likelihood of disputes with tax authorities.
It’s too early for tax administrations to provide guidance about how companies should treat coronavirus-related losses when they file their 2020 returns, as governments first turn their attention to immediate issues. In the meantime, companies that incur losses now in countries where they previously had profits should take steps to reduce the risk of tax authorities challenging their transfer pricing in a few years, such as:
- reviewing intercompany agreements,
- updating financial forecasts, and
- revising intercompany pricing policies.
GBQ’s team is here to help assist our clients in navigating through these challenging times. Please contact a member of our team for further assistance or to discuss specific questions.