As supply chains are strained, it’s critical to understand available tax incentives

30 March 2020

As of last week, over a fifth of the world’s population were on lockdown in a global effort to control COVID-19. That number is poised to rise, with New Zealand imposing a nationwide lockdown in the meantime and other countries perhaps ready to follow.

These widespread, evolving preventative measures have massively disrupted the global economy. Companies large and small now face the possibility of bankruptcy or permanent closure.

Supply chain disruption

One of the primary challenges for multinational groups has been the disruption to their supply chains. Supply chain problems were initially limited to multinational groups with manufacturing, R&D and other operations in China, the world’s foremost manufacturer and the origin of the outbreak.

Now, less than four months after the outbreak was first reported in China, no one needs to be told that the coronavirus and related supply-chain disruption have spread. From Japan to Italy and beyond, many manufacturers and other organizations that are vital links in our global supply chains have temporarily ground to a halt.

A recent article in the Financial Times illustrates supply chain complexities by detailing the coronavirus’ effects on the international supply chain that supports pasta eaten in the UK. It explains that UK pasta is made from Canadian wheat that is shipped to and processed in Italy, trucked through EU countries and ferried to the UK’s distribution centres. Any coronavirus-related disruption along these links — such as closed borders for truckers or worker lockdowns in Italy — puts the entire chain in jeopardy, meaning that less pasta ends up on supermarket shelves.

For the moment, the links in the UK’s pasta supply chain are holding. Other industries, such as the auto industry, have been hit much harder. In China, for example, auto sales fell 80 percent in February amid factory shutdowns. There are other sobering examples, such as shortages in ventilators and protective masks due to skyrocketing demand and the importance of hard-hit China-based manufacturers, which are a vital part of medical-supply and medical-device supply chains.

Tax relief as part of widespread governmental support

In the face of threatened and in some cases temporarily broken supply chains, governments across the globe are taking unprecedented action to help their industries and citizens. Efforts include fiscal stimulus through reduced lending rates for businesses, increased unemployment benefits for laid-off workers and more.

Significantly, many authorities are also offering tax concessions, incentives and rebates to alleviate corporate and private burdens. For example, some countries have extended corporate income tax filing deadlines and effective payment dates for corporate taxpayers. At the time of writing, these countries include (but aren’t limited to) China, France, Germany, the Netherlands, Spain, Norway, Switzerland, Sweden and the U.S. Some of these jurisdictions and others have also introduced temporary indirect tax (VAT/GST) holidays.

To give just one more example: The EU has implemented temporary legislation permitting EU national governments to circumvent state aid rules and provide direct grants, selective tax advantages and advance payments of up to 800,000 euros to companies so they can address their urgent liquidity needs.

Steps to take now to help protect your organization

The above examples speak to how rapidly the coronavirus is spreading and to how quickly — and sometimes inconsistently — governments are responding. Keeping up to date with legislative changes in each country of operation is difficult for multinational groups under normal circumstances. During the ongoing pandemic, that challenge is even greater because the changes are so rapid.

But given supply-chain disruptions and other challenges, keeping up with legislative change has never been more important. It’s especially critical to keep apprised of tax-related changes, which for many companies can spell the difference between solvency and bankruptcy.

In order to help your multinational organization stay current with legislative changes, and generally protect your organization during this volatile time, we recommend taking the following steps.

  • Put together a centralised team to determine what tax reliefs, incentives and benefits are available in the main jurisdictions where your group operates. Depending on the size of your organization and other factors, you’ll want to include members of your tax and finance teams, as well as legal and HR.
  • Communicate with your group companies. Your centralized team should keep offices in all jurisdictions informed about any tax-legislative changes, including all new reliefs and rebates, and provide assistance as necessary to obtain them.
  • Update policies and processes. Your central team should ensure that internal policies and processes are continually updated to reflect any changes. For example, your calendars should be updated to account for any extensions to corporate tax filing and payment deadlines.
  • Review existing intercompany agreements. To ensure compliance with transfer-pricing regulations, your groups should review their intercompany agreements and consider whether they allow adjustments to income between group companies because of business disruption.
  • Keep an ongoing record of how your businesses have been disrupted. Documenting your organization’s challenges — including the precise ways in which your organization has been forced to change as a result of the pandemic — can be used to support transfer pricing documentation for fiscal year-end 2020. (This documentation will likely be prepared in future years.)
  • Review and document where your employees are located. As travel restrictions are implemented and in some cases relaxed, your groups should understand where their respective employees and directors are performing their duties.
    • Groups should understand if any travel restrictions affect the personal tax liabilities of their workers (which may have to be borne by employers, particularly if a worker is unable to leave a country).
    • Groups should also keep track of where their employees are located to understand where key functions are being provided and risks are being controlled. If there are significant changes, groups may determine they need to update their functional analyses and tax operating models.

By taking the above steps, your organization’s tax and finance departments can help lessen the impact of reduced cash flow by minimising tax-related obligations until global supply chains get back to normal.

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Sandeep Samra, Director, International Tax Advisory, contributed to this post.