As businesses work to respond to the impacts and uncertainties of the novel COVID-19, it’s important to stay on top of the measures that governments are taking in regards to tax deadlines and reliefs.
Tax is an important contributing factor when considering business liquidity and profitability. During a crisis or unexpected economic downturn, it is important to understand how potential disruptions, such as abnormal losses, additional costs to protect employee safety and welfare, cash flow changes, and unexpected personnel shifts could affect a business’ overall tax position.
Effective and efficient tax management during periods of financial stress can help alleviate some of the burden. Companies can derive significant benefits through effective tax planning and varying the timing of their tax payments. For organizations operating across a number of jurisdictions, more vigorous management of tax can provide leverage for improved cash management and tax efficiencies.
A tax management focus should be a part of your overall cash management strategy. This can help to offset falling profits and shrinking margins. Areas to consider include non-cash employee benefits, bad debt write-offs, goods and services tax or harmonized sales tax (GST/HST), Quebec sales tax and provincial sales taxes, trade and customs, prompt filing of tax returns to bring forward tax refunds and early crystallization of reductions. Businesses should review the tax efficiency of operations, making use of any opportunities to defer or reduce payment of tax. Additionally, they should ensure any potential refunds are pursued. Businesses should also consider the customs duty impact if alternate suppliers need to be used.
Balance sheet strategies can be adopted to reinforce an entity’s tax position. Such approaches may include managing the effective tax rate and regulatory capital requirements. Consider the role of deferred tax assets (DTAs) on your tax positions. Consider also converting DTAs whose recognition is/may be limited to DTAs that are more robust and accelerating the crystallization of deferred tax liabilities (DTLs) in the appropriate circumstances.
Some additional risks and opportunities may arise in some jurisdictions. You should review your corporate structure considering the possible impact of thin capitalization, change of ownership, mind and management and M&A restructuring issues, transfer pricing (and ensuring no loss of deductions globally) as well as any specialized industry issues that might apply. Managing these risks and opportunities may deliver savings in the medium term.
Examining the tax implications of asset sale strategies will result in organizations more carefully managing their tax position. This may include writing down obsolete inventory and investments and the crystalization of unrealized tax positions (e.g. forex exposures), and undertaking a more detailed analysis of year- end provisions and accruals. In-house loss utilization plans and loss refreshing techniques can help an organization improve its cash flow.
Reassess your cross-border financing activities to ensure that the debt/equity mix is appropriate for the current economic times. Also, ensure that the rate imposed on the debt, guarantee fees and management fees are appropriate and that withholding tax obligations are complied with to avoid penalties and/or punitive late payment interest.
Organizations should consider what government support they are eligible for in turbulent times. For example, grants and tax incentives for research and development activities can offer significant tax savings. Government funded collaboration also could be of benefit in terms of speed to market and financial savings. Businesses should also understand and leverage special tax exemptions and deductions provided by governments during a time of crisis that can potentially improve their cash position. This also can include donation tax credits for companies who make donations to qualified public disaster relief efforts.
Apart from having employees work remotely during a crisis, a secondary consideration may be to relocate employees. Cross-border relocations may have implications for personal taxes, employer taxes and corporate tax. Employers may also be faced with the difficult decision of placing employees on unpaid or part-paid leave or deferring employment offers to save costs. In extreme cases, employers may have to defer payment of wages and other remuneration or to terminate workers. All of these actions have potential tax implications (including personal and corporate tax) and implications for employer withholding and reporting obligations.
Note that due to the fast pace of new developments, this KPMG Global page may not contain the latest information from each country immediately, including Canada.