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With the spread of the COVID-19, businesses are reviewing and implementing their business continuity plans. In this article we take a look at some of the immediate employee and wider tax related issues that are emerging for businesses coping with the effects of COVID-19.

Business continuance – employee safety

The safety of your staff and their families is the first priority for any employer. Once that is secured, thoughts need to turn to managing costs to protect the business and preserve jobs through challenging economic times ahead.

These actions impact staff and potentially create a complex web of compliance issues. Businesses will need the support of their human resources (HR) and finance teams to:

  • Identify where they are, and where they need to be to ensure safety and enable business continuity. Make sure you have clear records of employee location. 
  • Implement measures to manage future costs for the long-term health of the business and job security.
  • Address the implications for the business and the individuals involved across:
    • Personal tax, employer reporting and withholding obligations,
    • Immigration,
    • Employment law, 
    • Corporate tax matters, and 
    • Indirect tax matters.

Let’s start with some key questions that Boards and Senior Management should be asking themselves and their teams.

Start the discussion – the big picture

Big picture questions for employers to ask themselves include:

  • Where are my employees? Are they safe?
  • Who is critical to business continuance? Can they operate effectively from their current location?
  • Do we need an alternative work location? Do staff want to relocate?
  • Do we need to let staff go and/or change working/pay arrangements?
  • Do we have the necessary remote working infrastructure, policies and mechanisms to be compliant?
  • What actions do we need to take to protect the business and cashflows?
  • What issues arise from an indirect tax perspective? 
  • What will be the impact on businesses’ supply chains and operations?

In the below table, we take a look, in particular, at employees who carry out their duties internationally. We summarise some of the more in-depth issues to consider in managing cross-border workers and realising any potential changes to employment or remuneration terms.

 

Managing cross-border workers Changes to employment or remuneration terms

Immigration

Does the person have the right to work in the location?

Do they have / need the necessary work permits?

Employment law

Are the changes proposed legally permitted? What are the employment law implications, and in which jurisdiction?

Do you need to consult, agree with employees? If so, what should be documented?

Personal and employer taxes

Will the individual be liable to personal tax in another location? For example, will an individual employed by a company in Northern Ireland and working from home in the Republic of Ireland still qualify for cross-border workers relief?

Does the employer have registration, reporting or withholding obligations?

Could social security taxes apply?

Tax / Immigration

How is statutory sick pay treated for tax purposes?

How will any benefits or one-off payments be taxed and in which location/s?

In the event of workforce reduction, are termination payments, or payments to incentivise part-time work, taxable / deductible?

Is any deferral of employment payment effective for tax?

Do the changes impact on right to work, (e.g. minimum income requirements for work permits, or notifying change of remuneration)

Corporate tax matters

Tax residence of companies

The corporate income tax residence position of a company can be determined by the location where directors or other key decision takers make decisions related to the central and effective management and control of the company.

If directors of companies cannot travel to attend board of directors’ meetings in person and participate remotely in meetings at which important decisions are taken, could the location of this decision making undermine the corporate tax residence position of the company?

If non-attendance in person is driven by exceptional circumstances, it may not be evidence of the routine decision-making process of a company. Nonetheless, you should consider how to manage important meetings like board of directors’ meetings where directors cannot attend in person. Consider documenting the exceptional nature of remote participation in such meetings where this occurs outside the usual pattern of exercise of management and control.

Ask yourself if, in some instances of meetings due to occur in Ireland, could directors outside of Ireland refrain from participating in the meeting? Could routine (non-urgent) board meetings be postponed? 

Ensure that the “exceptional” doesn’t become the accepted “norm” in the future. The corporate governance of companies should return to routine patterns as soon as possible.

Finally, consider if your company has given any representations in key documents (e.g. loans, licence agreement, leases, etc.) around the tax residence position of the company (e.g. are there representations that the company holds all board meetings in Ireland in key agreements)? 

Triggering a taxable presence

If an individual finds that he or she spends longer than intended in a jurisdiction, e.g. due to travel restrictions resulting from COVID-19 measures, could the individual create a sufficient presence to trigger a taxable presence e.g. a branch or agency under domestic law or a permanent establishment under a double tax treaty? An obligation to register for corporate income tax purposes under domestic law can also mean obligations to register for payroll taxes or VAT/local sales taxes. This could apply to the example above of workers employed by a company in Northern Ireland having to work from home for a prolonged period in the Republic of Ireland or vice versa. 

The threshold presence required to establish a permanent establishment in a jurisdiction under a tax treaty usually refers to an “habitual” presence in a jurisdiction. Where an individual’s presence and business activities carried on in a jurisdiction arise due to exceptional circumstances, this might be said not to be habitual in character.

But local (or state/provincial) tax registration thresholds may be lower than those applicable under a tax treaty and may trigger corporate income tax registration requirements.

In addition, remember that not all income taxes are covered by the applicable double tax treaty, (e.g. state income taxes in the United States of America). Triggering a local taxable presence in a state or local territory can lead to the need to review and consider how profits/income/capital is taxed by the local tax authorities. 

Significant people functions – exercise of decision making

The location of key decision makers controlling a business and its risks is important to a group’s transfer pricing analysis. Consider whether a change in location of key decision makers or changed patterns of commuting to business locations by key decision makers could affect the transfer pricing analysis in Ireland or in counterparty jurisdictions - including the location of key functions that drive value creation in the supply chain.

If the COVID-19 crisis prompts a longer-term revision of where key business decision makers exercise their duties, consider if this could lead to the requirement to review the transfer pricing policies of the business and the basis for allocation of group profits between group entities.

Significant people functions – exercise of decision making

The location of key decision makers controlling a business and its risks is important to a group’s transfer pricing analysis. Consider whether a change in location of key decision makers or changed patterns of commuting to business locations by key decision makers could affect the transfer pricing analysis in Ireland or in counterparty jurisdictions - including the location of key functions that drive value creation in the supply chain.

If the COVID-19 crisis prompts a longer-term revision of where key business decision makers exercise their duties, consider if this could lead to the requirement to review the transfer pricing policies of the business and the basis for allocation of group profits between group entities.

Other issues – the longer term

Depending on the duration and the extent of the impact of COVID-19 a number of other corporate tax issues could become relevant to businesses in the longer term.  For example, if businesses have to refinance third party or intragroup loans as a result of cash flow issues a range of considerations could become relevant including transfer pricing and the deductibility of interest. 

Businesses may also wish to evaluate the resilience of their business model.  For some businesses that operate internationally in an increasingly globalised world, they may wish to consider whether supply chains and working arrangements for staff can be made more flexible and more robust to deal with similar events in the future should thy arise – helping to ensure the health of both staff and business.

Challenges from an indirect tax perspective

Indirect tax issues arising from the spread of COVID-19 are inextricably linked to cashflows, and actions that businesses take now can have a meaningful impact. The below checklist sets out matters to consider when assessing the challenges your business may face in relation to VAT (or GST or similar sales taxes in other jurisdictions), customs and excise duties, and other indirect taxes.

  • Many jurisdictions are granting filing and payment extensions, acceleration of VAT refunds, and even introducing specific VAT relief measures for temporary periods. Businesses should keep up to date with these continually evolving announcements. See below link to view insights on COVID-19 tax reliefs and other measures gathered from local insights from KPMG member firms around the world;
  • Consider if it is necessary for VAT to be accounted for in relation to retained deposits, cancellation charges, ‘no-shows’ and other similar events – these outcomes can be contentious in many jurisdictions. Where refunds are given to customers, it should generally be possible to reclaim any VAT previously accounted for, but there may be procedural requirements to secure such VAT reclaims (e.g. issue of valid VAT credit notes);
  • Consider whether VAT needs to be accounted for in relation to the payment of penalties or liquidated damages;
  • Address the impact of VAT on contractual variations, changes to payment terms or orders, terminations, changes to supply chains for products, and other similar events;
  • Consider the impact of VAT on donations of goods or services, and the scrapping or expiration of stock;
  • Consider whether VAT bad debt relief is available so as to enable an adjustment to any VAT/GST previously accounted for;
  • Consider potential VAT cash flow saving measures, such as monitoring the tax point for transactions (which is often based on the invoice issue date) or whether there is scope to move to the cash-receipts basis of accounting of VAT;
  • Assess whether your business is able to comply with VAT filing obligations, especially where your workforce is affected by remote working practices;
  • Consider robustness of customs processes to ensure import and/or export declarations can continue to be filed in a timely manner;
  • Consider scope to avail of customs deferment or other customs and excise reliefs in order to postpone or minimise payment of taxes and duties on imports;
  • Where deferment accounts or other reliefs are currently in place, review the level of guarantee provided in case this needs to be increased or decreased for significant changes in the volume of imported or excisable products.

Tax authority measures

As countries put in place measures which balance the requirement to protect public health and sustain the economy, many have introduced tax measures such as extended compliance deadlines or reliefs from interest, penalties in recognition of the challenges that businesses can face in meeting their tax compliance deadlines in crisis conditions.

Where the impact of the spread of the virus is particularly acute on your business, early engagement where possible, with the relevant taxing authorities is generally the best means of managing tax compliance obligations and continuing the business on a sustainable basis.

If your business is encountering any of the issues discussed in this article or you wish to discuss the impact of COVID-19 on any aspect of your business, please do not hesitate to get in touch with your KPMG team.

Further information