Adapted from an article originally published on kpmg.com by Robin Walduck, Head of International Tax & Treasury, KPMG in the UK
It’s a rapidly moving picture in which new relief and support measures for businesses including banks and financial institutions are being announced by governments and authorities almost every day in countries around the world. One of the most important things for any bank is to keep pace with these developments and ensure they can factor the likely effects into their financial models and forecasts.
Taxation is an important part of this. As a major component of a bank’s financial picture, maintaining an accurate view of tax obligations globally and by country is critically important to understanding, and anticipating, the present and future cash flow position. With new extensions, deferrals and incentives relating to tax being announced all the time, it is vital for banks to keep fully abreast of the situation.
The first priority for bank tax functions should therefore be to ensure they have the mechanisms in place to monitor and identify the key changes being announced in the countries they operate in. Once identified, these changes need to be evaluated, modelled and promptly communicated, whether through the finance function, or to the business.
The crisis is a time for tax teams to demonstrate their strategic value to the bank, by being able to quickly apply and model the effects of any changes on the organization’s financial forecasts and contribute to strategic decision making. Some examples such as:
- What is the impact of any changes on tax components in the financial accounts?
- What would the tax effect be of restructuring or even consolidating or closing operations in a certain country?
- With near-zero interest rates in many key markets, what is the impact on funding profiles and the pricing of intra-group transactions?
Tax teams should be looking to throw rapid light on key questions such as these.
Providing clear guidance internally is one key aspect – but another is communicating with external stakeholders. Clearly, having open lines of communication with the relevant tax authorities is essential, so that the tax team can seek clarification if they have queries and maintain a regular dialogue. At times such as these, it is also important to think about ongoing audits or enquiries that are in progress with the tax authorities. These will obviously be important in themselves – but now that COVID-19 has become the burning issue, are the timescales for existing enquiries appropriate?
Is there merit in discussing an extension?
This is essentially a question of prioritization – which should be top of mind for all tax leaders right now.
- What should your team be focusing on?
- Which issues are mandatory, and which ones are discretionary?
- How can you best allocate resources to ensure the most fundamental tasks are being prioritized?
Turning to specific areas of tax, there are many moving parts to consider. There is not room here to give exhaustive detail, but some of the key issues include:
- Identify and monitor all COVID-19 incentives, filing extensions and payment deferrals (whether automatic or election required)
- Revisit forecasting for corporate income tax payment estimates
- Assess the residency position of legal entities and whether any permanent establishment risk has materialized. Some jurisdictions have published helpful (and sympathetic) updates on this – In Singapore, the Inland Revenue Authority of Singapore (“IRAS”) has published guidance that any unplanned presence in Singapore solely arising from COVID-19 travel disruptions would not by itself result in a creation of a permanent establishment in Singapore for the foreign company, subject to the foreign company not having a Singapore permanent establishment in the prior year and there being no other changes to the business model/operations, etc.
- Ensure that proper documentation is maintained to support any “no permanent establishment” claims
- Review any tax attributes such as deferred tax assets and ensure tax reliefs (e.g. accelerated capital allowance and tax deduction) are maximized
- Keep a full picture of what GST/VAT submission extensions or payment deferrals are available in countries and consider whether the bank should utilize these
- Assess the extent to which the bank’s cashflow could be improved through such things as bad debt relief claims and the timing of invoicing
- Consider GST/VAT impacts in the supply chain and ensure GST/VAT documentation is robust
The crisis coincides with the filing period for many of the key Automatic Exchange of Information (AEOI) requirements such as FATCA and CRS. However, some countries have announced extensions – so make sure you have captured all of these. In Singapore, the submission deadline to the IRAS is 31 May 2020 (no extension announced currently). Do raise the issue immediately with the relevant Tax Authority if you think you may struggle with any deadlines. For local banks that have cross-border arrangements with EU entities, you should note that EU DAC6 reporting requirements are still expected to continue – meaning that banks will have to file reports from 1 July onwards, including a ‘look-back review’ that goes back to 25 June 2018. There could be significant work involved with this (e.g. ensure consistency with other filings such as Country-by-Country Reporting), so planning will be critical.
- Are there adjustments to be made from already moving transfer pricing charges down in anticipation of lower group profits or losses?
- Consider the impact of the lower interest rate environment on intra group financing and cash pooling/FTP policies
- Can any intra group payments be delayed or adjusted?
- Review any Advance Pricing Agreements in place with tax authorities – do the critical assumptions in them hold, or do they need to be revisited?
This has become a significant area, given that some bank staff on assignments or secondments may be trapped in their non-native country, while others may have come back earlier than expected. In Singapore, the IRAS has clarified that employees (including Singapore citizens/permanent residents and non-resident foreigners) working remotely in Singapore for an overseas employer due to COVID-19 may be treated as not exercising employment in Singapore, subject to certain conditions. There may also be additional benefits-in-kind being provided to employees at this time. Do consider the payroll, income tax and social security implications of these and follow changes in legislation – filing/payment deadlines; social security/employment tax holidays and exemptions. There are also many tax considerations for part-paid leave, unpaid leave, severance deals and any concessionary initiatives such as job retention schemes (e.g. Jobs Support Scheme in Singapore).
In these extraordinary times, tax teams are busier than ever and working flat out to support the wider business. In such circumstances, keeping on top of and digesting new developments is the overriding priority. KPMG has compiled a summary of all tax-related announcements from around the world, which we are updating daily.