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 are able to 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. For example, 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 all 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:
Direct Tax – Identify and monitor all Covid-19 incentives, filing extensions and payment holidays. Revisit forecasting for corporation 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. Review any tax attributes such as deferred tax assets and ensure tax reliefs are maximized.
Indirect Tax – Keep a full picture of what 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 VAT impacts in the supply chain, and ensure VAT documentation is robust.
Operational Taxes – 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. Raise the issue immediately with the relevant Tax Authority if you think you may struggle with any deadlines. EU DAC6 reporting requirements 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, so planning will be critical.
Transfer Pricing – 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?
Employment Tax – This has become a really 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. 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.
In these extraordinary times, tax teams are busier than ever and working flat out to support the wider business. In such circumstances, simply keeping on top of and digesting new developments is the overriding priority. To help do that, KPMG is compiling a summary of all tax-related announcements from around the world, which we are updating daily.
The list gets longer each day, but KPMG teams are available to discuss any item and what it might mean for your business.