Governments put priority on administrative tax relief in light of challenging times
The past few weeks have seen the world’s governments mobilize to contain both the spread of COVID-19 and the economic havoc emerging in its wake. Among the measures announced to help individuals and businesses deal with immediate liquidity needs, many jurisdictions are looking to their tax systems to deliver benefits and relief.
With many governments in firefighting mode, current measures are broad-based and designed for quick delivery. Over time, I expect we’ll see more sophisticated, better targeted responses to sustain people and businesses until recovery takes hold. It’s important for tax teams to monitor new economic relief and stimulus measures as they come to light and work with their peers in treasury and legal to help their organizations realize the intended benefits.
In this blog, I highlight some of the most important direct tax-related measures announced to date. For further details, please check out the jurisdictional tracker of tax measures being taken by governments that has been developed in a joint effort by my team at the KPMG EU Tax Centre and our colleagues all around the world. We continue to update, add to and enhance this on a daily basis.
Policy measures for easing income tax burdens
The current period is a busy time of year for direct tax filings in many jurisdictions, so governments have acted to remove unnecessary pressure on cash flows by addressing fast-approaching tax deadlines. Several governments in Europe have deferred advance tax payments or adjusted amounts based on prior-year income to reflect current conditions. Most of them have relaxed their income tax filing and payment deadlines. Across the globe, tax administrations also intend to waive penalties and interest while the crisis endures. The Organisation for Economic Co-operation (OECD) recommended these and other emergency tax policy responses in a special release issued on 20 March 2020.
Austria, France and Italy are examples of countries that have formally announced the suspension of tax audit activity. In practice, I expect most tax authorities will put their direct tax audits on hold, given the difficulties of doing this work with current social-distancing restrictions in place.
To date, only a few countries in the Asia Pacific region have introduced broad-based reductions to the direct tax rates. Indonesia has decreased its income tax rate, and Thailand has temporarily reduced corporate income tax withholdings on certain payments.
Norway and Poland have announced that they will allow taxpayers to carryback losses to the previous tax years and similar measures are being considered in the Czech Republic. These are welcome measures for companies that posted profits in 2018 and/or 2019 and are abruptly suffering losses in the current period and may have difficulty paying high tax bills for earlier periods. China has increased its loss carryforward period to 8 years (from 5 years). These income-smoothing measures are especially welcome, and I hope we will see more governments adopt them over time.
One of the questions that I am most frequently asked is whether any formal guidance on permanent establishment (PE) and central management and control issues is available. Around the world, many employees and directors are stuck in a country other than that where they normally work or hold board meetings. What this means for tax and economic substance rules is the subject of speculation.
Friday, 3 April 2020 came with a very nice surprise from the OECD Secretariat that published an analysis of the effect of the COVID-19 crisis on tax treaties. More details on this paper in a future post, but for now I wanted to mention that the OECD helpfully indicated that it is “unlikely that the COVID-19 situation will create any changes to an entity’s residence status under a tax treaty” where a change in location of the chief executive officers and other senior executives is due to the COVID-19 crisis. 1
We can only hope that tax authorities will be understanding when assessing PE and economic substance issues in the future, but more guidance from individual countries would certainly be very welcome.
The EU’s temporary framework for state aid
The European Union’s (EU) institutions have worked with remarkable speed to develop an EU-wide economic response to the current outbreak, helped in part by their experience managing the 2008 financial crisis. On 19 March 2020, the European Commission adopted a temporary framework for state aid measures to support the economy, using the full flexibility of EU State aid rules, which otherwise prohibit member states from providing anti-competitive financial assistance to their citizens and businesses.
Among the measures that member states may adopt under the framework it’s worth mentioning the possibility to provide direct grants, selective tax advantages and advance payments, up to 800,000 euros (EUR) to a company to address urgent liquidity needs.
A little over a week after its adoption, on 3 April 2020, the temporary framework was extended with an additional five measures, including targeted support in the form of:
- deferral of tax payments.
- suspensions of employers' social security contributions, and
- wage subsidies for employees.
According to the European Commission, this set of measures is intended to help avoid lay-offs due to the coronavirus crisis in specific regions or sectors that are hit hardest by the outbreak. 2
Member states must notify any schemes adopted under the temporary framework to the European Commission and gain its approval, which a number of countries have already done (by 4 April 2020, over 30 schemes had been notified and approved).
Impact on tax policies in progress
As you can see, things are moving quickly on the tax policy front both in Europe and around the world. As tax leaders work to stay on top of these fast-moving developments, it’s important to remember other significant tax changes that were in the works before the COVID-19 outbreak started. How the current crisis will effect existing tax policy work remains to be seen.
For example, the mandatory disclosure rules under the EU Directive on Administrative Cooperation in the field of taxation (DAC6) is still slated to become applicable on 1 July 2020. Formally postponing the directive’s entry into force is not possible at this stage, even though some member states may be unable to transpose the directive into local law or put in place the appropriate reporting mechanism in time. Although we have heard no coordinated response, we understand that tax authorities across the EU are discussing among themselves how best to deal with the fast-approaching deadlines. Individual states may decide to waive or reduce penalties for, say, the first few months that DAC6 is in effect or at least for filings for the retroactive period. Whether this would be with the European Commission’s (un)official blessing, remains to be seen.
In addition, the OECD has pledged to gain consensus on global principles for taxing the digital economy before the end of this year. Even though this timetable was already aggressive before the crisis hit, the OECD remains committed to it. In fact, since companies with highly digitized business models have been relatively less affected by the crisis, we may see financially strapped countries accelerate digital tax measures to boost post-crisis tax revenues from these businesses. In the past couple of weeks alone we have seen the UK DST come into force (on 1 April 2020), and India announcing a 2 percent DST on non-resident e-commerce operators (also with effect from 1 April 2020).
After the current health crisis has begun to ebb, all this tax uncertainty will diminish as governments clarify their tax reliefs and attention turns back to more usual tax policy concerns, albeit on adjusted timelines. In the immediate present, the most important work for tax leaders is to contribute to efforts to safeguard the health of their organization’s people and its finances.