Recently, tax leaders from KPMG member firms, including me, held the second in a series of virtual meeting sessions addressing business issues arising from the current health pandemic and the related tax and legal implications. We focused on issues ranging from transfer pricing, the mergers and acquisitions and asset management landscape, dealing with tax authorities, and international tax matters. In this blog, I share the result of two polling questions I asked the more than 1,000 attendees about their current and future expectations for priorities and provide an assessment of why this may be the greatest time for tax departments.1
Keeping up to date with business changes is the most pressing priority given the change in demand and the difficulty in keeping supply chains operating (23 percent of respondents). Chief Financial Officers (CFO) are taking a hard look at the business and capacity requirements. This has clear implications for transfer pricing and the allocation of such losses or expenses, and more than 50 percent identified this as their most critical transfer pricing priority today.
- Satisfactory development, enhancement, maintenance, protection and exploitation of intangibles (DEMPE) may no longer exist in their right places, causing difficulty in maintaining current transfer pricing systems or accessing treaties due to the impact of the multilateral instrument on double tax treaty reliefs;
- Permanent establishment issues, related to employees now assigned to operations in a different country, may become more common; and
- Operations that formerly did not create deemed income under a country’s controlled foreign corporation (CFC) rules may now create deemed income – such as subpart F in the US context.
This calls for the tax department to be in more regular contact with the business than ever in order to stay ahead of potential issues.
Cash preservation was another top priority (21 percent of respondents). Many clients’ treasury departments talk with tax departments on an almost daily basis to determine how to access cash in various countries.
Some countries and territories have cash reserve requirements meaning some cash is trapped. For the rest, treasurers are eager to quickly move cash to where it is most needed. This increases the focus on withholding taxes, cross border interest flows, foreign currency gains or losses and the need to have treaty documentation ready to use at a moment’s notice. Beyond that, tax departments may help the organization by focusing on cash tax liabilities. Ensuring that the technical requirements to claim a tax deduction for losses and excessive expenses incurred due to the pandemic is critical because this may reduce currently projected income taxes. There may even be additional opportunities to carry back losses to request refunds of previously paid taxes as countries and territories adjust carry back rules. Finally, now may be the time to ensure that it’s possible to group or consolidate all entities in a particular country so that one entity is not paying cash taxes while another is running losses. Importantly, the risk of withholding taxes (or BEAT/similar minimum tax regimes) on payments made to non-resident entities, and the potential for new taxes on the digital economy, must also be carefully watched to manage any negative cash impacts.
Rounding out the top three is compliance (17 percent of respondents). Although this would not be on a CFO’s mind, it’s important nonetheless. Files may be at the office and unreachable. DAC 6 is still around the corner. Although some countries have relaxed filing deadlines, others have not. Working remotely makes meeting these deadlines just that much harder and we see clients accelerating that work just so they can be sure that they can meet the deadlines.
Tax department’s priorities are expected to shift after business returns to normal. Building a tax department business continuity plan was the most common response (23 percent of respondents). Respondents believe that another top priority will be dealing with the implications of operational changes brought about as a consequence of the pandemic: DEMPE; permanent establishment; access to treaties; and tax authority questions about why country-by-country reporting is looking different to prior years (23 percent of respondents). Rounding out the top three is a focus on entity reduction. Chief Financial Officers have been looking to simplify, reduce, and cut the cost of the organization’s operating model – this will increase, especially in countries and territories that do not allow the offset of taxable income and losses between separate legal entities.
Importance of tax department alignment with CFO goals
Chief Financial Officers and Treasurers focus on cash flow and organizational change with issues arising on a daily basis. Business leaders focus on how to supply their markets when demand is failing and manufacturing plants are closing. Tax departments can and must get even closer to operational leaders and executives to make sure that they are focusing on the priorities at hand. This will mean that some current priorities fall away as tax departments reprioritize from regular tasks to those at the top of the mind of the C-suite. As long as the “table stakes” of completing mandatory compliance is taken care of, this is an opportunity for tax leaders to be viewed as critical to the success of an organization and to accordingly elevate their status as key executives.
Global Head of International Tax, KPMG International and Partner, KPMG in the US
The interpretations made in this blog are those of the author and are not intended to necessarily represent the views of KPMG member firms or attendees of the webcast referenced.
You can continue to keep up to date on significant business, tax, and legal issues resulting from the current pandemic by accessing KPMG’s Insights page.