Navigating the impact of COVID-19
How to manage tax issues
The COVID-19 outbreak and the scale of the response from national governments is unprecedented.
Tax is proving to be a key tool for government to deliver assistance and relief to businesses, and to provide incentives for businesses to maintain and support their workforce through the crisis.
The landscape is moving fast and it is critical that businesses are aware and avail themselves of the opportunities on offer.
However, the wider measures imposed – in particular travel restrictions and the requirement to work from home – also present tax risks and challenges for businesses.
Awareness of the issues and careful planning will be required now more than ever.
Looking forward, the huge government expenditure will need to be recouped eventually – although, in the short to medium term, balancing revenue-raising measures against the need for continued support of a recovering economy will be a delicate act.
- Many governments have announced deferral of tax payments to relieve the pressure on business cashflows during the crisis. Some of these are automatic; others are available only upon application and may require a business to show that it needs time to pay as a result of COVID-19.
- Further tax measures to bolster business cash reserves include temporary tax credits and exemptions, such as the UK 100 per cent business rates discount for the retail, leisure and hospitality sectors, and the US employee retention credit.
- Some governments are also accelerating the realisation of tax assets. Examples include the US temporary extension to loss relief carry-back, allowing losses to be carried back against profits in the previous five years thereby generating immediate cash tax refunds, and the French acceleration of the payment of R&D and VAT receivables.
- In addition to cashflow-related measures, in some instances the commencement date for planned new tax measures has been deferred to avoid additional disruption during the crisis, eg the 12-month postponement of the roll-out to the private sector of the UK off-payroll working rules (IR35).
Travel restrictions and working from home
- The wide-ranging global restrictions on travel and the general lockdowns in many jurisdictions present tax risks and challenges for groups whose employees may be forced to work in a different jurisdiction from normal or whose directors are unable to travel to attend board meetings.
- In the worst case, employees working outside their normal jurisdiction could become subject to employment/income taxes, or create a taxable presence and/or tax filing obligations for their employer, in their home jurisdiction. Similarly, directors dialling into company board meetings from overseas could in extreme cases cause a migration of the corporate tax residency of the company, with resulting risk of ‘exit’ tax charges and/or an ongoing increased tax burden.
- Some jurisdictions have published special COVID-19-related guidance setting out the circumstances in which tax residence requirements will not be challenged if directors or employees are unable to travel due to COVID-19 travel restrictions. However, this is not the case for all jurisdictions and it cannot always be assumed that tax authorities will not raise corporate tax residence challenges in these circumstances.
- Like the rest of the workforce, tax authorities are having to move to remote working in many jurisdictions. This may cause delays in obtaining tax clearances, etc and additional time should be built into the planning process to allow for this.
- It presents particular challenges when the tax system requires physical filings or stamping of documents, such as UK stamp duty. The UK has announced a temporary relaxation of the stamping requirements, allowing electronic submissions and ‘virtual’ stamping to allow company shareholder registers to be updated. But careful planning is required if transactions are reliant on these or similar processes.
- The timely preparation and submission of tax returns/filings may be disrupted by employees and advisers working from home. In some jurisdictions, filing deadlines have been extended (eg the US, Italy and Austria) and/or penalties have been waived. But others have emphasised that returns will still need to be filed on time.
- Tax enquiries and disputes/litigation with tax authorities may move more slowly or be stayed. However, this cannot be assumed and careful monitoring of deadlines remains necessary. Further, statutory limitation periods may be extended to give tax authorities more time to issue assessments, such as France's extension of the 31 December 2020 tax authority enquiry window.
- Businesses may need to undertake corporate actions in response to the crisis, such as the cancellation or deferral of dividends and the raising of new debt or equity.
- These actions may have tax implications for the business and/or its shareholders, which should be carefully considered as part of the decision-making process. For example, depending on how it is implemented, the deferral of a dividend may not be effective to defer the time at which the shareholder is required to pay tax on that dividend, potentially leading to a ‘dry’ tax charge for shareholders.
- Similarly, customer defaults or deferral of payments may not defer the date on which VAT is required to be accounted. VAT bad debt relief may be able to be claimed in some cases.
- It is likely that further tax measures will be announced as governments continue to develop their response and react to market developments and representations from business. Close monitoring will be required to ensure opportunities for breaks/relief are not missed.
- In the longer term, structural changes to the tax regime may emerge, both as a result of ‘modernisation’ initiatives currently being forced upon tax authorities (such as ‘electronic’ UK stamp duty) and in order to raise revenue to reduce government deficits. For example, it seems likely that changes will be made to level out UK social security contributions between employees and the self-employed.
- However, this will need to be balanced against the need for a soft exit from the crisis. Support for business may need to continue for a period. Perhaps we might see (temporary or targeted) relaxation of loss-relief restrictions as regards COVID-19-induced losses?
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If you would like to discuss these issues in more detail, please speak to your usual Freshfields contact or one of the lawyers listed below who can direct your query.