International Tax and Covid-19

I haven’t had a conversation recently that hasn’t involved the words “unprecedented” and “difficult”. That’s certainly how I would describe the last couple of weeks – Covid-19 is posing challenges to all of us, both personally and professionally. From a tax policy perspective, governments around the world have been announcing new initiatives at breakneck pace, in an attempt to mitigate the economic consequences of the pandemic. We have been trying to shape and respond to these initiatives, and help our clients navigate a course through these uncertain times.

UK developments

Let’s start at home where the UK government has been holding daily briefings. Many of these have contained new policy announcements, and we expect more to follow. KPMG in the UK has set up a dedicated Covid-19 webpage that I would recommend to everyone wanting to keep up to date, and I’ve outlined some of the most interesting areas of discussion below.

The Job Retention Scheme (‘JRS’) has received the most attention. I share the belief that it’s a positive measure (“we are all social democrats” now was a well-liked tweet by KPMG’s own Tim Sarson). Allowing businesses to retain talent and reduce costs, while also guaranteeing a level of income for furloughed workers, makes it a far better alternative to redundancy for all parties. KPMG has produced Summary and FAQ documents with the key details, if you haven’t yet seen them.

That said, however, JRS is not going to be suitable for everyone. I know that some businesses are worried about the potential for reputational damage. The concern is that accepting government support with one hand, only to later pay dividends and bonuses with the other, could draw criticism from some quarters. Businesses that still expect to be profitable despite the pandemic, particularly those with a public profile, may therefore look at other cost-saving measures first.

Corporate Residency has been raised with the Treasury as an area they need to look at. Some businesses, concerned that their non-resident directors are now unable to travel abroad, are worried about how they will be impacted by business decisions being taken remotely. This will affect more businesses the longer the lockdown continues, and so guidance on this point would be very welcome. I have heard one suggestion that directors will resort to rowing a boat out into international waters before dialling-in to their next Board meeting – let’s hope it doesn’t come to that. It certainly wouldn’t be my advice!

Related to this, businesses are also worried about increased PE Risk arising from remote working. Working from a home office isn’t expected to pose a high risk in itself, but the risk increases sharply if contracts are being negotiated or concluded outside the home jurisdiction. For those businesses with key employees working abroad, this will be a real concern. Furthermore, as interpretations of PE rules vary by jurisdiction, this is one area where it’s important to watch out for the responses of governments around the world.

The Covid Corporate Financing Facility (CCFF) has also caught my attention. Access to this going to be dependent on credit rating; the idea is that the funding will be restricted to only those businesses experiencing cash flow disruption due to Covid, excluding those that would be in difficulty regardless of the pandemic. However, where a business did not have a credit rating at the relevant date (1 March 2020), they were at risk of being excluded – one option was to approach a ratings agency and ask for a credit rating but this isn't always straight-forward. While other options have been discussed there is still some ambiguity as to how access this facility so the result could be a smaller uptake than first expected.

There are also further considerations for those businesses that do qualify – how to account for the government-supported finance, and what the tax implications will be. In fact, the same could be said of all businesses who are looking to raise finance. The key concern will be obtaining funding, of course, but determining whether a tax deduction will be available on the interest expense, and what the correct accounting treatment is, will also be important.

And let’s not forget the Budget! It seems a long time ago now, but is still very relevant and the key points from my perspective are outlined below.

• The decision to treat all IP brought into the UK after 1 July 2020 as eligible for tax relief is a positive step – the intention is to encourage multinational groups to locate their IP here, and I expect we’ll see some “onshoring” in the near future. 
• The “IR35” extension to the private sector has now been delayed. Businesses still need to prepare for it, but they can now divert resources to managing their response to Covid-19.
• The implementation of the EU’s Mandatory Disclosure Rules (“DAC 6”) is continuing as planned. It’s not within the Treasury’s power to delay implementation, because it stems from an EU Directive, but we’re hoping for a “light touch” approach from HMRC in the first year.
• The announcement that the UK is pressing ahead with its unilateral Digital Services Tax (‘DST’), in the face of US opposition that had led France to abandon its own version, surprised some. Businesses providing online services need to understand whether they will be impacted and, if so, what their tax profile looks like going forward.
• Plans to introduce a requirement for large businesses to report uncertain tax positions to HMRC is causing some concern. The worry is that the provisions will apply more broadly than first appears. The government is currently in the consultation phase and we can expect draft legislation later this year.

An International perspective

Looking further afield, the global response has been significant and widespread. KPMG’s summary document covers 80 countries and runs to 155 pages, which gives you an idea of the scale of the response. Many of the measures focus on extending tax filing and payment deadlines, but we’re also seeing tax investigations paused in many countries. Some countries are going further – improving loss carry back rules to unlock tax refunds, increasing or accelerating tax relief for Covid-19 related costs and providing support for employment costs.

In the US, the CARES Act provides for $2.2 trillion in emergency aid. Unsurprisingly for US tax, what sound like positive measures can have unintended consequences. As one example, UK groups with loans to US subgroups could decrease US taxable income with the relaxation of the interest expense limitation, but this could create a worse result under the BEAT rules.

Clearly if this pandemic teaches us anything, it’s how connected we all are. Governments around the world are responding and I would recommend KPMG’s Global Covid-19 webpage and an international developments tracker for those who want to keep up to date.  

Looking to the future

Looking to a post-Covid-19 world, I think we’re going to be dealing with changes to the tax system for years to come. Governments are borrowing heavily to fund economic rescue packages and we can expect the tax system to respond when those debts need to be repaid. While we were already expecting traditional models of taxation to be overhauled by BEPS 2.0, the success of some businesses, such as online retailers, at the expense of others will inevitably lead to efforts to find a “fair” way to tax their profits. This may result in sector-specific tax regimes, such as we are already seeing with the UK’s DST. At an individual level, the provision of financial support to employed and self-employed workers alike calls into question (again) whether that particular distinction is relevant any more.

The world after Covid-19 is going to look very different to the one we’re used to – I’m looking forward to more home-working* and perhaps less business travel – and updated tax regimes are almost certainly going to be part of that change.

*although hopefully with the children back at school!

Stay safe,

Melissa Geiger (from her desk in Teddington!)