Short-term strategies
Determining a short-term strategy to help manage and conserve cash is a critical first step. Taking advantage of stimulus initiatives, including tax relief, is one component of that strategy. In the U.S., companies can take advantage of recently enacted tax relief that relaxes net operating loss (NOL) carryback rules and provides additional interest deductions. U.S. tax relief also fixes the so-called retail glitch, allowing retailers the same increased depreciation deductions available to other taxpayers. In addition, payroll tax credits and small-business loans increase access to cash for those that qualify.
Numerous foreign jurisdictions also have issued some form of relief or stimulus package in response to COVID-19. Many of those packages allow companies to defer tax payments, including value-added tax and payroll taxes. Some require a formal application or agreement for relief, while others do not. Companies need to understand what incentives and relief are available and how to access those initiatives when developing their cash management strategy.
Transfer pricing also should be evaluated as a tool to manage immediate cash flow needs. Transfer pricing models need to reflect the unusual business dynamic at this time, and companies should consider adjustments to limited risk operations. Comparative data might be difficult to obtain for some time. As a result, companies might need to use extended ranges (three to five or more years). Companies also should consider implementing force majeure clauses and charging affiliates for COVID-19 response and risk management.
Long-term planning
Long-term planning requires flexibility and judgment. Some markets or supplies might recover or reopen sooner than others, which could cause a dramatic change to the flow and price of goods. These changes likewise will have an impact on the import value of goods and related duties and tariffs. Accordingly, companies should investigate opportunities to claim duty drawbacks.
Both the potential risks and opportunities need to be managed. Companies need to understand how changes to the supply chain will affect their ability to get goods flowing and serve existing and new customers. Supply chain changes could result in Subpart F income in the United States. Travel restrictions might leave employees in jurisdictions or locations longer than expected, which could lead to potential employee tax issues or permanent establishment issues for a company. While tax authorities are aware of these developments, there is not a one-size-fits-all answer.
Additionally, recent shortages in critical supplies or products might lead companies to bring manufacturing and related intangible property back to the United States, which could result in a dramatic tax impact. Changing a manufacturing location also could lead to increased U.S. exports and result in increased opportunities to claim the foreign derived intangible income (FDII) deduction. However, the act of onshoring also might have an unfavorable impact on the base erosion anti-abuse tax (BEAT). In addition, NOL carrybacks might also reduce deductions under Section 250. Companies should analyze these provisions carefully in light of the changing business environment.
