The primary focus of many US companies directly affected by the novel coronavirus, COVID-19, is the facilitation of employee health and business continuity with customers. However, as businesses respond to the international situation, they will likely encounter customs and short-term global mobility and tax implications. The effects of the coronavirus outbreak cuts across many aspects of international trade, including supply chain management, business travel, immigration, manufacturing, sales, importing, exporting, customs and logistics.
Even the Organization for Economic Cooperation and Development (OECD) has referred to COVID-19 as the greatest danger to the world economy since the 2008 financial crisis. Therefore, we must expect the COVID-19 pandemic to effectuate a negative impact on the operating income of multinational enterprises (MNEs) and impose a considerable burden on the cash flow of an MNE as well as its individual subsidiaries. Therefore, it is critical to address the short-term mobility and tax implications of such an economically devastating event, as refusing to do so may lead to bigger consequences.
Tax and trade-related challenges
Typically, employers must consider three tax and trade-related challenges:
- Development of comprehensive global mobility solutions. This encompasses leading employees and their families through immigration restrictions, discovering ways for employees to temporarily work outside of their primary location, and continuing operations remotely in order to service customers in affected regions.
- Continuance of moving products into and out of affected regions. This is particularly vital if you are responsible for moving needed medical products.
- Evaluation of long-term tax effects from the crisis and reconsideration of global presence and structure. The goals are to reduce exposure to similar risks and to maintain uninterrupted business operations.
What can I address now?
Mobility and immigration issues
There are significant immigration challenges for all persons needing to move into and out of areas directly affected by the outbreak. Business leaders should coordinate with their human resources professionals to track employees’ locations, promote employees’ safety, and help with potential immigration issues upon their return.
After taking steps to protect employees, companies should evaluate any likely tax implications – especially if the crisis continues for several months. Depending on where you choose to temporarily host your employees, your company – and your employees – may face unintended consequences. For example, you may have additional required tax filings or taxes related to employee change of residency. Careful and diligent tax planning can help identify solutions.
Business leaders may deal with short-term customs issues, such as navigating processes to transport goods into affected areas or obtaining appropriate clearances to export manufactured goods out of a country.
Additionally, companies using temporary vendors to replace vendors facing constraints should monitor tariffs and other customs implications. Depending on the regions, products, and suppliers being used, the level of import duty and/or tariff you may owe could vary.
What should I consider next?
Look ahead to future tax implications
Companies with significant operations in affected areas should evaluate the broader implications of their business decisions and consider taking the following steps:
- Reassess 2020 tax planning based on the impact a disruption of this magnitude could have on operations.
- Determine whether there is an impact on tax accruals/estimates across the board, or if issues only exist in specific locations.
- Reevaluate the company’s business continuity plan. Does it account for possible COVID-19 effects continuing into the remainder of the year?
- Evaluate transfer pricing activity related to moving cash into or out of affected countries to pay for crisis-related expenses. Are the company’s transfer pricing models current, and do they consider the ongoing situation?
- Evaluate and document the impact on transfer prices due to adjustments made to supply chains or employee locations and movements during the global pandemic.
- Determine the impact on additional expedited taxes and fees that may result from moving exports and imports through affected country’s backlogged customs authority.
Consider longer-term tax implications
If the COVID-19 crisis continues for an indefinite period, you should analyze longer-term tax effects. These could include:
- Losses due to missing revenue sources within affected areas;
- Restricted movement through affected areas, resulting in longer inventory turns or increased hardship in collecting receivables;
- Additional inspection expenses required to reopen factories; and/or
- Risk of changes in the primary tax location based on adjustments to supply chains or employee locations made during the crisis.
Ultimately, any intel gained throughout the outbreak will likely come into play when deciding whether to restructure or relocate some of your business operations. Depending on the impact of the crisis, business leaders may want to consider diversifying their geographic risk. Evaluating all options can better position your business for when the next crisis strikes.
How can Squar Milner help?
As we navigate through these uncertain and troubling times, making the right business decisions becomes all the more important. Each maneuver must be meticulously scrutinized and assessed to ensure that you are making the most appropriate and sound decision for your business, your employees, and yourself. But you do not have to make these profound decisions on your own.
Our Squar Milner International Tax team is here to guide you and work with you. We can strategize with you to develop the most optimal plan for the short-term and the long-term while taking your business goals and objectives into consideration. We are in this together.
Disclaimer: This material has been prepared for informational purposes only, and is not intended to substitute for obtaining accounting, tax, or financial advice from a professional tax planner or financial planner. All information is provided “as is,” with no guarantee of completeness, accuracy, timeliness or of the results obtained from the use of this information.