International Tax Considerations for Long-Term COVID-19 Recovery and Planning

Initial reaction to the COVID-19 pandemic forced many companies to focus on the basics to help reduce expenses and maintain cash flow.

As your business shifts from its immediate response to a more proactive plan—aimed at sustaining operations through the duration of the pandemic and recovery after it subsides—consider focusing on the following international tax strategies. 

Cash Repatriation

If your company requires cash at home, repatriating cash back to the United States could prove advantageous particularly because most foreign earnings could be repatriated tax-free from foreign subsidiaries. For companies closing or restructuring foreign operations, the repatriation of remaining cash may give rise to significant ordinary loss opportunities.

Although the US economy has been severely affected by the pandemic, the US dollar, as the global reserve currency, has only strengthened. Accordingly, most foreign currencies have declined in value against the US dollar. 

Local currency fluctuation could decrease liquid asset values abroad, and the added foreign exchange uncertainty could make maintaining significant assets in foreign currency riskier. 

Other cash flow management considerations include:

  • Tax deferral
  • Prolonged payments
  • Management of withholding tax credits
  • Refund of value-added tax (VAT) or custom duties

IP Valuation and Transfer Considerations

Intellectual or intangible property (IP) values are likely to decrease due to declining income or loss forecasting amid the current global economic uncertainty. However, this challenging moment could provide opportunity to consider migrating or realigning your IP.

If your company transfers its IP to a foreign jurisdiction through a controlled transaction, the income derived from the transaction could benefit from the foreign-derived intangible income (FDII) provision, for all or part of the consideration. The resulting tax rate would be 13.125%. 

Alternatively, if a US based multinational group repatriates its IP from overseas, the same FDII incentive permits a lower tax rate at 13.125% on profits generated by the US IP until 2026.

Revisiting Transfer Pricing Arrangements

As your company shifts operations and conditions deviate from the previous business expectations, it might be necessary to update your intercompany transfer pricing arrangements to reflect changes wrought by the pandemic.

Some action items include conducting a supply chain review from a risk-bearing perspective and updating the corresponding transfer pricing methodology. As the profitability of comparable transactions likely declines, it could be possible or even necessary to adjust pricing to take market fluctuations into account.

For example, a limited risk entity could potentially operate at break-even, or share value-chain losses, based on updated methodology and comparables. Additionally, transactions subject to advanced pricing agreements (APAs) could be impacted and may need to be revisited as the pandemic could significantly affect the profitability of global operations for years to come.

The COVID-19 pandemic could, in some circumstances, be used to invoke force majeure clauses that are often overlooked within contracts. Force majeure is broadly defined as an event no individual can reasonably foresee, often referred to as an “act of god,” that prevents either party from performing obligations under contract.

A review of possible effects under each jurisdiction in the existing supply chain, for both related and unrelated party transactions, should be considered in the event that force majeure is invoked.

Global Indirect Tax

VAT, sales tax, customs duty, and other similar worldwide indirect taxes typically have shorter reporting and payment time frames than direct taxes.

At a result of the global pandemic, many foreign tax authorities have introduced deferral programs that can generate short-term cash flow improvements. Filing penalties, interest, and other similar error-based penalties have also been suspended, but most authorities still require you to file the underlying return or declaration.

US businesses should review their non-US supply chain to ensure simplifications are being applied and costs, including taxes, are minimized.

In addition, indirect taxes that are incurred outside the United States on large purchases should be reviewed to ensure they can be recovered in a reasonable time.

It’s also important to work with your vendors to minimize indirect tax cash flow issues. Indirect taxes can make up a significant proportion of working capital requirements, and managing them properly can allow you to use free cash to fund other critical business needs.

Additional Considerations

As the impact of COVID-19 evolves, decreased US income could change a company’s tax positions under numerous provisions, including the Section 163(j) interest limitation, the foreign tax credit limitation, and the base erosion and anti-abuse tax (BEAT). 

Many companies that currently enjoy FDII or IC-DISC benefits might anticipate a drop in deductions as foreign profits decrease.

Global and regional travel restrictions could jeopardize local entity business substance. As a result, Subpart F income analysis and treaty benefits could be affected.

It’s also important to consider adjusting exit strategies due to potential downward valuations and forecasting.

We’re Here to Help

To learn more about how you can prepare for tax filing, contact your Moss Adams professional.

Additional Resources

For regulatory updates, strategies to help cope with subsequent risk, and possible steps to bolster your workforce and organization, please see the following resources: