In this period of unprecedented global upheaval, businesses have a range of actions to prioritise. This includes the safety of their employees and consumers, day-to-day operations, investor responsibilities and governmental obligations, among others. The key tool needed to meet each of these challenges is the same – having a sufficient cash flow. During a crisis, many turn to the conservation of resources, especially cash, but injecting new funds into your business may be equally crucial.
Obtaining new cash: Incentives and grants
Around the globe, governments have introduced a variety of tax and financial measures to help businesses stay afloat amid the impact of the COVID-19 pandemic. Almost $20 trillion in support and stimulus has thus far been made available in nearly 140 jurisdictions via a multitude of methods.
While the specifics of each mechanism vary, common measures designed to either give businesses cash or allow them to retain more cash include:
Employee retention schemes
Wage subsidies are being implemented by different methods, such as direct cash payments to businesses in Australia, Singapore and the UK; forgivable loans in the US; refunds or discounts of payroll contributions or tax payments in Canada, or a combination of these methods. According to EY professionals, more than 70 jurisdictions have implemented such measures thus far.
Tax payment deferrals
Present in the majority of countries and with highly jurisdiction-specific detail, deferrals may apply to payments of 2019 corporate income tax, 2020 estimated payments, payroll and social security contributions. Deferrals are sometimes open to all businesses by default and other times to only affected businesses upon application and range from an extension of a few weeks or until the end of 2020. Many jurisdictions have also extended various filing deadlines.
Loans and guarantees
Loans and guarantees may be available, with stipulations to receive the funds, including making no shareholder distributions or employee layoffs for a period of time. These are also present in many jurisdictions and with wildly different policy goals, eligibility requirements and amounts,
The ability to fully write-off the cost of eligible assets up to a certain amount is present in more than a dozen countries, including Australia, China, Japan, Malaysia, the US and others.
Loss utilisation rules
The rules may involve those such as carrybacks or carryforwards. Companies have the new or expanded option to carry losses backwards or forwards to other tax years in the Czech Republic, Germany, Japan, the US and other nations.
Measures designed to allow businesses to convert tax assets into cash payments
Such measures have been introduced in places such as Italy, where it allows for the conversion of existing deferred tax assets into tax credits which may trigger cash tax refunds, or in Australia, where research and development (R&D) credits can be converted into a cash refund of 43.5 cents per $1 for companies with global revenue of less than AU$20 million ($13.65 million).
Many countries are accelerating the timeframe in which tax refunds are made available to taxpayers, particularly in the area of VAT and goods and services tax (GST).
Virtually all support and stimulus measures will require analysis to determine if a business qualifies, what documentation or compliance measures must be adhered to and what the long-term impacts may be. Teams from EY have created a tracker to help companies assess what measures are available across their jurisdictions and total footprint. Covering more than 2,700 relief measures in nearly 140 jurisdictions, the EY Tax COVID-19 Global Stimulus Tracker is freely available online.
For companies interested in scrutinising available opportunities in even more detail, including assigning the responsibility for securing and managing individual measures to a specific tax team member, the EY COVID-19 Global Response Tool can help companies manage, apply for and comply with incentive programmes around the world.
In addition to the stimulus measures, there are also many existing incentives which can assist businesses secure cash. R&D incentives, as well as programme and sustainability grants, are common around the world.
R&D tax credits are one of the most popular methods used by governments to attract economic activity to their jurisdictions. Anchored in a desire to promote the development of new or improved services or products, these tax credits are typically awarded for money already spent by the taxpayer on eligible expenditures.
The EY Worldwide R&D Incentives Reference Guide offers an overview of the various credits available. In order to receive cash via tax refund or conserve cash via reduced future payments, businesses may want to consider accelerating the filing of their R&D claims; in many cases it is possible to file immediately.
Additionally, businesses with innovative responses that help society cope with the COVID-19 outbreak or lockdown (including research on how to repurpose an existing manufacturing process to produce COVID-19-related supplies) may opt to consider preparing a claim.
Governments worldwide also offer grants, or cash payments that do not require repayment, to companies for specific initiatives that align with government policy goals, such as sustainability innovations or for capital-based projects where the aim is to create jobs in economically-deprived areas.
Grants are often competitive, always discretionary and a successful application is not guaranteed. Businesses can benefit from dedicated assistance and support to identify such grants, triumph in the application process, manage the ensuing project effectively and satisfy funding compliance requirements.
As governments are keen to see solutions to the COVID-19 crisis come to market quickly, many have launched dedicated funds to that end and companies that offer innovative changes to products, manufacturing processes and buildings may be eligible to receive grant funding.
Cash tax planning
Many cash tax planning strategies relate to how best to utilise the aforementioned recent legislative initiatives, while others look to traditional tax planning opportunities to increase liquidity and otherwise reduce or defer tax liabilities. Businesses can increase their available cash by applying these methods to prior year tax returns (including to-be-filed 2019 returns) to receive refunds or by applying them in current periods to reduce estimated or future tax payments.
The procedural mechanism to apply these methods, whether a special claim form, an accounting method change request or even an amendment to a tax return, vary not only by jurisdiction, but more importantly by what is most advantageous to the taxpayer. Extensive modelling that evaluates every position and procedural opportunity is therefore key to achieving the best result.
Modelling is even more critical for US taxpayers where recent tax reform reduced the corporate rate from 35% to 21%, creating a unique opportunity for corporations to carry back a current loss to a 35% year.
Top cash tax planning methods for all taxpayers to consider include:
- Deferring income: identify items that are properly excludable from taxable income, defer advance payments, limit income acceleration by analysing income recognition methods;
- Accelerating deductions: review the timing of expense deductions – including prepaid expenses or prepaid services or property and evaluate recovery periods to accelerate depreciation or amortisation; and
- Fully utilising losses: recognise built-in losses on depressed asset values, evaluate bad debts that can be written off and review transfer pricing policies to ensure equitable sharing of current losses within the supply chain.
In addition to income taxes, consider your VAT and GST positions and promptly reclaim any overpayments. Many governments have accelerated or simplified this process.
Opportunity in adversity
In normal times, expanding your business repertoire of funding sources, strategies or methods is always a challenge. Fears of complexity or confusion may limit a company's willingness to innovate. However in uncertain times, which necessitate bold action, new methods may not be so intimidating.
Taking a lesson from the Great Recession, governments over the world are also acting decisively to protect businesses and people from the economic disruption being caused by the pandemic. With this earnest desire in mind, tax authorities and government regulators want to support taxpayers as much as they can.
These two factors combined make this time of great adversity an opportunity for business growth and resilience.
T: +61 2 9276 9087
Jamie Munday is the Global Leader for Quantitative Services and the Asia-Pacific Leader of R&D Incentives, Government Grants and Quantitative Services. With over 25 years of experience, he is passionate about helping people create opportunities to invest in, encourage and celebrate innovation, technology and international investment and expansion in Australia and overseas.
He regularly speaks on the application of government incentives, innovation policy, emerging technology and regulatory landscape, on panels, with industry groups and with regulatory bodies.
© 2021 Euromoney Institutional Investor PLC. For help please see our FAQ.