Managing tax now and beyond Covid-19

LOOKING back, it is clear that businesses and nations were caught unprepared by the devastating and far-reaching impact of the Covid19 pandemic. As late as February, reports were mainly focused on the impact of Covid19 on China and, to a lesser extent, her trading partners.

The focus then was on reduced imports by China, reduction in outbound tourism, supply chain disruption due to shortages of Chineseproduced intermediate goods, and the impact on financial markets and business confidence in selected countries.

Several months on, the entire world has been affected, with more than 188 countries, areas or territories with Covid-19 cases, nearly five million confirmed cases and over 300,000 deaths worldwide. Almost every nation has imposed some form of movement restriction and borders have been closed.

This has resulted in a severe decline in demand for most goods and services. Aviation, tourism and leisure, automotive and property development are among the sectors most affected by this pandemic.

Businesses are dealing with complete or partial shutdowns of factories, supply chain disruptions and cashflow stress.

It is crucial for businesses to rethink strategies, supply chains and tax policies as this crisis continues to evolve.

It is also clear that businesses and their tax functions should not just focus on what is in front ofthem now. There is a need to anticipate and consider what comes next, during the recovery period, and how businesses should set themselves up for success in the beyond, ie the new normal.

The more resilient a company’s tax function is today, the better equipped it will be to help the company weather a downturn and capitalise on growth opportunities during the recovery.

Here is a three-phase approach that businesses may consider:

> Now - focus on business continuity, loss forecasting, scenario modelling, working capital and stimulus measures. Immediately put in place a process to identify opportunities which will alleviate the cash flow burden today – but do not forget about protecting the future.

As the economic damage inflicted by Covid19 increases, central banks have cut interest rates and governments have introduced stimulus packages as well as administrative relief measures such as deferring tax payments and extending tax filing deadlines.

In Malaysia, the government has announced stimulus packages totaling Rm260bil, rolled out through 71 initiatives, targeted at the rakyat (20), businesses (39) and economic strengtheners (12).

Businesses should understand what measures they qualify for and ensure they capitalize on these. Some measures which all businesses must consider include revising tax instalment plans, deferring tax payments (including withholding tax payments) and maximising extended filing periods to focus on business needs.

Further, businesses should follow up on tax and GST refunds to try and accelerate the cash inflow.

Businesses must also anticipate issues which may arise in the future and consider what can be done today to mitigate these.

For example, companies enjoying tax incentives should carefully evaluate whether they will be able to meet the various incentive conditions as revenue, sales volume and investments have significantly reduced.

Where conditions cannot be met, companies should immediately begin discussions with the relevant incentive agencies.

> Next – focus on recovery. Tax reforms are taking place all over the world and Covid-19 will accelerate this process, so businesses need to understand which tax rules have changed, which are in the process of changing and also anticipate which rules may change in the future.

In the longer term, governments will need to consider how best to replace the revenue lost during this pandemic, which may result in an increased focus on certain aspects of the economy, such as the digital economy, and may result in additional tax controversy. Businesses must be prepared for this.

It is not just tax rules that may be changing; businesses will evolve too.

Business leaders need to critically assess whether their business models and supply chains were robust enough to cope with the fallout from the pandemic and if not, change is necessary.

Any change in the business model or supply chain would require transfer pricing, incentive management and controversy management policies to be re-visited.

> Beyond - transform your tax function so that it is agile, leverages on technology and able to anticipate and meet business needs in the new normal.

Get a handle on precisely how your tax function allocates and uses resources, particularly with respect to technology.

Today, tax authorities are using big data and artificial intelligence to examine transactions and flag inconsistencies in real time.

For your tax function to be proactive and relevant, your technology must be as advanced as the government’s – in many jurisdictions, tax administrators now have better digital tools than businesses.

Consider the specific areas of your business which may be subject to risk-based analysis by tax authorities.

For example, the authorities may challenge inconsistencies between customs filings and income tax filings of a business, or use information collected from a foreign tax authority to question business substance or profit allocation methodologies.

The above steps should not only be executed during an economic slowdown.

Constantly thinking about the now, next and beyond will ensure that business leaders, including tax directors, have a balanced view of the business, are able to anticipate and address issues as they arise, and pro-actively plan for the future.

The Covid-19 crisis is an impetus for change like never before, and a change in mindset and approach is crucial to break down old barriers to progress.

Amarjeet Singh is the EY Asean Tax Leader and the Malaysia Tax Leader in Ernst & Young Tax Consultants Sdn Bhd. The views expressed here are solely that of the writer’s.