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International tax strategies to generate cash during COVID-19

October 20, 2020 / 10 min read

Looking to generate or preserve cash amid the COVID-19 pandemic? Our experts discuss how you could benefit from NOLs, transfer pricing, customs strategies, and more.

When the economic-going gets tough, few things help a business more than cash in the bank. U.S.-based multinationals have several cash-generating strategies at their disposal to generate or preserve cash by virtue of their ability to shift operations and resources among different countries. They also need to plan ahead to protect against COVID-19-related obstacles that can drain cash unexpectedly during this crisis. Some of the key areas we’ll focus on in this article are global mobility concerns, tax-efficient cash repatriation, and opportunities to streamline or revise transfer pricing strategies.

Cash repatriation and related topics

The Tax Cuts and Jobs Act (TCJA) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act both made some significant changes in the tax consequences to U.S. multinationals of repatriating earnings from overseas operations. A quick overview of these changes can help businesses understand how application of the new rules can have a significant impact on cash flow.

While there are no additional U.S. income tax consequences to shareholders for above distributions, there are local jurisdiction tax consequences to consider such as local withholding taxes. Additionally, in the current pandemic environment, companies will want to consider local tax relief impacts of taking distributions out of subsidiaries, as some of these programs may limit or rescind tax relief if dividends are paid.

Debt and debt modification

In a period of economic distress, debt management is more important than ever. Multinational businesses have additional options to consider when managing debt obligations between CFCs and U.S. parents, and each of those options comes with potential tax advantages or consequences that must be considered in advance in order to maximize cash on-hand.

Multinational businesses have additional options to consider when managing debt obligations between CFCs and U.S. parents.

As always, multinationals that rely on intercompany debt obligations across international borders should make sure that these obligations are accurately and formally documented to verify the substance of the transaction in case authorities review it. Here are a few of the considerations that multinationals should keep in mind when managing intercompany debt during the pandemic:

Debt modifications between CFCs and U.S. parents can be particularly tricky.

Net operating losses under the CARES Act

The CARES Act increased the number of years that a taxpayer can carry back a net operating loss (NOL). NOLs incurred in tax years beginning after Dec. 31, 2017, and before Jan. 1, 2021, can be carried back to each of the five years preceding the loss. In addition, the CARES Act temporarily waived a rule imposed by the TCJA that limited the amount of an NOL applied in any year to 80% of the taxpayer’s taxable income. The 80% cap is eliminated for carrybacks and carryforwards to tax years that begin before Jan. 1, 2021. Under current law, the 80% cap will be reinstated to any carryforwards applied to years beginning after that date, even if the losses were generated during years in which the cap was waived.

The five-year window for NOL carrybacks will include some years in which affected U.S. multinationals will have paid taxes on repatriated income under the TCJA’s repatriation rules. Taxpayers in this situation can elect to not apply their NOLs in years when they paid the repatriation tax. If they don’t elect to this treatment, the amount of the repatriation tax paid in the applicable year isn’t eligible for reduction by the NOL.

On top of the interaction with the repatriation rules, any reduction in a multinational’s prior year income will have a cascading effect on income-based calculations like GILTI, the foreign-derived intangible income (FDII) deduction, and the foreign tax credit (FTC). The impact on calculations like these should be factored into any discussion about use of an NOL carryback by a multinational business.

Transfer pricing

The havoc wrought upon the world economy by the COVID-19 pandemic has almost certainly caused changes at any global business that has an intercompany transfer pricing policy. Here are a few additional considerations:

Any changes a business makes to its transfer pricing policy must be supported by proper documentation.

Global mobility

There are a number of COVID-19 tax considerations for global mobility professionals. For example, posting U.S. employees into foreign countries and hosting foreign nationals for work inside the United States require careful tracking of time spent and money earned in relevant locations. Employers need to know each employee’s location, the duration of the stay and the amount of money earned, and the reporting and payment obligations that may be triggered by the person’s presence in the jurisdiction. Businesses also need to track potential law changes in those countries that may grant relief to international employees whose time within the boundaries has been extended due to COVID-19. Strategies in this area focus primarily on protecting against unexpected tax obligations that could drain cash at a critical moment.

It’s important to consult with a tax advisor familiar with the local rules that define “permanent establishment” for a business in each country. 

We can help

If your multinational business is affected by any of these issues and would like to learn more about potential cash generating strategies that can help you weather the COVID-19 pandemic, please contact your Plante Moran advisor to learn more about how we can help.

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