International Tax Implications During Global Commercial Instability
The increasing concern and impact of COVID-19 on American companies – now coupled with travel restrictions, unsteady global trade discussions and swelling conditions surrounding oil – has created an international business environment unlike any we have ever seen.
As you and your clients analyze and predict volatile business conditions over the coming weeks and months, the following international tax and commercial implications should be at the forefront of immediate consideration:
With currency fluctuations around the globe based on supply and demand, most of the world’s currencies are bought and sold based on flexible exchange rates in the foreign exchange market. Current conditions will move currency values in the same way that equity and futures markets have moved. As such, multinational companies should be proactive in understanding the implications of Forex (FX) gain and loss reporting under Section 988 of the Internal Revenue Code.
In an attempt to stabilize or stimulate a domestic economy, Central Banks may restrict the ability for companies to move cash out of their respective economies. This may have an immediate impact on the ability (or lack thereof) of overseas affiliate entities to repatriate funds to a U.S. parent company. This may also have a significant impact on treasury management, local withholding taxes, foreign tax credits, and bank/debt covenants.
Existing shifts in the global economy may cause companies to revisit cash flow in order to serve capital expenditure (CapEx) needs within their group and across jurisdictions. An unanticipated and artificial shift in income allocation will create transfer pricing scrutiny, ultimately impacting pre-existing international tax strategies.
Corporate Governance Challenges
For U.S.-based companies that have offshore entities utilizing offshore structuring techniques, corporate governance implications must be considered. In order to comply with the OECD’s BEPS initiatives, multilateral instrument and alignment of operations with tax policy, we remind multinational enterprises of the emerging “nexus approach” to global tax planning. As such, we always recommend that our clients adhere to strict corporate governance protocol, including in-person Board meetings in the jurisdiction to which income may be allocated. As travel bans continue to be placed across continents, companies need to anticipate and plan for impediments to corporate governance that may impact the company’s overall international tax posture and global effective tax rate.
McGuire Sponsel is extremely well versed in complex international business and associated tax issues. Our team is available to help you navigate these complexities alongside you and your clients.