Being Proactive on the Tax Side while Restarting the Business

30/04/20
Being Proactive on the Tax Side while Restarting the Business
The critical element for affected companies is to access liquidity promptly to ease the financial burden. One major avenue is to benefit from stimulus packages. Stimulus packages include several tax provisions that have been recently implemented in many OECD countries. French multinational companies (MNC) should carefully look at the financial consequences and opportunities of the relevant foreign stimulus packages. The USA and some European countries for example are providing very interesting responses to the pandemic from a tax standpoint. CFO, treasurers and head of tax of French based MNC may find some unexpected liquidity in foreign stimulus packages if they have financed large operations and/or if they have acquired targets in the relevant OECD countries recently or over the past few years.  

1- Cash is king

Many MNC have been working hard over the past weeks to secure cash facilities, to issue bonds and as need be to access governmental guaranteed loans to secure the cash needed to carry-on their activities in the coming months/years.  

2- Issue

Since the beginning of the pandemic, many French MNC have faced the following issue: Foreign operations have not been generating enough cash flows. This means that some French MNC have not been able to receive from their foreign subsidiaries the cash they expected, under their intercompany agreements or otherwise, that was usually used by the relevant MNC to repay part of the external debt taken and borne at its level.   Hence the need to find other sources of funding or savings at the parent but one may also consider at the foreign subsidiaries level.  

3- Planning

In addition to the well-known financing measures available in France (including “Prêt Garanti par l’Etat” etc), MNC may put at good use the tax provisions provided by some of the relevant foreign stimulus packages. Objective is to increase the foreign tax deductibility of financial flows (including on the intra-group flows) and specific tax opportunities that will transform tax elections into hard cash in the short or mid-term.   The objective here is not to provide a detailed explanation of complex foreign mechanisms but rather to identify some examples of actions that could be rapidly contemplated from France on the tax opportunities that may exist in foreign OECD jurisdictions.   Illustration: Take as an example a French MNC that holds a large US sub group. The French parent usually finances its US subs using various debt instruments in addition to equity.   3-1 Interest expenses : The USA CARES[1] Act recently enacted in the context of the pandemic amends the practitioners well-known section 163(j) of the US Tax Code such that the US Sub group (like any US taxpayer) has the right to deduct interest for 2019 and 2020 tax periods to a greater amount than the one originally provided for in the US tax reform signed by President Trump in the 2017 Tax Cuts and Jobs Act (TCJA). This means that interest limitation in the USA is increased to 50% (instead of 30%) of adjusted taxable income (an approximation of EBITDA). French MNC having US subsidiaries should therefore be able to claim immediately more deductible expenses in the US that can reduce taxable income locally. However French MNC may pay careful attention to the specific BEAT[2] limitation that applies on intercompany expenses. They may consider, as applicable, a variation of the way they are currently financing their US subsidiaries to benefit from the increased deductibility of interest provided for in the CARES Act without being significantly impacted by BEAT.   3-2 NOL carry-back: As provided for in the TCJA reform of 2017, NOLs arising in years 2018 and after could not be carried back. The CARES Act allows US taxpayers to carry back NOLs originated in FY 2018 and thereafter (but prior to Jan 1, 2021) for up to five years. This means that the potential to carry back 2018-2020 NOLs for up to five years could create an opportunity, in case of a US tax loss of a US subsidiary, to claim locally a tax refund of tax paid prior to the TCJA when the Federal corporate income tax rate was set at 35%.[3]   3-3 NOL carry forward: Prior to the pandemic, in line with the TCJA, NOLs in the USA could only be carried forward to offset no more than 80% of the US sub group taxable income. In the CARES Act the 80% carry forward limit currently no longer applies on carry forwards for tax periods beginning prior to January 1, 2021. This means potentially more net cash for the US sub group having NOLs in a fairly short period of time. What the French MNC should do? In our example,
  • if the French MNC has been involved in an acquisition over the past few years: There is a need to revisit all acquisition documentation, financial valuation/modelling and financings to determine best options to finance the US sub group with adequate instruments that will allow to maximize interest deductions while keeping BEAT under control. Also, there is a need to look at whether the seller or the buyer could be entitled to the tax benefit in case of a carry-back / carry forward situations (economic right of the tax refund, filing requirements and by which party etc).
  • If the French MNC is contemplating an acquisition in the US, it will need to pay careful attention to the financing structure and to the legal arrangements to secure more cash returns in a time where cash flows received by most French MNC from their foreign subsidiaries are particularly sensitive.
  As mentioned above not only the USA but other countries have taken some interesting tax measures to ease an indirect access to what could be viewed as another way of providing State financing.    

Our Lawyers may assist French MNC while revisiting these key financial and legal aspects (e.g., SPA, legal agreements, intercompany financing arrangements, pooling, royalties, management fees etc.) in the current situation where having access to cash in the short or mid-term may turn to be essential. Tax is one significant avenue.

For French MNC, as structuring usually starts from France, the combination of French and international rules is likely providing additional financing opportunities. Our full-service firm is here to help.

    [interne id="109748"]     [1] Coronavirus Aid, Relief and Economic Security Act is the Congress and White House response to the pandemic in the USA. [2] BEAT is a provision of the 2017 TCJA that provides for a specific corporate income tax computation of US companies that account for large intercompany expenses viewed as base erosion payments. BEAT has been increasing the cost of intercompany financing for many French MNC. [3] The TCJA set the Federal corporate income tax rate at 21%.
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