Navigating Uncertainty:Responding to the business impact of COVID-19

COVID-19 Update

As the Covid-19 situation continues to develop, businesses across the Middle East are facing significant challenges which they need to respond to rapidly. We set out six areas of immediate impact and possible response actions for businesses from a tax and legal perspective.

Manage cash pressures

Challenge Response Benefit

Businesses are experiencing significant cash flow and profitability issues, and are in need of short term liquidity relief

Use existing and COVID-19 tax relief measures and other tax strategies to manage cash taxes and improve liquidity

Immediate (and longer term) current tax savings and improved cash flow

Ways to address immediate challenges

Key takeaway

With the current situation putting new demands on businesses, liquidity has become a key issue. It is important that businesses maximise the use of existing and COVID-19 response measures and robust tax (accounting) and transfer pricing methods, to relieve existing cash pressures and improve liquidity.

● Claim tax filing and payment deferrals● Accelerate the recovery of input VAT ● Review expense allocations and VAT recovery for partially

exempt businesses ● Claim exemptions or reductions in customs duties, property

taxes, stamp duty, and other taxes● Claim available refunds of foreign taxes under double tax

treaties or domestic relief measures

● Accelerate the use of tax losses and other tax attributes● Identify opportunities to defer income and accelerate

deductions● Adjust intercompany agreements and transaction flows to

reduce withholding and transactional taxes payable ● Adjust the transfer pricing and allocation of profits amongst

group companies● Engage with customs authorities to reduce / waive cash and

bank guarantee requirements

A tax and legal perspective

Workforce

Challenge Response Benefit

Employees “trapped” and working remotely from a country that is different to their country of employment can give rise to immigration issues, personal income tax liabilities, employer tax and social security obligations, as well as foreign taxable presence exposures for the business

Manage tax risks for the business and its employees and ensure compliance withtax and legal obligations

Prevent unintended employer and employee tax costs and non-compliance

Ways to address immediate challenges

● Determine whether the business could be subject to payroll tax and social security obligations in the relevant foreign country● Determine whether the prolonged presence in a foreign country could expose employees to personal income tax in that country● Assess whether personnel in a foreign country could create a taxable permanent establishment for the business in that country● Assess whether the activities of directors and senior executives in a foreign country could change the tax residence of the business,

or impact the ability of the business to comply with (economic) substance requirements, and how technology may support● Assess whether employees discharging their functions in a foreign country may alter the value chain analysis for the group and

require transfer pricing adjustments● Understand the tax treatment of cost reimbursements to staff for working from home or for health and safety reasons

Key takeaways

Key business personnel stranded in countries that are different to their usual work location introduces a number of tax, transfer pricing and immigration issues which, if not dealt with appropriately, could expose businesses to additional taxation, costs, and non-compliance.

It is important that businesses have real time data on their employees (location, visa status, etc.) and plan for expected employee movements once travel restrictions begin to ease. Protection from adverse legal and tax implications may be available under COVID-19 emergency measures, bilateral double tax and social security agreements, and domestic “force majeure” type regulations.

Operations and supply chain

Challenge Response Benefit

Businesses are facing disruptions to the usual flow of goods and services between related and unrelated parties, and are needing to take recovery measures

Assess and proactively manage the tax and legal implications of operational and supply chain disruptions and response actions

Manage legal liabilities and mitigate adverse tax consequences

Ways to address the immediate challenges

● Understand the VAT, customs and tariff implications of using alternative suppliers● Determine the tax treatment of extraordinary costs associated with supply chain disruption and other business interruptions● Determine the transfer pricing implications of a shift in functions, risks and assets within the group● Understand the tax costs associated with new or altered intercompany transactions, and the impact on legal agreements and

transfer pricing documentation● Assess the need to obtain or amend tax rulings or advance pricing agreements● Analyse the VAT cash flow impact of delays in supply/production lead-times● Determine the ability to claim damages from vendors and suppliers who do not fulfil their contractual obligations, and the risk of

being liable yourself

Key takeaways

Businesses are impacted by vendors and suppliers facing operational or financial struggles of their own. This may create supply chain bottlenecks both locally and internationally, disrupt the usual flow of goods and services between related and unrelated parties, and impact the ability of businesses to meet customer obligations.

It is important that businesses holistically model, and proactively manage the trade, tax and legal consequences of operational and supply chain disruption and recovery measures.

Finance and liquidity

Challenge Response Benefit

Reduced revenues and tightened cash flow are requiring businesses to seek new or alternative sources of finance and liquidity

Assess the tax and legal implications of intercompany and external financing and liquidity transactions

Address legal consequences and mitigate unnecessary tax costs

Ways to address the immediate challenges

● Determine the tax treatment of short-term intercompany cash injections (equity or debt)● Analyse the impact of increased levels of debt and decreased EBITDA on interest deductibility for tax purposes● Assess the covenants and guarantees under existing financing arrangements● Assess the ability and tax cost of repatriating cash through dividends and upstream loans● Determine the transfer pricing implications of related party financing transactions● Understand the tax costs on waiving, canceling or repurchasing (at a discount) internal and external debt balances● Understand the impact of changes to the group credit rating on the capacity of individual companies to claim interest deductions● Assess the tax and legal implications of introducing (or amending) cash pooling arrangements● Determine the exit and other tax consequences of working capital and asset monetisation

Key takeaways

Accessing new and alternative sources of liquidity and funding is becoming increasingly important for businesses. It is important that the tax, legal and accounting implications of financing and liquidity transactions are assessed in advance to be able to proactively manage any unnecessary costs and delays in implementation.

Legal and business restructuring

Challenge Response Benefit

Businesses are required to restructure their operations to respond to changing economic circumstances and business requirements, which presents tax and legal implications

Understand the tax and legal implications from business adjustments and restructuring actions taken to address short and medium term challenges

Mitigate unintended tax costs and manage legal obligations

Ways to address the immediate challenges

● Determine whether restructuring actions could trigger exit charges or tax attributes being lost● Determine whether restructuring actions could impact the VAT position of the business and its ability to recover input-VAT● Understand the transfer pricing outcomes for group companies that will undergo a change in their functional profile● Determine whether all tax and legal obligations have been met in order to be able to wind down non-critical entities and operations● Understand the VAT, customs and withholding tax implications of changes to intercompany transactions● Understand whether contracts allow for immediate adjustments under express provisions or the interpretation of “force majeure”

Key takeaways

Businesses are rapidly adjusting their strategies to maintain financial and operational stability. Immediate actions focus on technology and workforce, cost containment measures, deferring or cancelling planned investments, changing or relocating production capacity, and winding down non-critical entities and operations. Short term business adjustments and restructuring actions could trigger unintended tax costs and have legal implications.

It is important that businesses have a holistic understanding of the immediate and long-term tax, legal and accounting implications of restructuring measures taken in response to COVID-19.

© 2020 PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only and should not be used as a substitute for consultation with professional advisors.

Tax and regulatory compliance

Challenge Response Benefit

Despite internal finance and compliance teams experiencing additional resource challenges, budget constraints and difficulties accessing information, businesses still need to continue to comply with tax and other reporting obligations

Proactively access and apply for filing extensions, register for electronic filing, monitor changing tax and regulatory deadlines, and use automation and technology to address resource constraints

Ensure businesses continue to meet their compliance obligations

Ways to address the immediate challenges

● Claim existing and COVID-19 related extensions of filing and reporting deadlines● Use online filing and reporting services (where available)● Use automation and technology tools to ensure timely and accurate reporting● Use external “tax agents” for all applicable taxes● Co-source or outsource tax and regulatory compliance● Use insource or remote loan staff options● Assess tax and regulatory information reporting obligations where deadlines are unlikely to change (i.e. DAC6)

Key takeaways

Businesses require visibility on the impact of COVID-19 on their tax and regulatory obligations, and whether any actions need to be taken as a result.

It is important that businesses consider their overall strategy when it comes to proactively engaging with authorities regarding ongoing audits and disputes, and the impact of the economic disruption on tax, transfer pricing and other filings, for current and future reporting periods.

©2020 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

Get in touch

Mark SchofieldMiddle East Tax and Legal Services Leader+971 4 515 7250mark.d.schofield@pwc.com

Jochem RosselMiddle East M&A / International Tax Services Leader +971 4 304 3445jochem.rossel@pwc.com

Jay RicheMiddle East Tax and Legal Digital Lead+971 56 385 4717jay.riche@pwc.com

Stephen Drake Middle East Global Mobility Leader+974 4419 2831stephen.d.drake@pwc.com

Mohammed YaghmourTax and Zakat Leader, Saudi Arabia and Egypt+966 54 425 0540mohammed.yaghmour@pwc.com

Mohamed SerokhMiddle East Transfer Pricing Leader +971 4 304 3100 mohamed.serokh@pwc.com

Jeanine DaouMiddle East Indirect Tax Leader +971 4 304 3744 jeanine.daou@pwc.com

Darren HarrisMiddle East Legal Services Leader +971 56 418 9768 Darren.Harris@pwc.com