Most of the tax considerations can help save money or offset the start-up costs of conversions. For starters, there are stimulus measures to consider, as governments commit to protecting their economies from the damage caused by the crisis, whether through spending, tax cuts, investment incentives or changes to filing deadlines.
While many of the stimulus measures are aimed at helping individuals, there are many business provisions, including changes to loss limitation rules and charitable deduction limits. Some governments may compensate businesses for tax losses arising from expanded operations, while others may offer credits or offsets for new expenses related to continuing operations.
But it’s not just stimulus. Tax laws long on the books can be used to help with start-up costs arising from converting production. Methods vary by jurisdiction and range from accelerated recovery periods for capitalization, immediate expensing or tax credits. Conversion costs of manufacturing facilities, including the interplay with IT systems and design processes for remote workers, may also qualify for existing research and development credits.
In addition, rules are changing rapidly concerning the imposition of value-added tax, goods and services tax, and sales and use tax. The changes vary as much as the jurisdictions imposing them. Some specific issues include recovery on donated goods (non-economic activities), the treatment of new products and raw materials, reduced rates or exemptions that may be available and repayments on increased purchases for imports, capital goods and start-up costs.
In addition to new COVID-specific tax measures, production conversion may result in temporary business activities that qualify for newly adopted or existing grants and incentives offered by governments. This could include the acceleration of longer-term incentives, the conversion of tax incentives to cash grants or refundable credits, or a reduction in the “typical” time commitments to maintain qualifying employment or investments.
Additionally, many jurisdictions have delayed the due date for periodic payments, and many are also offering time-to-pay arrangements. Also, companies can prioritize return filing in jurisdictions where they will receive a refund or can take advantage of net operating loss changes. Cash flow can be enhanced by accelerating deductions or deferring the recognition of income.
As Gibson discovered, new products and the need for new raw materials can raise supply chain challenges. At a bigger scale, particularly when products are being shipped across national borders, new customs and export licenses may be required. Additionally, new tariffs or tax rates may apply on those new products and raw materials, and they may face non-tariff regulations. There also may be challenges related to the movement of stock in and out of warehouses and distribution centers related to both new needs and COVID-19 disruptions.
Transfer pricing agreements may also need to be revisited in light of changing circumstances, including: decreases in profitability, the carrying cost of inventory, changing roles and responsibilities, the cost share treatment of extraordinary costs, and the allocation of risk and cost of supplier failure.