Marcum 2021 Year-End Tax Guide

• Since the COVID-19 crisis started, the OECD has been providing data, analysis, and recommendations on the pandemic’s impact on health, the economy, employment, and society. The OECD features a dedicated COVID-19 section on its website to share its latest insights on the crisis. • The catastrophic impact of the COVID-19 pandemic continues to be far reaching, and the serious implications for many MNEs’ transfer prices, analysis and documentation is yet another thing to consider. THE CORONAVIRUS AID, RELIEF AND ECONOMIC SECURITY (CARES) ACT The 116th U.S. Congress passed the $2.2 trillion economic stimulus bill called the CARES Act, signed into law by President Donald Trump on March 27, 2020, in response to the economic fallout of the COVID-19 pandemic in the United States. • The CARES Act temporarily suspended the 80 percent taxable income limitation on the use of a net operating loss (NOL) to offset taxable income for tax years beginning after December 31, 2017, and before January 1, 2021. • The CARES Act further introduced temporary changes to the IRC Section 163(j) business interest limitation. The CARES Act generally allows taxpayers to increase the 30 percent of adjusted taxable income (ATI) limitation on business interest expense to 50 percent of ATI for any tax year beginning in 2019 or 2020. Taxpayers can elect not to apply the higher 50 percent limitation. If the additional deduction yields negative tax consequences for another tax provision, such as IRC Section 59A (BEAT), taxpayers can decide not to elect to apply the increased IRC Section 163(j) limitation.

Inventory levels for both raw materials and finished goods were reassessed, and required additional investment, or cuts, to prepare for future shifts in demand. MNEs began to focus on responding to all of their specific issues and recalibrating their supply chains as COVID-19 became priority number one. • MNEs were forced to review their existing agreements for intercompany financing arrangements, intercompany services arrangements and intercompany royalty arrangements. Consideration of restructuring or re-pricing interest rates, to be in line with third party interest rates and help to free up cash flow, was front of mind. Many MNEs temporarily held off charging for intercompany interest, intercompany services and intercompany royalties. • MNEs will be under more pressure in the future to defend their existing transfer pricing policies due to the economic downturn. One element of this is that any adversely affected companies will be required to explain low operating profits or losses to tax authorities for both the current and coming years. It may be prudent for MNEs to model the impact of COVID-19 on operating results now, to help demonstrate in the future the commercial rationale for changes in transfer pricing and other planning decisions, and ultimately show that low profits or losses were not the result of non-arm’s length transfer pricing policies. The guidance issued by the OECD was welcomed, as many taxing authorities and taxpayers continued to face uncertainty about the treatment of operating losses and taxing of incentive schemes. The business impacts vary greatly by industry sector and geography. Moreover, the profit margin data often used for setting or testing transfer prices is generally only available with a lag of five to six months for North American databases and up to 18 months for some foreign databases.

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