EY and multinational tax clients adjust to coronavirus
Big Four firm Ernst & Young and its business tax clients at companies across the U.S. and other countries have faced a series of challenges amid the coronavirus pandemic, including new tax legislation like the CARES Act, just as they were starting to grow more familiar with the Tax Cuts and Jobs Act of 2017 and all of its brand-new tax provisions. Still, as EY and its clients adjust to working from home and dealing with each other remotely, they have found ways to get their jobs done.
“Tax departments are hanging in there,” said Kate Barton, global vice chair of tax at EY. “It’s been really hard. The U.S.-based multinationals and even the non-U.S. multinationals are still dealing with U.S. tax reform. It’s only been two and half years. The way the law came together so quickly, they’re still in digestion on the U.S. reform, so you go from U.S. reform and then on top of that you go into a pandemic. All around the world, we’re tracking 130 countries on their global stimulus. So many countries passed new tax laws to stimulate their economy and to try to bridge how they would navigate the economic perspective right now. There are so many tax laws, and so much that heads of tax have to deal with.”
Understanding and keeping up with the fast-changing tax laws hasn’t been easy for many tax departments at multinationals. “They still haven’t digested the extra tax load that came from U.S. tax reform, and then they have this huge extra workload from the global pandemic because most CEOs in the C suites want to quickly understand what are we availing ourselves around the world in terms of tax stimulus and monetary stimulus,” said Barton “A lot of that falls on the head of tax’s shoulders. The workload has only gone up, and they're trying to navigate their departments with a whole bunch of people working from home, which is never easy, but that’s the new norm in today’s world. They’re really trying to keep everybody motivated and engaged in a time of great change.”
Just before COVID-19 began spreading, EY surveyed more than 1,000 tax and finance executives in 42 jurisdictions and 17 industries. It discovered that many of them were already going through considerable transformation. It found 99% of the respondents said they were transforming their tax and finance operating models in some way to ensure they had the right talent and technology capabilities to monitor, evaluate and respond to major legislative changes around the world. Eighty-five percent of the companies anticipated an increased workload from emerging digital tax-filing requirements, while 73% were more likely than not to co-source tax and finance activities in the next 24 months, and 45% had trouble providing new responsibilities and career advancement.
This poll was mostly done before the outbreak. Thomson Reuters conducted a separate survey of U.S.-based corporate tax departments from late 2019 to mid-February and then updated it in mid-April to reflect the impact of the pandemic. Over half of the in-house tax departments polled by Thomson Reuters indicated they would describe themselves as under-resourced, though only a third of them planned to increase their headcount. Over 50% of the tax departments surveyed described their level of technological optimization as either “chaotic” or “reactive.”
At Ernst & Young, much of the staff is now accustomed to working remotely for the past few months. “We have over 280,000 people in our firm, and pretty much all our people are working from home,” said Barton. “Some of our Asia Pac offices have reopened and are working again. Every country has different guidelines for abiding by the laws and regulations, but most of our workforce is working from home. We were ready for something like this. We have invested globally in our technology platform, and we have a lot of technology and tools to foster client collaboration and teaming. Everybody is equipped to work from wherever, so we’re managing through that. Unfortunately, a lot of our clients, some of them were very ready and others were not, depending on the industry and what they do.”
Clients who weren’t already using remote technology to work from home had to adjust more quickly to this new normal. “In those situations, we’re using cell phone calls and things like that,” said Barton. “But most companies, if they weren’t prepared, scrambled and have had to make some sharp investments in technology and equip their people. We had a lot of clients where the people had desktops and so they had to figure out how to get the right equipment to their workers so they could effectively work from home. You have seen a spike in laptop purchases and software purchases.”
EY had long ago made such investments. “We’ve had deep practice at EY with people working from home,” said Barton. “We’re a professional services organization. What we sell is our people so we’ve had more experience. When you’re working in a company where they sell widgets or consumer products or something like that, it’s not as easy for those companies and working from home seems to be harder. It’s just not part of their culture, so it’s going to be tough if you’re trying to figure out new technology that you haven’t necessarily used and workstyles that you have never tried before.”
The CARES Act has particular challenges for many tax departments to deal with while they’re working in this new environment. “Some of it is just the amount of calculation and filing work,” said Barton. “The employer tax credit is just a lot of calculations. The benefit has been rather small, so it’s a lot of work to get it.”
One of her clients contrasted the employee retention credit to the benefits they received in the U.K. for retaining employees. “In the U.K. big retailers were able to take a credit for last year’s real estate taxes,” said Barton. “It was a very different stimulus provision, and it really gave them a lift in their operations and more cash. Cash optimization is critical right now. So the employer credit has been a lot of work for maybe not as big of a reward.”
The net operating loss carryback provision in the CARES Act has also proven to be complex. “People are doing their calculations and trying to make their filings as well,” said Barton.
EY has been helping bank clients deal with the Paycheck Protection Program provided under the CARES Act, which requires businesses to retain their employees for a period of time in order to get their SBA-backed loans forgiven.
“Some things that look like tax filings have to be filed with the bank,” said Barton. “The burden of proof is now on the bank to come up with the forgiveness side, so if the loans were used for employment and the right reasons, then the bank can forgive them and the bank has to go through a whole lot of documentation. The burden of proof for the original loan was on the borrower, and then the forgiveness burden of proof is actually on the banks, so you can imagine the banks want to make sure they follow the federal procedures to a tee. The amount of loans that they have had to administer has been so large that they’re resource constrained, so we have been able to assist some banks in that endeavor.”
She believes more clarity is still needed. “Everybody is just looking for clarity on the rules,” said Barton.“I feel there’s still more action that needs to be taken. Nobody wants to make a mistake or forgive something and then have it be questioned in hindsight. I think there’s some reluctance in some cases about who is really eligible for borrowing. Some people went in and borrowed the money, but then thought about it after they took it and returned it because they felt like it really wasn’t intended for them. Some companies really need the money, and others are really looking at it carefully to make sure that they don’t take away from somebody who maybe needs it more. I’ve talked to a lot of clients where they are very careful and have a global framework on what stimulus they’re taking, not only in the U.S. but around the globe. They just want to make sure it aligns with their purpose and it’s absolutely needed and reputationally from a risk perspective fits their dynamic.”
She believes the pandemic will spur more companies to automate their tax and finance departments. “I feel like the COVID-19 situation is only going to accelerate the transformation that most companies have to do for their tax and finance function,” said Barton. “Our survey was done just as COVID started to erupt, and it was saying that companies needed to do more with less, and they needed to use technology in new and different ways. I feel like COVID-19 has accelerated that journey by a 10X factor, so if you thought that was an imperative before COVID really did its complete damage, now I think it is amazing how many companies are looking at what’s the best way to run their tax function. Is there a better, faster, less expensive way to do this? I think you’ll see more and more companies look at ‘Can I be a part of a multi-tenanted technology platform or should I build my own? How should I go about it because tax technology is really complicated.’ Every country has its own tax rules, and sometimes they’re not intuitive.”
EY has seen countries around the world changing their tax rules in response to the pandemic. “Globally, just on the stimulus that came out, 2,100 provisions around the world were modified, changed or added to,” said Barton. “There was that much legislative change around the world. That’s just a ton of stuff to keep on top of. And guess what’s going to happen next to the tax laws around the world when we emerge, hopefully soon, from this COVID-19? The EU has come forward with their package on what they’re contemplating in terms of the pay-fors. These countries are going to have to adjust their tax codes to figure out how to raise revenue to pay for the stimulus, because a lot of countries raised their debt levels to an uncomfortable level to fund the economic help with COVID.”
She believes there will be more of a move toward digital services taxes in Europe, which has prompted the U.S.to threaten retaliation if U.S. tech companies are taxed. “They want a tax on the gross revenues for digital companies doing business in their country, for the privilege of selling to their marketing base in their countries,” said Barton. “You’ll see carbon taxes possibly. Maybe you’ll see in the United States a U.S. VAT.”
She anticipates that further stimulus legislation will be needed in the U.S. to spur the economy. “The next bill we’re following is the HEROES Act, which passed the House, but the Republicans in the Senate are not in favor of all the provisions,” said Barton, “but I do think there will probably be another stimulus coming in the U.S. And what shape that will take is anybody’s guess, but I think it will be more tax law changes. In some ways, it may be good news for the U.S. economy, but for the tax department it just adds more legislative uncertainty and interpretation and more watching because they have to digest and apply it to their company’s fact pattern. I can tell you, it’s a good time to be a tax professional. It’s a time of great change, but it’s a lot of work.”