INSIGHT: Covid-19—How are Businesses Adapting Their Operations?

Businesses around the world are responding to the Covid-19 pandemic by converting their normal operations into manufacturing lines that produce desperately needed supplies such as personal protective equipment and ventilators.

There are numerous feel-good stories playing out across industries and geographies as businesses large and small feel compelled to do something to help, especially as government responses have been uneven.

More than 50 EY clients across the advanced manufacturing, hospitality and consumer products sectors have announced publicly that they are engaging in some sort of manufacturing line conversions to help in the Covid-19 fight. For most, the tax, legal and workforce ramifications of these actions are secondary, but nonetheless important, considerations.

As these corporate responses to Covid-19 proliferate, businesses trying to help are encountering new and sometimes unexpected tax, legal and workforce implications. Understanding how to navigate them can help distribution of their new products, mitigate costs associated with the sudden conversions and control risks, according to EY professionals.

“On the tax side, there are government incentives, credits, and grants that can potentially offset some start-up costs with these initiatives,” says Rob Weber, EY Global Business Tax Services Leader. “Businesses may also need support with cash flow issues, logistical challenges along their supply chains and new legal risks. And, if they’re keeping their people working during the pandemic or looking to bring them back as things stabilize, they need to be concerned about how to keep them safe.”

“The above experiences are common for businesses stepping up to help,” says Gijsbert Bulk, EY Global Director of Indirect Tax. “These companies have fantastic ideas and are making a difference. But often there are a number of important steps they can take to most effectively execute their ideas.”

In general, there are five areas on which companies undertaking benevolent conversions should be focusing. These include:

• tax implications;
• cash flow considerations;
• logistical concerns;
• risk and law issues; and
• managing people.

Tax Implications

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 are committed 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, changes to loss limitations rules and charitable deduction limitations in response to the pandemic. Some governments may compensate businesses for tax losses arising from expanded operations and others may offer credits or offsets for new expenses related to continuing operation. The EY COVID-19 Stimulus Tracker provides a snapshot of the global policy changes that have been announced and can assist in examining the government initiatives available in jurisdictions throughout the world.

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 credit. In addition, 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 consideration. 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.

Cash Flow

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. Companies can also 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.

Logistical Concerns

New products and the need for new raw materials can raise some 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 tariff or tax rates and face non-tariff regulations may apply on those new products and raw materials.

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.

Law and Risk

Creating new products also potentially creates new legal risk to be considered and ideally mitigated.

For example, some companies may need to consider whether they are taking on additional product liability exposure and need to take steps to protect themselves.

Also, as companies respond quickly and reach out to others doing the same, they will form new relationships with third parties. Those partners may consider temporary or enduring joint ventures or the creation of new legal entities.

Finally, from a law perspective and depending on the public pressure to make available life-saving designs and formulas, businesses may still want to take measures to protect their intellectual property (IP), and conversely, companies should endeavor to respect IP, including considering new licensing arrangements. Cyber security and data privacy support continue to be of great importance.

Companies in general should be contemplating the option of applying the principles of force majeure to assess suspension or termination of their commercial contracts. Legal positions on force majeure and how it affects parties who are unable, or may be unable, to perform their contractual obligations due to Covid-19, and the associated responsive measures, differ across the world.

Managing People

The health, safety and protection of employees and customers is paramount. Policies should follow the best health and wellness guidance as well as all government restrictions and recommendations. Emotional and mental well-being are also critical. This is particularly true of employers asking workers to stay on during lockdown periods to produce life-saving products or employees managing increased personal commitments while simultaneously transitioning to remote working.

“It’s clear organizations need to fundamentally shift their collective mindsets, to one which I believe promotes and recognizes a ‘care for self, care for others’ mentality first,” says Mike Bertolino, EY Global People Advisory Services Leader.

As companies begin the process of returning their workforces back to normal operations, they should ensure that the workforce has the skills and training necessary to convert production safely and efficiently. And they should be sure to comply with rapidly changing laws and regulations affecting immigration and worker mobility or employer obligations around the world.

Workforce planning must address the very real temporary constraints on the availability of personnel and also align to short- and long-term goals. For example, locations heavily impacted by Covid-19 may not be as suited to activities as other locations, even if they are business critical locations.

Kate Barton is EY Global Vice Chair—Tax.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.