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Coronavirus Menaces Tax Audits, SEC Filings for Multinationals

March 2, 2020, 7:29 PM

Travel disruptions and canceled meetings are just the first wave of coronavirus impact on financial operations of multinational companies.

Businesses will increasingly be challenged to meet tax deadlines, audit inventory in far-flung locations, and conduct due diligence for mergers. Even the filing of quarterly financial results is threatened.

“If this ends in two weeks, it’s not an issue,” Friedemann Thomma, chair of the international tax practice at Venable LLP in California, said. “But if it’s still going in six months, we’ve got a massive problem.” Companies might have little choice but to ask tax authorities for more time to compute their results, he added.

Taxing Concerns

Tax professionals in particular face a litany of issues if the spread of coronavirus were to cause a lasting disruption. Adele Hogan and Sabrina Conyers, partners at Columbia, S.C.-based Nelson Mullins Riley & Scarborough LLP, cited several of them:

  • State income tax apportionment changes if part of a workforce works remotely from different locations than the main office for long periods;
  • Impact to businesses that use expense-accrual accounting, which requires goods and services to be delivered within 3 ½ months, but where the unavailability of materials or services delays delivery;
  • Impact of timing differences on financial statements and tax returns, where expenses go up while revenues go down and vice versa;
  • Impact to net operating loss carrybacks and carryforwards.

They also said due diligence for mergers and acquisitions will become more granular, including more information requested about the possible exercise of material adverse change clauses, going concern issues in audits, potential insurance coverage and claims, purchase price adjustments, and more, all of which may may impact the tax treatment of the transactions.

But right now, they cautioned, it isn’t possible to do much more than consider the possibilities. “It’s all still unfolding,” Hogan said.

Lisa M. Zarlenga, a partner with Steptoe & Johnson LLP in Washington, pointed to another type of looming issue: Investors may have trouble qualifying for wind energy-tax credits if they can’t show that they satisfy the IRS’s Continuity Safe Harbor rules, which require that investors demonstrate progress towards completion of a project once construction has begun.

“Companies that started wind projects in 2016 have to complete them by the end of 2020 if they want to take advantage of the Continuity Safe Harbor,” she said, “but if they’re facing delays in getting supplies from China, that may be a challenge.”

The issue isn’t limited to energy-tax credits, she added, as “anytime there’s a statutory date, delays that are beyond your control could create some issues.”

She noted that, in the case of federally declared disasters, the IRS has the authority under tax code Section 7508A to postpone filing and payment obligations, an authority it regularly employs after natural disasters like floods and hurricanes. But that authority would require a declaration of a major disaster or emergency first.

To contact the reporter on this story: David Jolly at djolly@bloombergtax.com

To contact the editors responsible for this story: Kathy Larsen at klarsen@bloombergtax.com; Jeff Harrington at jharrington@bloombergtax.com

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