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Why every treasurer should be thinking about tax when dealing with the Covid-19 disruption ?


Covid-19 has hit the world as a black swan event – it deviates beyond what is normally expected and is extremely difficult to predict. It is impacting businesses and governments with unexpected disruption, global uncertainty and unprecedented risks. CFOs and treasurers are having to address a number of challenges to manage short-term risks, sustain business and prepare for what is to come. The examples below illustrate how critical it is not to forget the potential tax consequences of various treasury activities such as mobilizing cash or adjusting the terms of existing debt.

Important tax aspects to consider…

…when managing fluctuating short-term liquidity needs

Given that, in these uncertain times, cash is more important than ever, any tax leakage incurred when circulating or repatriating cash is undesirable.


Mobilizing cash may be executed as a plain vanilla loan, distribution or contribution of cash etc. Repatriation of cash may be achieved via dividends, capital redemptions, debt-related payments, intercompany asset transfers or intercompany upstream lending. Liquidity needs may also be managed by consolidating funds centrally and redistributing them through cash pooling or other alternative financing arrangements. Each of these various cash-mobilization possibilities entails different tax consequences. The easiest way to circulate cash may not be the best one and may trigger unfavorable tax consequences, for example, from a withholding tax or debt-to-equity ratio perspective.

Similarly, due to supply chain reorganizations, financing may be required in entities within the group that have previously not required funding. When setting up such new funding, tax aspects such as tax treaty analysis and potential withholding tax clearances need to be considered.  

…when making changes to existing debt

Internal or external loans may need to be refinanced or, considering lower interest rates for certain borrowers, be reduced. Also, intercompany settlements may need to be postponed. Any such changes to existing debt instruments (change of interest rates, extension of maturity, delayed repayment schedules etc.) may entail undesired tax implications, such as the loss of grandfathering benefits in connection with interest limitation rules.

The tax implications of transactions such as intercompany debt waivers, capitalizations or transfers need to be considered carefully. For instance, where the value of a loan has increased because its interest rate is above the current market rate, its transfer could result in a taxable gain. Similarly, the tax implications associated with potential loan forgiveness need to be assessed carefully.

The increased level of volatility of different currencies may reinforce the need to hedge the resulting foreign exchange exposure, and this should be carried out in a tax-efficient way.

“The easiest way to circulate cash may not be the best one and may trigger unfavorable tax consequences.” 

Transfer pricing needs to be high on the radar

What was considered as arm’s length in a normal business environment may be different in the current climate that is heavily impacted by Covid-19. Below are a few examples of important transfer-pricing aspects that need to be considered:

  • Existing benchmarking studies and transfer pricing policies may have to be reviewed given increased interest rates for certain borrowings in the current climate of cash shortage.

  • In view of Government-backed facilities, the extent to which such facilities need to be considered as comparables for new intra-group financing should be assessed.

  • Reduced performance leading to changes in credit rating may impact the volume and pricing for financing. In this connection, specifically relevant for intra-group financing is that changes in the borrower’s credit rating may also affect the required equity at the level of the lender.

  • For companies affected by the Covid-19 situation, parental guarantees may be requested to secure external funding; such guarantees need to be accurately priced and documented.


Other important tax considerations that might help to remove financing inefficiencies

When considering how intra-group financing can be provided to entities in need of funding, and in order to mitigate cash tax implications as much as possible, an analysis is recommended of the extent to which existing tax losses can be accessed throughout the group. Factoring may also be a consideration in that context.

In view of the widely introduced interest limitation rules which restrict tax-deductible interest expenses to a certain percentage of tax EBITDA, existing debt financing should be revisited, in light of a possible reduction in EBITDA, to maintain the tax efficiency of debt funding.


Tax and transfer-pricing considerations can significantly impact the actions to be taken by treasurers in this new Covid-19 environment and should be carefully considered before being taken.


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