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We are all navigating uncharted waters as business and society faces up to the impact of COVID-19. We very much hope you and your loved ones remain in good health.
Please be assured that Fieldfisher is continuing to work with clients to navigate COVID-19 related issues and on business as usual needs. Do get in touch with us if you would like to chat anything through.
Carrying back to move forward
Most EU Member States have now taken emergency tax measures in order to safeguard their economies. These measures mainly consist in deferrals, suspension of interest, or extended compliance deadlines.
That has been helpful. However, this is a time for creativity, resolution and boldness. Now is the time to look at accompanying measures that will aid the expected recovery and minimise the recessionary impact of the pandemic.
An idea that we recommend to Finance Ministers is the introduction of unrestricted tax loss carry-back rules across the EU. This would allow enterprises to offset part of their previous taxable benefits with the (expected) losses of the current tax year.
Carry-forward: not enough
All Member States allow an offset of the taxable result of a given year with existing losses of a previous year. This “carry forward” system is, by definition, only of use where the enterprise continues to exist from one year to the next.
Now, for many businesses that sadly is not a given. Losses incurred in the most affected sectors (hospitality, transport, and tourism) already reach such levels that they might not be able to be offset over the number of years allowed, even if there is a swift recovery. Losses booked in 2020 will remain in the balance sheets of many companies for a long time, thus damaging access to credit. And, where companies are liquidated, the losses are lost.
The ability to carry forward losses will not be a sufficient measure in terms of encouraging economic recovery.
Carry-back: a way forward
Some Member States already allow taxpayers to use losses incurred in the current year to reduce the taxable (and already assessed) profits of a previous taxable year. This is the case in the UK, Germany, France and The Netherlands, for example. A carry back system enables the re-computation of the taxable result of the previous year, by taking into account the loss incurred in the current tax year. It results in the repayment of any excess tax, thereby relieving the cash-flow position of the taxpayer that suffers an unanticipated loss.
But, there are often temporal restrictions on carry back and there is not complete freedom to carry back losses incurred in one Member State to be set against profits earned in another Member State. In normal times, the restrictions can be justified. But, these are not normal times.
After the Corona Emergency: re-building Europe
“Better days will come”
Adopting an unrestricted EU-wide carry-back rule (on a temporary basis) would immediately help businesses facing cash-flow challenges. It would improve their financial health and ease their access to capital markets. Whilst the measure would come with an immediate cost to the exchequers, that would be more than mitigated by its being a catalyst to recovery, with the concomitant increase in the tax take in the medium term.
Now is the time.
Let us begin the recovery process.