What can you do with taxes to survive the crisis?
The globally spreading coronavirus is putting pressure on a large number of companies and creating difficulties in various economic sectors. While sector-based tax moratoria and advantages are yet being planned by the government and taxes must continue to be paid as usual (including VAT on 20 March), you have some basic tools that you can use today:
Deferral of tax debt – also prior to incurring the debt
If you can see that you will face difficulty in paying taxes, you can apply for tax deferral, meaning you will apply for scheduled payments with the tax authorities. You can apply for tax deferral from the Tax and Customs Board electronically, provided the website user (a) has no prior applications currently being processed and also (b) has an outstanding tax debt or future tax obligations that can be deferred. The application can also be sent in on paper. The tax authorities can require a guarantee, but one must rely on the sober understanding by the authorities that refusing deferral will not benefit anyone.
If you realise that the payment difficulties you face are broader, you may use the option of reorganisation. In that case, the company’s obligations can be restructured, which eventually also helps to overcome payment difficulties. However, when applying for reorganisation the principle “the sooner, the better” applies. The primary reason for failed reorganisations ‒ other than fraudulent applications ‒ is applying too late.
Tax debts not exceeding EUR 20 000 can be deferred automatically
The payment schedule is then up to 12 months, all tax declarations must be filed, and there may be no other outstanding payment schedules. A decision on automatic deferral is made by the tax authority’s electronic system and the application procedure is fast.
Apply for reduction of tax interest – both prospectively and retroactively
In general, interest in the case of deferral is 0.06% daily on the amount due – or generally more than on an equivalent bank loan. However, the tax authority can decrease interest on tax by 50% both prospectively and retroactively from the day the tax debt occurred. The latter option can be used in exceptional and justified cases, but there is no doubt that many companies are in just this situation.
Note that the state is planning to provide overall exemption from tax delay interest from 1 March to 1 May. This applies to tax arrears arising both within that period and before that. From 1 May, the overall daily tax delay interest rate is planned to be reduced from 0.06% to 0.03% and no tax delay interest at all will be applied in cases of deferring tax debts under the schedule set by the tax authorities.
Debt write-off
The Tax and Customs Board can write off tax debts if a taxpayer files a justified application and requiring payment is hopeless for reasons beyond the taxpayer’s control (including force majeure). It is clear that the government will not massively and carelessly write off tax receivables. Therefore, this is more likely to happen in sectors under pressure, such as those where business is based on cross-border movement and person-to-person contacts, especially in the case of saving large employers. It is not enough to add “COVID-19” in the description box for force majeure circumstances; instead, you must explain in detail how it affects your business. Likewise, it is important to explain what socio-economic and regional effects tax write-off would have, primarily in the context of saving jobs.
Cancellation of transactions and VAT
In cases of cancellation of transactions or reducing the price of goods/services, the seller or service provider must issue a credit invoice. A credit invoice annuls the original invoice, freeing the trader from the obligation to pay VAT. Both trader and buyer must reflect the credit invoice in their VAT return covering the taxation period during which the invoice was cancelled. This rule does not apply if a credit invoice has been issued because payment for the goods or services did not arrive in full or in part, but applies if the transaction circumstances change, for example the transaction is cancelled or the price changes and a credit invoice is issued as a result. If the buyer has already paid the sale price but the goods have not been sold or the services provided, the seller need not pay VAT in respect of an amount repaid to the buyer.
And then there is transfer pricing…
Depending on the sector, the crisis may dramatically change the functions of international group companies, their contribution to group activities, division of risks, the necessity to grant intra-group credit and lower interest rates and lack of guarantees. International groups must bring their transfer pricing guidelines into line with reality, and not so much because of the tax authority’s interest in making changes, but because they are economically beneficial.
… and share options
During tough times, people are driven by the vision of a better future. For companies with great development potential, this future potential is a currency that can translate into employee share options. This is an opportunity to pay for work by way of options, giving employees the opportunity of one day being included among the company’s shareholders. The clear tax benefit lies in not having to pay social tax on dividend income. Clearly, it is no alternative for remuneration, but it allows employers to partly compensate payment for those employees who share the vision. It must be remembered, however, that option contracts must mature no earlier than 3 years to make acquisition of shares tax-free for employees. Formal requirements must also be followed when concluding the contract (digitally signed, notarially attested or notified to the tax authority).
Information of tax arrears is not public any more
The tax authorities have stopped publishing information on tax arrears in order to exclude information on tax arrears arising during the COVID crisis from commercial decision-making. However, maintaining healthy commercial relations does involve acquiring information on outstanding tax liabilities when entering into contracts. In the context of public procurement, tax debt can still be a show-stopper and prevent procurement agreements with public authorities.
Tax refund for private person entrepreneurs (FIE)
The state is planning to compensate the first quarter’s advance payments of social tax for individuals as entrepreneurs. This means that individual entrepreneurs who have not yet paid tax need not do so. For those who have done so already, the state will repay it to the prepayment account, which then can be used for covering other tax liabilities or can be transferred to a bank account for other use.
Senior associates Kaido Künnapas and Tanel Molok