COVID-19: combat liquidity shortages with immediate loss carryback

The exceptional situation resulting from the COVID-19 threat in Germany, Europe and many other countries places companies and self-employed persons in severe difficulties and threatens numerous jobs. The biggest problem companies and self-employed face is the lack of liquidity caused by the decline in sales, while payment obligations (e.g. salaries, rent) continue. Consequently, voices have been raised for short-term financial assistance in cases of liquidity shortages for companies and the self-employed. Our tax experts have analyzed possible tax measures to accommodate increased liquidity and conclude that immediate loss carryback is an important measure to provide affected companies with short-term liquidity.

Immediate loss carryback

Loss carryback allows companies to apply their net operating loss to a prior year’s tax return and as such generates a tax refund, since it is as though the business overpaid its taxes for that year. Under the COVID-19 threat this measure could be made available to companies immediately, meaning they do not have to wait for the end of the year to report their losses. Instead they only report that they suffer from the COVID-19 threat, and subsequently receive tax refunds to increase their liquidity. As such, immediate loss carryback is a helpful emergency tax measure to financially relieve threatened companies.

In practice: short-term, simple and company-specific

Income/Corporate Tax

To bring this loss carryback into practice we recommend the following measures. First of all, arrangements to provide liquidity have to be carried out short-termed and without unnecessary bureaucratic requirements. We recommend that the overpaid tax should be refunded immediately upon application, and that an informal application by the taxpayer, meaning without assessing whether the applying taxpayer is affected by Corona-induced losses from sales shortfalls, should suffice. Furthermore, the liquidity supply by immediate loss carryback should not induce any interest payments on these upfront tax refunds.

Secondly, the liquidity supply should be company-specific. Therefore, we do not recommend a lump sum transfer independent of the company’s size. Depending on the targeted liquidity effect, a partial payment could be discussed. Thus, depending on the expected duration of the economic difficulties (3, 6, or 12 months in 2020) either 3/12, 6/12, or the full tax could be refunded.

Thirdly, to ensure short-term and unbureaucratic, as well as company-specific assistance we recommend using the profits of the previous year as a basis. Specifically, the total amount of profit from the previous year should be used as the basis for the loss carryback. An extension of this immediate one-period carryback to a carryback of two periods should be considered.

German Trade Tax

A refund to the taxpayer should also apply, at least partially, to the German trade tax. Trade tax, on average, burdens corporations to the same extent as corporate tax. It also burdens partnerships despite the flat-rate imputation to the income tax, at least partially. Yet, technically a loss carryback cannot be applied to this tax form. In order to achieve the same effect as for the income/corporate tax, we are thus advocating an immediate tax refund anticipating a future loss compensation.

Implementation: short-term, simple and limited period of time

As we already mentioned, it is important that the proposed tax refunds are quick and painless. They should happen without unnecessary application forms and within a few days. We recommend that companies hand in a simple, informal report about their missed business activities and/or rough estimate of the sales drop. In times of crisis, such a simple report should suffice. Finally, we recommend communicating a clear timeline: the possibility of an immediate, increased loss carryback through tax refunds should be offered for a limited period of time.

Direct aid for uncovered cases

There will be companies and self-employed persons who are not sufficiently covered by the proposed measure. For these groups we should seek further direct liquidity support. Examples are companies that have created jobs that are not (yet) profitable. Instead of using tax measures to assist these companies, we recommend offering these groups direct aid. The intensity of assistance could depend on the level of social security contributions.

In conclusion, we believe that an immediate loss carryback offers an effective and easily implementable aid for the liquidity problems that many entrepreneurs and companies are currently facing. We would like to emphasize that the measure does not represent a tax cut. It rather is an anticipation of future tax relief in order to provide emergency aid without red tape. We urge companies and government officials to review these recommendations for their emergency tax measures to support our economy and minimize the economic impact from the health crisis.

To cite this blog:

Schanz, D., Sureth-Sloane, C., Gassen, J., Jacob, M., Maiterth, R., Müller, J., Nicolay, K., Ortmann, R., & Voget, J. (2020, March 25). COVID-19: combat liquidity shortages with immediate loss carryback, TRR 266 Accounting for Transparency Blog. https://www.accounting-for-transparency.de/covid-19-combat-liquidity-shortages-with-immediate-loss-carryback/

About this Post

Date

March 25, 2020

Authors

Deborah Schanz LMU Munich

Deborah Schanz is Professor of Taxation and Accounting at Ludwig-Maximilians-University (LMU) of Munich. Her research interests include the influence of taxation on investment and financing decision-making, tax accounting and international taxation. She is member of the executive committee of the German Academic Association for Business Research (VHB). In addition, she is head of the working group “taxes” of the Schmalenbach- Gesellschaft and member of arqus, working group quantitative business taxation. Her work is published in leading refereed and professional journals such as the Contemporary Accounting Research, European Accounting Review, Review of Managerial Science and the German Zeitschrift für Betriebswirtschaftliche Forschung (ZfbF).

Caren Sureth-Sloane Paderborn University

Caren Sureth-Sloane is Professor for Business Administration, especially Business Taxation at Paderborn University and visiting professor at the Vienna University of Economics and Business. Her research focus is on the effects of taxation on corporate decisions, especially on the effects of taxes on risky investments, as well as on international business taxation and on tax complexity. She is founding member of arqus, working group quantitative business taxation, as well as member of the working group “taxes” and “transfer prices” of the Schmalenbach-Gesellschaft, of which she is the vice president. She is also full member of the North Rhine-Westphalian Academy of Sciences, Humanities and the Arts.

Joachim Gassen Humboldt University of Berlin

Joachim Gassen is Professor for Accounting at Humboldt University of Berlin and distinguished affiliate professor at ESMT Berlin. His research focuses on the role of accounting information in markets and contracts. He is currently acting as the departmental editor for accounting at the German business association journal “Business Research” and is co-chairing the Doctoral Colloquium of the European Accounting Association. In addition, he is member of the Academic Panel of the European Financial Reporting Advisory Group (EFRAG).

Martin Jacob WHU

Martin Jacob is the adidas Professor of Finance, Accounting, and Taxation at WHU – Otto Beisheim School of Management, Vallendar. His research interests include taxation and investment decisions, taxation and payout policies, capital gains taxation, empirical tax research and tax avoidance and income shifting. He is associate editor of the Accounting and Business Research and the European Accounting Review as well as editorial board member of the Journal of the American Taxation Association. In addition, he has published in several renowned international journals such as Journal of Finance, Review of Financial Studies, Journal of Accounting Research, Journal of Accounting and Economics and The Accounting Review. He is also a member of the Management Committee and the Standing Scientific Committee of the European Accounting Association.

Ralf Maiterth Humboldt University of Berlin

Ralf Maiterth is Professor for Business Taxation at Humboldt University of Berlin. He is also Dean of Studies and Vice Dean for International Affairs as well as Deputy Member of the Audit Committee of the Faculty of Economic Sciences of the Humboldt University of Berlin. He is member of the academic committee of the Leibniz ScienceCampus “Mannheim Taxation” (MaTax) which is a joint initiative of the University of Mannheim and the Zentrum für Europäische Wirtschaftsforschung (ZEW). In addition, he is Professor at the German Institute for Economic Research and chairman of arqus, working group quantitative business taxation. He is co-editor of the German “Steuer und Wirtschaft” and member of the German Academic Association for Business Research (VHB), European Accounting Association and of the German Economic Association of Business Administration (GEABA).

Jens Müller Paderborn University

Jens Müller is Professor for Business Administration, especially Tax Accounting at Paderborn University. He is member of the Scientific Committee of the Annual Congress of the European Accounting Association. Other memberships include the American Accounting Association, arqus, working group quantitative business taxation, Center for Tax Research (CETAR), European Accounting Association and INTACCT as well as the German Academic Association for Business Research (VHB).

Katharina Nicolay University of Mannheim

Katharina Nicolay is assistant professor for accounting and taxation at the University of Mannheim. Her research interest cover topics of international business taxation, empirical tax research, evaluation of tax reforms, and tax accounting. She is also a researcher at ZEW’s Research Department “Corporate Taxation and Public Finance” and one of two coordinators of the Leibniz ScienceCampus “MannheimTaxation”.

Regina Ortmann Paderborn University

Regina Ortmann is Junior Professor for International Business Taxation at Paderborn University. She is member of the American Accounting Association, European Accounting Association, Center for Tax and Accounting Research (CETAR), German Economic Association of Business Administration (GEABA) and affiliated member at the Norwegian Center for Taxation (NoCeT).

Johannes Voget University of Mannheim

Johannes Voget holds the Chair of Taxation & Finance at the University of Mannheim. His research interests cover international taxation, corporate finance and public finance. Prior to joining the University of Mannheim, Johannes Voget held a position as Research Fellow at the Oxford University Centre for Business Taxation, with which he is still affiliated as a Research Associate.

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COVID-19: combat liquidity shortages with immediate loss carryback

Immediate loss carryback

In practice: short-term, simple and company-specific

Income/Corporate Tax

German Trade Tax

Implementation: short-term, simple and limited period of time

Direct aid for uncovered cases

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Immediate loss carryback

In practice: short-term, simple and company-specific

Income/Corporate Tax

German Trade Tax

Implementation: short-term, simple and limited period of time

Direct aid for uncovered cases

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