EY: Threats and Opportunities in a Post-Covid-19 Economic Context

A statement currently circulating on social media warns that “it is strange that certain world economies easily collapse when consumers buy only what they need”.

Statements like this often contain some degree of truth. The social isolation linked to the pandemic has generated forced changes in the consumption habits of millions of people. But it has also encouraged those consumers to question their objectives.

The economy in general, and private companies and family business in particular, are subject to an unprecedented degree of pressure. Except for some particular industries, many sectors and segments of the economy must reinvent themselves to survive. Airlines, restaurants and tourism service-related fields have faced massive layoffs as revenues or prices have collapsed. However, other sectors are on the rise: medical equipment, telehealth, streaming, videoconferencing, collabo-ration tools, cloud services and on-line retail stores. An EY study found, for instance, that 50 percent of consumers will change their consumption habits in the post-Covid long term, prioritising the affordability, health and environmental im-pacts of their decisions. Companies will need to reconfigure their value proposition around these objectives.

Every day, social media and networks show the magnitude of ongoing changes which will surely modify habits and cus-toms. Changes involve not only consumers’ formats but also the way in which many businesses produce and generate added value. We are facing a turning point that questions and challenges supply and demand assumptions.

Those leading transformation of their market will eventually win. Those failing to invest their energy and resources in innovation will probably see decline in their sectors. Agility and resiliency are key values or elements.

Business innovation is no longer a “nice-to-have”; it is now a need. Companies and family enterprises must innovate and define changes in their business strategy or models. One of the main aspects to be factored-in is the consequences of tax associated with the changes.

Companies’ lack of resources to invest in designing and defining strategic changes, without a safety net or an alternative plan, is a limiting factor. In this context, tax is also key in designing a business strategy. The tax variable is present in Ar-gentina and cannot be disregarded. Recently, the Argentine congress passed a tax moratorium or amnesty law (including application restrictions for multinational enterprises) and amendments to the legislation that promote the knowledge-driven economy.

As if the scenario were not complex enough, changes in the tax system are being analysed from a holistic perspective. Central Bank regulations intend to maintain governments’ hard currency reserves by restricting the free trade of currency. Today the only source of foreign currency reserves for Argentina are private-sector exports, because sovereign indebted-ness is not available in foreign markets. The “decision tree” to be created under these circumstances is complex. This is particularly so not only because changes to business strategy foundations are being accelerated, but also because they are part of an uncertain and volatile tax and economic context.

Textbooks teach us to model economic and tax scenarios and to sensitise the related variables to draw conclusions. This is having an impact on how expected changes should be arranged and weighted to define appropriate courses of action. If we intend to put the factors affecting decision-making in order, we should emphasise first of all that the tax concept fol-lows the business. If the intention of a company is to modify the tax treatment of a specific taxable event by providing it with characteristics that are not consistent with the substance or economic reality of the new business, or the transaction in question, the structure may be challenged by authorities.

Summing-up, the search for tax shortcuts may generate consequences that outweigh the potential benefits. Probably, however, a specific change to a business model may not be economically viable because the tax cost makes it ineffective. It is true that the unco-ordinated accumulation of federal and local taxes in Argentina over a specific value chain may cause a business to be non-competitive.

In these cases, the tax factor should be reviewed with a view of efficiency — without modifying the substance of the busi-ness. Today more than ever, tax alternatives should be studied to allow for the proper performance of new business mod-els concerning direct and indirect taxes. This puts the company in a position to build alternative scenarios to factor-in pos-sible consequences.

The search of tax efficiency in a business model should not be construed as illicit behavior. The Argentina Supreme Court of Justice has already ruled in favour of taxpayers’ rights by establishing that “the honest effort of the taxpayer to limit their taxes to the legal minimum is not reprehensible”.

And what about technology? In another research, EY also noted a heightened focus on digitalisation. Many business lead-ers and family enterprises’ next-generation members view the pandemic as the point that will allow them to redefine themselves, placing new emphasis on data, robotics and other new technologies. More companies are accepting the home-office as an option, and may lead to changes in requirements for office space.

The decision by some companies to cut back on travel prompted a major surge in demand for virtual-meeting technology. Cybersecurity can also become more of a business resource and transformation enabler: norms and government regula-tions on data and intellectual property could require changes or adjustments.

A willingness to adapt to consumer demand, readiness and resiliency, transformation and innovation, are essential values. Time is short, and hardship tough. But strong decisions now may pre-empt a brighter and more resilient future. i

About the Authors

Sergio Caveggia is a tax partner currently in charge of Transaction Tax area in Argentina. He joined EY Argentina in 1994 and has developed expertise over 24 years in international taxation and merger and acquisition matters. Sergio is also focus on servicing clients in the Private Client Services (PCS) area. He is highly experienced in inbound and outbound investments, buy side, sell side and restructuring services within the Transaction Tax area.

Sergio has served in a variety of industries and has also been involved in many due diligence procedures performed in the past 20 years. He has given lectures in national universities and is a frequent speaker in tax seminars. He has also written several articles dealing with Argentina tax issues.

He is a Certified Public Accountant who graduated from University of Belgrano in Argentina. He obtained his Tax Specialist’s Degree at the University of Belgrano and has a postgraduate certificate in Business and Management from Universidad Catolica Argentina (UCA). He is also member of the Professional Council of Economic Sciences of Buenos Aires and the Argentina Fiscal Association.

Jimena Garcia is a Manager currently working in the International Tax and Transaction Services (ITTS) and Private Client Services (PCS) areas in Argentina. She joined the firm in 2014.

She has extensive experience in social security & labor law buy-side and sell-side due diligence services in numerous companies in different industries. She also participated in the coordination of many cross-border engagements, dealing with foreign labor and social security legislation matters on each transaction. Jimena participates in numerous seminars related to payroll taxes and labor law matters.

Jimena is a Lawyer graduated in 2010 from UNLAM (Universidad de La Matanza). She is enrolled in the Bar Association of the City of Buenos Aires.