COVID-19 Disruption: Challenges for Life Sciences Companies (and Beyond)
Cash flow strategies are paramount, then come “postscript” considerations

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The COVID-19 pandemic has had an unprecedented impact on the business community. The life sciences industry has not been immune to its effects, since the pandemic has affected consumer demand for life sciences products in sometimes unpredictable ways and has wreaked havoc on supply chains. Although some life sciences companies had extra inventory on hand as a cushion against disruption, no one could have foretold the enormity of COVID-19.

Collectively, life sciences companies are experiencing a wide range of effects, including intense patient and consumer focus on certain products, treatments, and equipment as well as distraction or delay with respect to others. Thus, it makes sense to use the life sciences industry to frame a discussion of disruption that can be used as a baseline for other industries.

Two things that are top of mind for all companies, life sciences and otherwise, are cash flow strategies to get through the period of disruption, and “postscript” considerations for moving forward. A technical analysis of direct and indirect disruption tax issues could fill a tome in itself, but for now we limit our discussion to material highlights and considerations in these two areas.

Cash Flow and Financing

Federal Income Tax Considerations

Now more than ever, cash is king, and cash flow planning has taken center stage. Several recent federal income tax developments have facilitated cash flow planning significantly.

Tentative tax refunds provide a ready route to a cash infusion. The Coronavirus Aid, Relief, and Economic Security (CARES) Act permits corporations that have remaining minimum tax credits (MTCs) to receive refunds of 100 percent of those amounts in 2018 or 2019, rather than in 2021 as was the case under the legislation commonly referred to as the Tax Cuts and Jobs Act (TCJA).

Companies may file tentative refund requests for remaining MTCs until December 30, 2020. Although the Internal Revenue Service has been instructed to act upon and pay the refunds within ninety days, current realities may lengthen that period. A word of caution: IRS Notice 2020-26 may accelerate the filing deadline if the taxpayer files a single Form 1139, Corporation Application for Tentative Refund, so as to claim both a net operating loss (NOL) carryback and remaining MTCs at the same time. Filing separate Forms 1139 for the NOL and MTC refund claims may prevent the unwary from falling into that trap.

Also valuable when seeking cash is the temporary five-year carryback period for NOLs arising in tax years 2018, 2019, or 2020. In addition to permitting carrybacks into pre-TCJA tax years that had a thirty-five percent tax rate, the CARES Act temporarily permits the losses to offset 100 percent—rather than eighty percent—of taxable income.

A wide range of potential method changes can optimize carryback-eligible NOLs in either 2019 or 2020 (depending on the type of method change and whether the company has already filed its tax return for the year of change) through combinations of accelerating deductions and deferring income. Most companies are familiar with the available method changes, with the critical task being to select the optimal year(s) of change and combination of accounting methods.

In addition, the CARES Act corrects the TCJA treatment of “qualified improvement property” (QIP), retroactively extending bonus depreciation eligibility to most improvements made by the taxpayer to the interior of a nonresidential building after the building was placed in service. Building owners and tenants—including those in some of the hardest-hit sectors of the economy—may each fully expense QIP costs incurred in 2018, 2019, or 2020 (and claim bonus depreciation for future years as well).

Revenue Procedure 2020-25 provides liberalized procedures effectively permitting a do-over for QIP accounting methods and for many (but not all) bonus depreciation elections made in 2018, 2019, and 2020. This allows companies to choose between preserving cash immediately (using a method change with a “negative Section 481 adjustment”) or instead filing an amended return reducing taxes in a prior year. Although liberalized, the revenue procedure’s many options require close scrutiny to reach the optimal outcome.

Electing under Section 165(i) to treat “disaster losses” attributable to the pandemic as occurring and being deductible in 2019, rather than in 2020, is another potential option for accelerating a cash refund, and may be available in far more situations than is the case with typical casualty losses.

The CARES Act also increases the Section 163(j) limitation on interest expense deductions from thirty percent to fifty percent of 2019 and 2020 adjusted taxable income (ATI) and allows (but does not require) use of 2019 ATI for 2020 computations. ATI is computed without regard to NOLs, allowing companies to benefit from the temporary NOL carryback provisions without impairing their interest deduction in carryback years.

“Real property trades or businesses” should review the relaxed procedures in Revenue Procedure 2020-22 for electing (or revoking) that designation for purposes of Section 163(j) in light of the CARES Act.

Companies whose 2019 or 2020 interest expense exceeds their Section 163(j) limitation even after these temporary liberalizations should consider identifying financing leases that are more properly treated as operating leases for tax purposes. Characterizing such agreements using an automatic method change may convert deduction-limited interest into fully deductible lease payments, all of which can be included in the NOL.

Finally, the administrative deferral of both filing and paying federal income taxes otherwise due on April 15, 2020, will aid cash flow, as will the ability under the CARES Act to defer paying a portion of federal employment taxes until as late as December 31, 2021, and December 31, 2022. The economic performance rules of Section 461(h) somewhat dampen this latter benefit, permitting taxpayers to deduct payroll taxes only when paying them in either 2021 or 2022. Companies using the “recurring item exception” to those rules, however, may still be able to claim a full deduction in 2020 by making payment no later than 8.5 months after the end of their 2020 tax year.

In weighing the various options to optimize cash flow, companies should be aware of the myriad and unexpected ways in which these temporary provisions may interact with other areas of the Internal Revenue Code. For example, the carryback of 2018, 2019, and 2020 NOLs to pre-TCJA periods not only creates opportunities for current refunds but also precludes prospective NOL absorption and potential exposure to the base erosion anti-abuse tax (BEAT) of Section 59A. In contrast, temporarily increased interest deductibility under Section 163(j), or acceleration of deductions to increase current NOLs, could also result in increased BEAT liability, depending on the nature of the underlying payments (for example, related versus unrelated payments). Companies should also consider the interaction of CARES Act provisions with their foreign tax credit utilization (in particular, foreign tax credits in the global intangible low-taxed income [GILTI] basket, which do not carry forward), the Section 250 deduction for GILTI and foreign-derived intangible income (FDII) (in particular, the taxable income limitation), and Section 965 inclusions.

The bottom line for all cash flow planning options: model, model, model.

State Tax Considerations

Potential state tax implications add another layer of complexity. When taxpayers file tentative claims for a federal refund or amended returns to generate cash flow, they could also trigger state amended return requirements. Generally, filing an amended federal return creates an obligation to file amended state returns (often even if the federal change does not affect the taxpayer’s state taxable income). Failing to file the required amended state returns could expose the taxpayer to penalties and potentially leave the statute of limitations for the amended year open indefinitely in those states.

CARES Act provisions offer many opportunities for taxpayers to access cash through refund claims and otherwise reducing federal taxable income. Maximizing cash flow related to those changes takes planning and modeling, including through the use of changes to a taxpayer’s accounting methods.

Although states generally conform to the Internal Revenue Code, nearly half the states require state legislation to update that conformity from a specified date. As a result, when the CARES Act passed in late March, roughly only half the states conformed to its provisions. When state legislatures do act, they may do so in ways that do not entirely mirror the federal provisions. Also, states often have their own rules that decouple from federal income tax provisions.

When modeling the effects of federal elections, carrybacks, and accounting method changes, taxpayers should take into account the differences between state and federal taxable income. For example, states generally do not permit NOL carrybacks, and many decouple in full or in part from the interest limitations in Section 163(j) and do not allow bonus depreciation on acquired assets. Failing to account for these differences can result in unanticipated reductions in overall cash flow associated with a taxpayer’s federal income tax decisions.

Complying with myriad state filing requirements has become even more difficult as companies operate with reduced and remote staff. In response to these issues, states and localities have provided relief in the form of extended due dates for filing returns and making required payments. These extensions, however, have not been uniform among the states and require tracking by taxpayers to ensure that no deadlines are missed.

It can be difficult to identify all states in which a taxpayer is subject to tax and required to file returns. This may not be as much of an issue for the life sciences industry as it is, for example, for retail, but it’s worth noting that unanticipated increases in e-commerce and remote workforces in response to social distancing guidelines may also trigger unanticipated income, sales and use, and employee withholding tax and compliance obligations.

For example, in June 2018, the United States Supreme Court issued its opinion in South Dakota v. Wayfair, in which it held that no physical presence is needed in a state for the state to assert sales and use tax jurisdiction over a business.1 Since then, states have asserted nexus over businesses with only an economic connection to the state. This assertion can create unexpected exposures for businesses with customers in a state but without a physical presence there. Because sales tax liabilities are based on in-state sales receipts rather than on net income, exposures can arise even in years in which the business operates at a loss from an income perspective.

In addition, during this period of mandatory work-from-home orders in many U.S. jurisdictions, state nexus can be triggered by the presence of employees working from home in states where their employers have historically never filed tax returns. Some states have issued guidance noting that they will not consider the temporary presence of such employees in the state when making nexus determinations, but this remains an open issue in many states.

Trade and Customs

A little forethought could go a long way toward managing cash flow in the trade and customs area, particularly as life sciences companies respond to shifting demands for COVID-19-related products. Government regulation may be a significant factor here as some jurisdictions constrain exports of COVID-19 drugs, active pharmaceutical ingredients, and personal protective equipment. Supply chain and inventory flexibility are crucial, and companies can pursue several strategies to minimize the cash impact of moving products and supplies from one jurisdiction to another (and possibly back or on to a third).

Customs Duty Mitigation and Cash Flow

During the COVID-19 pandemic, companies have become agile in order to flexibly change sources of supply and deploy or export inventories to strategic markets. Many companies increasingly employ duty-relief programs such a “duty drawback” and foreign trade zones (FTZs) to reduce costs when goods imported into the United States are subsequently exported. For instance, if customs duties have been paid on imported goods, it is possible to obtain a refund, or duty drawback, of ninety-nine percent of the duties paid upon exportation of those imported goods, even if the imported good has been incorporated in the manufacture of another good in the United States (that is, drawback is still available on the imported component or ingredient of an exported finished good). Drawback may also be available if the exported good is an eligible “substitute” for an imported good (that is, the exported good need not be the actual imported good so long as it satisfies the regulatory criteria for duty drawback “substitution”).

Similarly, FTZs offer a safe haven from customs duties while the imported goods remain in an FTZ. FTZs are designated areas physically located in the United States, including private distribution and manufacturing facilities, that are deemed to be outside the customs territory of the United States for customs purposes. Thus, goods may be admitted into an FTZ with the deferment of customs duties until the goods are withdrawn from the FTZ for consumption in the United States. If goods are exported from the FTZ, duties are avoided altogether. The FTZ program is especially attractive during the pandemic due to the deferment advantage, particularly in year one of FTZ activation, because duties will not become due until the first domestic and/or duty-paid inventory layer has been exhausted and withdrawn from the FTZ on a first in, first out basis post-activation. Depending on the length of the company’s inventory turn, this deferment can be a significant and immediate cash flow benefit in year one, with a more measured carryforward cash flow benefit each year thereafter. FTZs also offer other potential savings such as reductions in customs and brokerage import fees, duty elimination on manufacturing waste, scrap and yield loss, and avoidance of state and local tangible personal property ad valorem taxes, where applicable.

To further assist with cash flow during the pandemic, Customs and Border Protection (CBP) has postponed for ninety days the deposit of certain estimated duties, taxes and fees, without interest, for goods imported in March or April 2020, for importers who can demonstrate a significant financial hardship. A financial hardship exists for purposes of the deferral if the importer’s operations are fully or partially suspended due to a government order limiting commerce, and gross receipts are less than sixty percent of the gross receipts for the comparable period in 2019.2

There is also potential relief from the high tariffs imposed due to the ongoing trade wars. Importers can file exclusion requests for specific products subject to the Section 232 “national security” tariffs assessed on aluminum and steel imports and/or can piggyback on exclusions granted to other importers of similar goods for Section 301 “unfair trade remedy” tariffs imposed on goods of Chinese origin (assuming they haven’t obtained their own exclusions before the Section 301 exclusion process closed). The United States Trade Representative (USTR) is also soliciting comments from the public through June 25, 2020, regarding medical care products that should be exempt from Section 301 tariffs in order to respond to the COVID-19 outbreak.3

Valuation Opportunities

COVID-19-related demand and supply shocks stemming from production disruptions or lower consumer spending may also cause companies to manage shortfalls in profit within their affiliated supply chain by making transfer pricing adjustments so as to comply with tax requirements. Generally, retrospective transfer price adjustments with respect to imported goods have a correlative impact on the goods’ customs value. In other words, if a transfer price increase results, then the importer may owe additional customs duties to CBP, and, conversely, a transfer price decrease may allow the importer to obtain a refund of duties under certain conditions.

Companies are considering alternative ways to reduce the value basis for customs duties, such as employing the “first sale” or “earlier sale” principle. Generally, ad valorem customs duties are assessed on the basis of the price the importer pays the seller/exporter. However, if certain criteria are met in a multitiered supply chain—for example, where a Chinese contract manufacturer produces and sells goods to a Swiss principal, who in turn sells the goods to the U.S. importer—the lower price paid by a foreign buyer to the foreign manufacturer may potentially serve as the basis for U.S. customs duties.

Trade Facilitation

Finally, federal agencies have taken extraordinary steps to facilitate trade during the COVID-19 national emergency and to protect U.S. supplies of critical medical equipment and personal protective equipment. For instance, the Food and Drug Administration has relaxed enforcement policies and import authorizations on specified equipment to increase the availability of medical goods needed to respond to the COVID-19 pandemic, including electronic thermometers, infusion pumps, air purifiers, gowns, gloves, sterilizers, face masks, respirators, and other equipment. Furthermore, the Federal Emergency Management Agency has imposed restrictions on the export of personal protective equipment, with certain exemptions (for example, exports by nonprofits, intracompany transfers, shipments to Mexico and Canada), to be enforced by CBP.4

The World Customs Organization and the World Health Organization have issued coordinated guidance on the customs classification for COVID-19 medical supplies in response to the pandemic.5 The guidance aims to facilitate classifying and identifying the movement across borders of products needed during the pandemic for the purpose of applying contingent tariff and nontariff relief policies. Globally, countries have taken various contingent measures, such as extending import filing deadlines, suspending customs audits, and exempting and deferring the payment of customs duties.

COVID-19 “Postscript” Issues

As life sciences companies scramble to create COVID-19 vaccines and treatments, retrofit current supply chains, and maintain inventory flexibility, they are creating new transactions, assets, and owners—sometimes unexpectedly and in unanticipated jurisdictions. Eventually, when the scramble tapers off into normalcy (old or new), companies will need to decide whether to incorporate these surprises into their post-disruption reality or to clean them up. Either way, they will face federal, international, and transfer-pricing transition issues.

Federal and International Tax Considerations

Members of the life sciences community are already attuned to research and experimentation (R&E) costs being incurred to develop new treatments and medical devices for COVID-19. Equally important are the costs to adapt a range of processes to the new business realities.

Many companies face paradigmatic shifts in how they conduct business—supply chain, production, distribution, consumer interactions, workplace safety, virtual workplaces and collaboration, and many others—and are incurring sizable sums to develop new business processes to adapt. The costs of developing software to complement these new processes likewise may be eligible for immediate expensing or, alternatively, flexible amortization. Scrubbing current expenditures for eligible R&E and software development costs arising from changed business processes is likely to pay sizable dividends.

In addition, many companies may have been forced to draw on all available resources to address COVID-19-related disruptions. These all-hands-on-deck efforts may have created intellectual property (IP) in surprising locations (and with unanticipated service providers or owners) that should be transferred to more strategic locations once companies have had a chance to catch their breath.

Companies should also consider relocating IP that may have become temporarily devalued (for example, due to delayed clinical trials) or permanently devalued (for example, R&E set back or lost due to insufficient manpower or supplies). This may also be a good time to assess opportunistic acquisitions. Valuation and structure will be significant factors for the U.S. (or foreign) tax consequences of any cleanup efforts. Some taxing mechanisms, such as Section 311(b), will focus on current value, whereas others, such as Section 367(d), will take long-term value into account. Still others will allow or disallow (for example, Section 311(a)) loss recognition on devalued assets.

It is worth remembering that if the incremental deductible R&E expense relates to payments to foreign related persons, the value of the additional deductions may be reduced if BEAT-able. R&E expense is not generally eligible for potential BEAT exceptions. In particular, R&E expense is not capitalized into cost of goods sold, and R&E is not a “whitelist” activity that qualifies for the services cost method exception to the BEAT.6 However, other mitigation strategies may help. Taxpayers could consider deferring their R&E recapture via a Section 59(e) election or by changing the method of accounting under Section 174(b) or by taking intrusive measures such as “checking-the-box” on U.S. payors or related foreign payees, to eliminate the BEAT-able payment.

In addition to the immediate BEAT impact of these strategies, taxpayers should also project the tax cost for post-2025 tax years, when R&E credits increase BEAT liability. And, of course, these strategies should be modeled as parts of a company’s bigger-picture cash flow planning (including the CARES Act).

Also worth noting is the opportunity for FDII benefits for companies using the United States as an export hub. In particular, domestic companies may be entitled to claim a deduction of up to 37.5 percent under Section 250 for certain export sales (resulting in a 13.125 percent tax rate for qualifying sales income, prior to expense allocations), including those made through a foreign related party.

Even companies exporting only as a temporary response to disrupted supply chains may benefit, provided they meet FDII-specific documentation requirements, including, among others, retaining copies of export bills of lading and obtaining buyer representations regarding product foreign use in binding sales contracts. (Until final FDII regulations are issued, see Proposed Regulation 1.250(b)-4(d)(3).) Other export benefits, such as the IC-DISC regime of Sections 991 to 997 and the U.S. sales branch rules of Sections 863(b) and 865(e)(2), are more complex because, for example, they depend highly on production location. Although not entirely out of reach, those benefits are better suited to long-term supply chain planning discussions.

Transfer Pricing

Many of the abovementioned considerations, such as adjustments to product prices and their impact on import duties and IP restructurings prompted in part by “cleanup” efforts or devaluations, are examples of transfer-pricing-related issues arising from the crisis. Although some life sciences companies or business segments are flourishing, others (and companies in many other industries) are experiencing widespread supply-chain disruptions and significant losses at the market or system-wide (group-wide) level.

An immediate transfer pricing question is, Which related party or parties should bear those losses? For example, should the limited risk distribution, contract manufacturing, or contract service entities be restored to pre-crisis profit levels through transfer pricing adjustments, or should they be allowed to incur at least some level of the group’s losses? Limited risk does not necessarily mean no risk, and the arm’s-length result may well be that limited risk companies earn losses, at least initially.

This result has important implications for the use of losses across the group (see above discussion of loss carryback provisions), customs valuations, etc. Similar considerations come into play when considering whether intercompany royalties, for instance, may be suspended for a period of time, “take or pay” payments are made to contract manufacturing entities, and payments on interest or principal on intercompany loans are delayed.

Most companies have established working groups, sometimes called “crisis management centers,” to address the business challenges brought on by COVID-19. Some of these efforts may just intensify ongoing or normal supply chain, financial planning, personnel management, and other efforts within the group’s current operating structure.

If so, perhaps the value they convey to the group’s operating companies is covered through ongoing management or other service fees. If, however, the activities are reshaping the business—for instance, creating new business opportunities or income streams—there may be broader transfer pricing implications for the business. In such cases, a fuller understanding of these activities and the expected changes to the business through conducting a value chain analysis is warranted to identify how the intercompany pricing structure should be adapted.

In all these instances, companies are considering whether their existing intercompany agreements—distribution, manufacturing, licensing, service, and financial—should be renegotiated or otherwise changed. Third parties are free to renegotiate their agreements at any time with the consent of the interested parties. Governed by the arm’s-length principle, related parties alike may consider whether the terms of their transactions (for example, product pricing, royalty rates, payment terms, etc.) should be adjusted to reflect the realities of the new business environment. These efforts have an economic and legal aspects that should be taken into account, since considerations such as the role of force majeure clauses and rescission often come into play alongside adjustments of the arm’s-length contract terms.


These are truly unprecedented times, with unanticipated pressures creating commercial issues that, while hopefully short term, could have long-term effects on life sciences companies. Awareness and forethought with respect to direct and indirect tax implications could ease both current cash constraints and the transition to a “new normal” state.

Editor’s note: The information in this article is not intended to be “written advice concerning one or more federal tax matters” subject to the requirements of Section 10.37(a)(2) of Treasury Department Circular 230, because the content is issued for general informational purposes only. The information contained in this article is of a general nature and based on authorities subject to change. Applicability of the information to specific situations should be determined through consultation with your tax advisor. This article represents the views of the authors only and does not necessarily represent the views or the professional advice of KPMG LLP.

Kim Majure, James Atkinson, Luis Abad, and Brian Cody are principals, Dan De Jong is senior manager, and Brett Bloom is manager, Washington National Tax/international tax, all at KPMG.


  1. South Dakota v. Wayfair, 138 U.S. 2080 (2018).
  2. The postponement of duties does not apply to antidumping duties, countervailing duties, or the trade war tariffs assessed pursuant to Sections 201 (safeguards), 232 (national security), or 301 (unfair trade remedies).
  3. Office of the United States Trade Representative, “Request for Comments on Additional Modifications to the 301 Action to Address COVID–19: China’s Acts, Policies, and Practices Related to Technology Transfer, Intellectual Property, and Innovation,” Federal Register 85, no. 58 (March 25, 2020): 16987,
  4. Federal Emergency Management Agency, “Prioritization and Allocation of Certain Scarce or Threatened Health and Medical Resources for Domestic Use; Exemptions,” Federal Register 85, no. 77 (April 21, 2020): 22021,
  5. HS Classification Reference for Covid-19 Medical Supplies, 2nd edition, World Customs Organization, April 9, 2020,
  6. See Revenue Procedure 2007-13, 2007-1 C.B. 295.

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