Ukraine and Russia: Summary of the Tax, Legal and People considerations

The Russian Government’s invasion of Ukraine has led to tax and legal changes that impact organisations who operate in or alongside Russia and Ukraine. We have individuals on board to help keep you updated and informed of these changes and implications. This is a live website and PwC will be updating our guidance as we receive additional information and the situation evolves.

_{[Last updated: 18th March 2022]}

Operations

The global risk of cyber threat is elevated and considerable. It is critical that organisations monitor network connections and traffic for immediate identification across countries. This includes understanding and testing the defence strategies and scenario readiness.
The potential for cyber escalations in all sectors and geographies has resulted in a number of regulators pressing organisations to focus on patching and securing their data back ups. We have also seen indications that the situation could impact cyber insurance renewals.

There are a number of considerations for organisations in light of potential cyber attacks linked to the invasion of Ukraine. In particular, organisations should: verify their capability to, if required, disconnect systems in Russia and Ukraine from their wider IT network; regularly review the risk of maintaining connectivity; ensure advanced monitoring capability on all systems to detect and respond to unexpected cyber attacks, and ensure cyber incident response support is retained to assist in case of a successful cyber attack.

The impact of the invasion of Ukraine will be diverse and unpredictable. It is essential that all organisations have clarity around structures, people and processes including escalation channels for managing the unforeseen results of this evolving situation.

We recommend urgent scenario planning sessions to explore how the escalating situation could impact your organisations and identify the risks and mitigating actions. ‘Table-top exercising’ can be used to validate response structures if they are not already in operation.

We also recommend ensuring that planned responses to extreme but plausible scenarios such as loss of IT for an extended period and disruption to critical suppliers are taken into account.

Organisations will be facing issues that may have an impact on both immediate and long term financial resilience and in particular, their liquidity position and ability to comply with financial covenants. These issues may include:
- Impact on trading (for those with significant Russian / Ukrainian operations)
- Sanctions considerations including ability to access cash (especially for organisations with GBP, EUR, USD denominated borrowing) and other assets in Russia as well as impact of sanctions on relationships with customers, suppliers and financing providers
- Impact of further inflationary pressures (for example from increased energy prices)
- Threats to supply chain which will impact on ability to operate
- Broader impacts on financial markets (e.g. on high yield bond issuance) and impact on finance raising

Organisations understanding the impact of these issues on their financial position will be key to ensure this is managed and mitigating action can be taken to minimise risks.

Tax and Trade

There are risks to global supply chains including for non-Russian, Belarusian and Ukrainian companies. Organisations should be identifying and quantifying risks to better capture the impact on existing customers and vendors. Appropriate actions may include discussions with vendors on revised terms and payment methods including revisiting early warning indicators that trigger management teams to consider actions and contingency plans for different scenarios. Consideration should also be given to the cost of new tariffs.
As the conflict escalates there may be short term exposure due to change in consumer behaviours and organisations should consider the impact on storage and distribution networks or responses to sanctions that could disrupt supply chains.

Organisations should ensure they have visibility through their supply chain and review risks associated with critical suppliers and their supply chains in turn.

Organisations sourcing commodities (e.g. oil, natural gas, wheat, soy beans etc.) from global markets will experience supply and price volatility. Organisations will need to review commodity purchase agreements and existing commodity hedging programs to determine the impact and necessary actions to lesser the short to medium term impact. Responses are likely to include replacing standard sources of finished products, raw materials and other components, supplying customers when factory workers or service personnel are unable to work, opting to buy and sell products when manufacturing is not possible and addressing latency and bandwidth issues with new suppliers.
Pricing changes will initially impact companies who directly rely on commodities in question - transportation, shipping, chemicals, semiconductor, other industrials. This will be passed down the value chain and will affect upstream and downstream businesses, resulting in higher costs, higher prices, and margin erosion. In response, organisations should revisit intercompany operational models / agreements / Transfer Pricing strategy and model the impact of scenarios on jurisdictional income / losses and how those items affect tax.

Some businesses will be ramping up supply of critical equipment or supplies - either as part of a foreign military sale via a governmental intermediary or directly as a commercial transaction or a donation. Consider which entity is the supply point and what are direct and indirect tax consequences.

While undertaking any steps in immediate response to the current geo-political situation, operation model design that supports commercial operations when the rebuilding effort commences should be taken into account.
There are treasury considerations including impact of sanctions on cash pooling. The specific areas to work through include:
- loss of revenue / margin - terms of ICO agreements / which entity should bear economic loss
- decoupling / ceasing operations - exit considerations, potential joint venture impacts
- worthless stock / bad debt consideration
- write-offs of inventory
- impairment of valuations
- tested losses / loss planning
- repatriation or redeployment of personnel

Paying tax in Russia: Organisations with operations in Russia have started to ask whether there are sanctions against paying tax in Russia.
Foreign tax reclaims: Organisations are considering how to approach foreign tax reclaims from Russia.

Organisations are considering the treatment of accrued interest on Russian owned securities or their potential write-off accruals, and the potential write off of dividends accrued to date with respect to Russian-owned securities. Many advisers of registered and non-registered funds are closely monitoring the continued accrual and when it would be appropriate to determine to place assets on non-accrual. In undertaking this determination it requires consideration of each fund’s policies for determining non-accrual status, the specific facts and circumstances related to each asset (including, potentially, the country from which the asset was issued), and the application of significant judgement in terms of expectations of collecting amounts contractually due.Similar considerations are also relevant in connection with derivatives and when a potential loss on a derivative may crystallise for tax purposes.

Permanent establishment: Where organisations with operations in Russia and Ukraine are considering the impact of Russian employees relocating to other jurisdictions, they should take into account any related permanent establishment issues particularly for individuals undertaking certain roles or holding senior positions.

Organisations should consider the personal tax, social security and immigration implications of its workforce working from a third country as these could give rise to filing or residency implications.

Organisations should consider how to support affected workforce while also shifting production capacity to other Central and Eastern European countries or near-shoring.
Organisations should consider extracting or relocating staff from Russia, Belarus and Ukraine to ensure your workforce safety and fulfil employer obligations around workforce safety. This is of particular consideration for employees on international secondment to these locations as well as local employees,

Capital

Organisations with operations in Ukraine, Russia and Belarus may be affected by the inability to fund operations, collect customer receipts or make vendor payments as central governments and banks are sanctioned. This will require organisations to revisit current cash and working capital levels, expand forecasting and scenario planning to identify potential “trapped cash,” liquidity shortfalls and remediations. The liquidity situation is further exacerbated by the international community preventing Russian and Central Banks from accessing the SWIFT payments network. Operations may need to find alternative payment methods (e.g. non-sanctioned banks, alternative payment networks, phone or fax) to meet supply chain or customer obligations.

Organisations are likely to face foreign exchange volatility, and mitigating or realising the tax effects of foregin exchange rate gains and losses caused by volatile currency swings. organisations with non-US denominated exposures who may see a sharp decline in the Russian Ruble and Ukrainian Hryvnia.This may require companies to review the forecasted currency exposure impact and potentially alter hedging strategies to reduce currency volatility in the short term.

Given the multitude of sanctions imposed to date, vendor payments to affected customers or counterparties heightens the need for expanded controls and screening to identify sanctioned banks/persons in order to detect and block payments and suspicious activity.

Organisations are likely to be impacted by deteriorating counterparty risk from impacted banks. As such, organisations should evaluate current exposures (e.g. cash, credit line drawdowns, borrowings, derivatives and investments) and take the necessary action (e.g. banking partner discussions, heightened credit rating monitoring, etc.) to reduce exposures and risk in the short to medium term.

Capital markets were already on edge prior to the start of the invasion of Ukraine with high volatility as investors were rapidly repositioning portfolios to reflect tightened monetary policy and escalating inflation. As we then layer in the additional uncertainties that the invasion of Ukraine brings (e.g. additional escalation in the price of energy, the reduction in availability of energy supply, sanctions, etc.), there will be heightened investor scrutiny on management teams.

Investors will be looking with increased focus, not just with regard to the specifics of the challenges that will be presented but, as was demonstrated through the COVID-19 pandemic, the strength of the crisis management and corresponding judgement that management teams demonstrate.

Worthlessness of securities: Organisations are thinking through whether the current events could result in a Russian-owned security being worthless. From a financial reporting perspective, we understand there are discounts being applied to these investments and certain indices are considering listing these securities with zero value.