Podcast transcript: How tax and law affects factory conversions to fight COVID-19

Simon Hobbs

This is the EY Podcast – Tax and Law in Focus – sharing leadership insights, from one of the world’s most successful providers of advice to international C-suites. Welcome. I’m your host, Simon Hobbs in California.

On this, our first edition, we focus on the biggest business challenge of our collective lives – COVID- 19. And in particular – we concentrate on businesses that stepped-up. Rushing to convert their existing facilities to manufacture the necessities desperately needed by our health workers. Ventilators, hand sanitizers, Personal Protective Equipment. Businesses helping their communities. Businesses saving lives. But businesses as a direct result, also now navigating unexpected problems: legal, tax and workforce issues.

The EY leaders that you’re about to meet know the potential solutions well. Their multi-national clients regularly convert facilities, in their global supply chains for a whole host of business reasons. But in this, the era of COVID- 19, stresses are clearly potentially magnified.

Before we go any further let me be explicit: conversations during this podcast should NOT be relied upon as tax, legal, accounting nor investment advice. Listeners must consult their own advisors.

Here we go.

From Berlin, EY Global Law Leader, Cornelius Grossman, who spends much of his time these days addressing the challenges his clients are facing from COVID-19.

From Amsterdam, EY Global Director of Indirect Tax, Gijsbert Bulk, who’s at at the forefront of helping clients who themselves drive global trade, specifically on VAT, GST and the other major sales tax issues.

And from New York, EY Global Leader of Business Tax Services, Rob Weber, who’s constantly evolving strategies underpin his clients’ ever-changing international supply chains, incentives, credit claims, tax risk and tax controversy.

Welcome to you all. I get that none of you is going to break client-confidentiality, but more than 50 EY clients have already gone public on their COVID- 19 efforts.

So let me kick off with you Cornelius. You’re in Germany but with 2,000 attorneys in 80 countries around the world. What do you see? What do they see?

Cornelius Grossman

Well you won’t be surprised that we’re seeing an unprecedented impact of COVID on the businesses of our clients. Now these are the obvious sectors: travel, retail, entertainment but it goes beyond there. Obviously automotive is another one that you’ll have read a lot about in the paper, and we’ve seen from our client’s conversations. We’ve seen companies to convert but not all sectors are able to convert or adjust to the challenges of COVID. We’ve seen hotels deciding to convert rooms into apartments, we’ve seen restaurants becoming food delivery enterprises, we’ve seen breweries now selling sanitisers, we’ve seen fashion houses producing masks, and – most important perhaps – we’ve seen car suppliers who engage in producing medical equipment like respirators.

Hobbs

Rob Weber in New York, let me ask you: I know that you’re big on resiliency planning and resilience is certainly a word that many of us would credit New York with. What are you seeing over there in the Empire State?

Rob Weber

Yes Simon as you heard, early on in the pandemic here in the US the North East and New York were certainly the hardest hit, back in March and April, and many of the companies were really challenged to step up in the pandemic and really help out. Many car manufacturers making ventilators, many pharmaceutical companies creating capacity to deliver on much needed pharmaceuticals, therapeutics. And also just garment companies, as we look at mattress factories and others converting over to make the absolute essential PPE available for the healthcare workers on the front lines. You know in some I would say that these companies had a tremendous willingness to put aside their own commercial needs of the moment and convert their manufacturing facilities to really get the healthcare workers the essential PPE and medical devices needed in order to serve the pandemic. That was number one. Number two was really the government backing that went with that. Many of the contracts really helping out in making sure they had the funding to be able to do that. So truly where the situation was, the healthcare facilities were absolutely stretched, the equipment availability was stretched, and ultimately at the end of the day they were able to step up, really convert over and provide the essential PPE and other medical needs of the environment.

Hobbs

Gijsbert Bulk

Well I think that many of the examples that Cornelius and Rob just mentioned – we’ve seen them across the globe as well so I’m not going to repeat those, although at the moment you can see other changes that are taking place in the global economy. There’s a tremendous demand for storage. We’ve seen airlines change from passenger transport to cargo, and all these changes -beer breweries that switched to hand sanitisers - create issues in the supply chain, changes in the supply chain, caused new rates to apply, whether it’s VAT or GST or sales tax or customs duty rates. And all of that has an immediate impact on the cash flow and the compliance obligations of businesses. Our clients are already finding themselves in a very turbulent period.

We’ve been able, through the past five or six months, to assist many of our clients in making those business conversions from that perspective.

Hobbs

And obviously during the course of the podcast we’ll drill down on many of those issues. I think it’s probably worth pointing out that, although obviously factory conversions take place all the time, with COVID-19 what a lot of people are grappling with is the sheer speed of human effort – it’s just extraordinary. Often 30 days to convert a factory, to pull in the new machine parts, to pull in the new raw materials.

Gijsbert, you begin there to outline many of the concerns that emerge. You’ve been able to boil them down into five main areas of potential dislocation. Can you just lead us through those five briefly if you would?

Bulk

Sure absolutely. First of all, there are always tax implications, basically to everything that a client undertakes. And those tax implications lead to changes in cash positions, cash flow, cash taxes. And as we all know, cash is extremely important in a period of crisis.

Because of the speed with which business conversions have been taking place, companies are sometimes ignorant of the risks that they run and of the legal issues that the new type of business may bring to them, and we’re always mindful of those. We’ve helped clients where the logistics are changing, where if you change from one product to another production, or from one service to another service, all of that requires management and care as well.

And then finally – and I think we even should have started with that – managing the people. Making sure that your staff, your employees, their families and your clients stay safe and healthy.

Hobbs

Okay, so you’ve outlined the five areas of concern. What I want to do now is to drill down on each of those one by one, and let’s kick off with number one as you laid it out there: tax considerations. Rob let me pick this up with you – it looks like basically the tax considerations revolve around making the best use of government incentives. Clearly there are tax laws that were always there that can offset the cost of an investment, but Rob, with COVID-19 conversions you’ve also got these new tax laws aimed at stimulating the economy.

Weber

Absolutely, and I think you hit it on the head Simon. When you look at it you really have two things in play: the new government incentives that really have proliferated across the globe in order to support the economy, number one. Number two, support the healthcare and the needs there for the workers. And the opportunity to get government funding to keep employees in place, get loans that in many instances can be forgivable if used for employment and keeping people in play. In many cases working in these manufacturing facilities that are converted over to support the healthcare needs across the globe. And then other things in the tax laws that basically allow for immediate deductibility of expenses that otherwise would be required to be amortised over a number of years. And in some instances, just where companies have shut down operations, and in that circumstance is driving losses because they’ve kept employees on the books, or they wanted to keep supply chains open and continue to buy losses generated in current years that can be carried back to gain the much needed cash in order to continue the operations of the business going forward. And we see that in some instances, for example here in the US where the current tax rate is at 21%, the carry-back allows you to get to years prior to tax reform, that really generate a 35% benefit to the company so a much better benefit than they would otherwise get in the current environment, and that stimulus again allows them to be able to take that needed cash and really put it back into the business, keep their operations moving, keep people employed keep the economy running and in a lot of ways it’s been a lifeline in the current circumstances.                                                     

Hobbs

Gijsbert, let me come back to you here because I think your perspective as Director of Indirect Tax is absolutely key. Obviously, VAT, GST, other sales taxes are applied on transactions as they take place irrespective of profitability, so it’s precisely here that we’ve seen very powerful attempts by governments to cut rates, and most obviously on taxes on medical equipment but it goes much further. Just pick up that thought if you would Gjisbert.

Bulk

Yes we’ve seen many governments take measures where they have reduced rates – even to zero – on medical equipment and protection materials, and temporarily reduced customs duty rates, they’ve also eased importation procedures, which are very important for a number of our clients. And across the board a little bit later some governments started taking generic measures where they cut their standard VAT rates with three percentage points – for example in Germany – in order to stimulate the economy. So all of that is taking place. The German measure, by the way, is a temporary measure by 1 January the VAT rate should jump back again. And eventually we believe that in the years to follow, because of the deficits that many governments are facing – the VAT, GST, sales tax rates – the States in the US are also facing balance budget that they need to maintain,  that those rates will go up again, but that’s a more long term thing. So a lot of volatility there.

Hobbs

Yeah and we’ll stare into the future later in the podcast, but I think it’s worth noting that some of these tax rates are going to shoot back up – in the case that you just cited on 1^st January – you guys or your clients are as we swing back, effectively in a constant state of flux. Things are changing, and these businesses obviously have to keep up with it continuously Gijsbert.

Bulk

Yes absolutely. The agility was of the essence, and still is actually. Companies must be prepared to stay informed and to keep making changes in their business.

Hobbs

Cornelius, I think it’s worth pointing out as well, not only have governments never before rushed to inject such huge sums of money in to businesses to keep them afloat. They’ve also done it essentially though an ‘honours system’ oftentimes

How do you see that journey for business moving forward, as that all that becomes subject to audit? 

Grossman

What we have seen businesses in particular in the retail business that applied for state aid rushed into the applications, there was an opportunity to get fast relief, fast cash, they were financially strained, and then reviewing the preconditions to get the state aid. They are fearful that they might not be eligible and might need to repay when the audit comes and you know, such repayment plus penalties might put their business at risk after the COVID help has been paid. So this is something we have been dealing with and we're advising clients to look carefully to the preconditions of any state aid they apply for.

Hobbs

Let me ask all of you this. As you look forward, and specifically just on this first question of tax considerations, what is what is the bigger picture? What are we learning? As we look into the future, about conversions in general? Do any of you want to pick that up?

Weber

Sure, I'd be happy to Simon. As we see and working with our clients, what I think our clients are realising is that, although this pandemic is, you know, once in 50, or 100 years, when all is said and done, and they're thinking about the path forward, what the learning is, is that these types of situations that could have a massive impact on their business, on their supply chain, how they operate on their workforce is going to occur and given the global nature of the world now, it's not going to be contained to one or two jurisdictions, it's going to have an opportunity to just be pervasive across The Globe. And so I really think that our clients are stepping back and thinking about as they look at their business, where are the spots in which they could get caught short, you know, with things like export restrictions on particular materials that are critical to their supply chain. And we saw that certainly across the globe in the early days of the pandemic, thinking about their workforce, and do they have the ability to work remotely when they can't get to the office in this type of situation?

And so, I think as our clients are looking at critical planning, just purely from a business perspective, that they need to be more nimble, they need to really think through how they put themselves in a position where they could, you know, move quickly to adjust their business process and supply chain in workforce. Where’s needed in order to address these things in the, you know, the five year plan is going to become a, you know, five day plan or a five week plan and they just need to be much more nimble as we move forward.

Hobbs

Okay, let's return to the roadmap here where we have these five issues to remind everybody that we're working our way through. We've just dealt with the tax considerations. Let's talk now, Gijsbert about cash flow, which I think was the second concern, or bucket if you like, of concerns that you raise for us. I mean, obviously, prioritising cash flow is always the precondition for any business to meet its obligations to all its shareholders. And that's clearly exacerbated during a crisis like COVID 19. And Gijsbert, I guess, not only is cash king, but you've got this repatriating of cash to international HQ that presumably is become a major dynamic.

Bulk

Yes, and you're right Simon. Cash is like oxygen, together with communications and health. It was one of the three first things that businesses need to take care of. If you cannot pay your bills, if there is no cash, your company is going to come to an end. So that was important at the start of the crisis and it actually still is, and then obviously making sure that from my cash management perspective or cash pooling perspective, it's a product that also banks or for repatriating the cash – centralising cash –  is important point for companies in order to be sufficiently agile. So yeah, that is definitely something that we've seen all across Simon.

Hobbs

And Gijsbert, where have you seen the innovation on the funding methods and the strategies? I mean, your basic message reading you on EY.com to clients or to everybody really is be bold. As you put it, governments are earnestly behind you.

Bulk

Yes. And obviously, I think the banks so far have played an important role in the crisis, but as tax advisors we've mainly focused on the traditional tax planning. For instance, in order to increase liquidity we've been very active in the field of grants and incentives, like Rob mentioned, especially grants that were introduced for the COVID-19 situation in depressed geographies. We've looked at opportunities to defer income or to accelerate write offs deductions, all of that utilising losses that occur in this period and, obviously, cash savings in the cash taxes like VAT, GST, etc, where cash flow plays such an important role. And we've helped our clients to make use of the emergency provisions from government. Some clients have been quite reluctant with that– a deliberate choice not to go in that direction because they felt that they didn't need the aid. But for those companies that really needed it, we've explained to them that it's something they're entitled to. And obviously, like Cornelius mentioned, companies must make sure that they meet all the requirements for the support that they're getting. Otherwise they can find themselves in trouble.

Hobbs

Yeah. And I think I'm right in saying that your international tracker that you've been running for clients detailed, I think, almost 3000 measures that were available relief measures in 140 jurisdictions. Before we leave you on this topic Gijsbert, and I know this is a much bigger issue that will probably come towards, we'll come to address towards the end of the podcast, you're also very focused on the need for businesses to digitise how they deal with indirect taxes so that they effectively account in real time. And that is important, I think, from your perspective on cash flow or aiding cash flow as well.

Bulk

Yes, we are. We're seeing a general trend already before the COVID-19 crisis of governments demanding companies to account for taxes near real time or even real time online and have huge amounts of transactional data. And in fact open their systems to governments. And that can only mean one thing: that you'd better get it right in, in the field of tax within your systems. And you better get it right the first time because there is no time to make corrections. And if you get it right that gives you a competitive edge that will accelerate refunds that will help you to avoid audits that can be very, very costly and time consuming. So making sure that you digitise your tax accounts, that does make a lot of sense.

Hobbs

Rob Weber in New York, I've heard you mention I think it's $23 trillion of COVID-19 stimulus from governments. In your view, what best determines the ability of an individual business to successfully tap that? I mean, is it more about where you're located geographically? Or is it the type of industry that you're in?

Weber

Yes Simon, great question. The level of stimulus that we've been tracking updates almost weekly –  it's up to $27 trillion. It's almost 40% of global GDP. And it's really both monetary policy, again, that ability to get lending and then fiscal policy, which is really where we have focused with clients and, you know, you mentioned a tracker in the 3000 different global stimulus opportunities to go through and it's a real challenge for companies to look through that. You know, again both geographically and by industry, the decisions can be very different. First and foremost, most of the stimulus is driven geographically. So the geography matters the most, the government's locally are looking to really drive local stimulus into the economy, to support the economy, support the companies and our clients to really do what they need to do to keep employment up, produce the most critical needed PPE health care and other things and really try to get back to a sense of normalcy. So I would say first, between geography and industry geography is the most critical. You really do see it across the globe in these cash flow devices and each of the geographies have taken a different approach as to what they're focused on, but really around supporting the companies.

With respect to industry, you know, some of the industries that were the hardest hit got direct investment. So a good example of that would be the airlines here in the US, supported with loans to the company that over time could be forgiven if they're used for employment expenses and other things to keep the airlines going. So you certainly see industry related stimulus such as that. And then the last thing I would say is with respect to the stimulus, you know, depending on the industry, the winners and losers, there certainly is a PR component of the decision that companies are making. So if you have companies that have done well, during the COVID crisis, you know, those big technology companies that have really been able to use their infrastructure and their historic investment, to deliver on goods and really keep things going and keeping the supply chain for critical food and other things for people going – they've done really well. They've been very reluctant, as you would imagine, to take stimulus and really put it to those hardest hit, and when you think about the hardest hit, you think about oil and gas, you think about hospitality. You think about airlines and even to some degree automotive given the fact that a lot of people weren't buying cars in this timeframe. So, you know, both matter [but] I'd say geography first industry second, but both are considerations our clients are looking at.

Hobbs

Rob Weber in New York thank you, a reminder that you’re listening to the EY podcast, Tax and Law in Focus.

Hobbs

We move on now to the third of our five areas of concern, thrown up by factory conversions, made all the more pressing in this, the era of COVID- 19. That third area is law and risk. Cornelius Grossman in Berlin, if you change what a factory produces, you have I assume new liability risks on new products, new joint ventures for new partners, new licencing agreements for fresh IP, but what about terminating existing contracts that are no longer needed, how easy is it to site force majeure that virtually everybody has in their small print, to suspend or terminate those unwanted contracts?

Grossman

Well, the easy answer: it's not easy at all. It very much depends on a case to case basis and we have looked at court rulings in connection with the previous pandemic SARS and we couldn't find any significant ruling, which would confirm that a pandemic is automatically a force majeure event in any jurisdiction. So what we have seen is that courts take very careful review of the facts and circumstances and they look for two criteria. One is has it been an unforeseeable event – with a pandemic in most cases that might be the case. The timing of the contract might be an issue here if it's too close to the outbreak. The other criteria is has the party who is looking for the relief from obligations – have they taken all reasonable endeavours to mitigate the impact, so they will have to prove that they have looked for alternative suppliers, alternative sourcing. This is something which is not easy to prove and that's where the case is. We have reviewed the claim and have failed. So, it is a high risk to rely on force majeure. If you want to rely on force majeure you should take legal advice. And you should also be aware that you need to notify the other parties instantly if you want to go down that road.

Hobbs

Rob, importantly, there are other areas in which you're warning clients that they should be prepared for controversy, no?

Weber

Absolutely. If you look at the landscape, to start pre COVID, the environment was very hot in the sense that jurisdictions across the globe were very aggressive with respect to enforcement. And, you know, with the proliferation of data accessibility, sharing of information, our clients were already in a position where the tax controversy posture of the company was one that they had to spend a really good amount of resource on a lot of focus, and to manage it centrally across the globe. When you layer that with the stimulus situation where governments have gone out and provided mass amounts, as we talked about 27 trillion of stimulus, what's going to happen after the pandemic is that they're going to need to find the funding for that somewhere. And so just in the normal course, you're going to see the aggressive nature of taxing authorities across the globe, out looking to do enforcement, and so I think the three things the clients really need to focus on is one: you really need to have a global controversy strategy. You need to drive that - number two - centrally from the middle to be able to be consistent across the globe with the information sharing the days of doing controversy, one off and each of the jurisdictions are pretty much over and you need to have a consistent policy to be able to defend that across the globe. And then finally, I would say technology enabled. The key to controversy is understanding what's going on where and what jurisdictions and having access to the information and the data so that you can truly manage it and put the company in the best position possible to be able to ensure that, you know, you're not taking on undue risk. And then the last thing I would say in COVID, is where you've had stimulus. You know, one of the things you're going to need to make sure is that there were requirements that you needed to meet. In order to get the stimulus, you need to have the documentation. And you need to have the ability to demonstrate that you were able to access that in accordance with the rules, and it just adds an additional layer of complexity.

Hobbs

Which brings us to our fourth area of concern: logistical challenges. Gijsbert, you're leading on global trade and tax. Let's talk about the logistical challenges that any factory conversion is going to throw up: new products, new raw materials, new export licenses, new tariffs, new taxes. All the non tariff regulations. But with a COVID-19 conversion, obviously, logistically, you've got that added angst of an entire economy, really, that is under some stress, even just in moving stock in and out of warehouses and distribution centres. I mean, what are we learning on logistics specifically?

Bulk

Yes, well Simon one thing that is really important to realise in situations like these is that the baseline is to keep the goods moving to make sure that the goods reach their destination in time and as agreed upon. That's the very essence of what is needed from a logistics perspective and from a trade and customs point of view. Yeah, you need to make sure that that those processes do not delay the transportation and the logistics movements of goods that are being stopped at a customs border. And to stay there for days is a disaster of course for any company. And in a normal situation and with a business converting and changing its supplies and its purchases at short notice there is every risk that you get it wrong with the classification of those new products and the new materials that you don't have the proper licenses in place, that you have overlooked the fact that the rates that apply have changed or that there are certain non-tariff regulations that apply and that block the importation of goods. All of that was, by the way, already an issue before the Covid-19 crisis as a consequence of the constant tension between the US and China, US and other countries and retaliatory measures in the field of customs and international trade

Hobbs

And Gijsberg, during COVID-19 arguably you've also lost some of the normal demand signals due to the market stress due to the dislocation. I mean, demand for PPE personal protective equipment for health workers that might be fundamentally off the charts. But I'm assuming that the pricing could for example, go haywire on that. Not least because of stockpiling

Bulk

Yes, that’s obviously, those big swings and volatility in supply and demand, that’s what we've been seeing across the globe, I think in in some places in China it was, you know, all of a sudden manufacturing dropping was 20%. Or when it's about PPE, then it's, you know, going up with hundreds of percent, by the way, also hand in hand with fraud, including customs, fraud, all the bad things that that happen in in such a situation and yeah, we've seen all that.

Hobbs

So in your mind's eye, where do you think we're going with this? What are we learning for the future on logistics, do you think?

Bulk

Well, you know, I already made the connection with what we've been experiencing over the past few years in the field of customs and international trade, with the trade tensions between quite a number of countries across the globe and to such effects that at boardroom level leaders are very interested and keen to know okay, if we start importing goods not from that country, but from another country, change our supply chain, what does that mean? What does that do to our cost and customs duty rates etc. And, by the way, you know, can anyone tell me for which values we imported those goods in the last quarter you know, if the logistics guys, the trade guys, the text guys need to make sure that they have available all such information, whether it's about the rates, whether it's about free trade agreements, and the classification of the goods and again, automation and digitisation is the name of the game here. If you have your data management in order then you know any customs duty rate or any product that changes overnight, we'll probably be able to work it out and to advise your company as to how to navigate.

Hobbs

Well thank you for that. That brings us to the final of our five concerns about conversions. And let me turn to Cornelius Grossman on this. It is arguably the most important and that's the managing of people, Cornelius. So let's talk about the personnel issues that arise from a factory conversion in general, you know, maybe the need to downsize a workforce, certainly the need to reskill workers to operate a converted manufacturing line, but obviously for COVID-19 conversion, bringing in employees during what might be a bigger health lockdown. As you boil that down, Cornelius, what are the questions that a general counsel really needs to be able to answer these days?

Grossman

Well, I would like to answer this twofold. One, there's an overriding principle that as an employee, you need to provide a safe working environment. And if you convert a company, you need to keep in mind that, you know, the conversion will have change of business, there might be new, you know, health hazards and new production lines. People need to be retrained, works councils might need to be involved before you can do that. A conversion is nothing you can just put upon your employees. You need to work with the employees and consider that even if you convert in a rush, you stay compliant with all rules and regulations in the jurisdiction. For those who don't have employees during covid anymore in the factories because they had to close down. We have seen across the globe, great support measures by the governments to avoid layoffs. So they're taking over part of the payroll or Social Security payments. In order to avoid that the businesses rush to layoffs, if they have temporarily, furloughs or temporarily close downs due to conversion or just the lack of demand.

Hobbs

Can you give us a feeling as to what it is like to be in the midst of this for you or, or more importantly, for your clients, when I'm assuming that things could be moving really quite fast in a legal sense. I mean, governments invoking emergency powers. You've seen trade bodies, insurers changing their rules. You mentioned the work councils, which are clearly very important in Western Europe. I mean, here in here in the United States, Donald Trump's administration has fought very hard to write a legal immunity for employers from COVID-19 into US law. Is that a common response for example, from governments around the world?

Grossman

I would not see that as a common response. What we have seen is some governments who gave a freeze and litigation so you can enforce rights in your commercial or civil contracts due to COVID impairments. So there is a six month freeze or freeze up to the end of the year in some of the jurisdictions, but I wouldn't call it a, you know, a global immunity for employers. I think all employers should be very worried about, you know, liability risks and compliance. As we have seen from other pandemics and crises, that in a rush people might take a different judgment, but an after sight, the courts and the authorities measure you at the then applicable laws and not necessarily what the intention was or give in due to the fact that there was a big rush. So compliance should be at the forefront of any general counsel's mind in the times of a pandemic.

Hobbs

And Cornelius as you look forward, specifically on this question of managing people, how is the big picture changing? Do you think what are we learning through this? What are the policy implications for the future?

Grossman

Well, we get a lot of requests from General Counsel functions on employment law regulations, which change across the globe, and it is a real challenge for them to keep up with them. So one of the challenges the employers right now have is the speed of change they try to keep up with. The other challenge is the obvious one: that the employees, most of them, or many of them work now remotely, and keeping connection to the remote working workforce. And again, you know, supporting them in the right way without disrupting the business is a major challenge for most businesses.

Hobbs

So there you have it. We've dealt with those five areas of concern: tax, cash flow, risk and law issues, logistical concerns and, most importantly, managing people. Rob, let me bring you in here in New York. I mean, this pandemic will at some point end, you're still telling clients, I believe that if their workflow is down and their employees are physically present, they should consider doing more to convert to help COVID-19. But once we've conquered the health side of the equation, how are you framing the inevitable wind down, the normalisation of operations?

Weber

Yes, I think clients really are looking forward to getting back to, quote unquote, a normal environment and you know, based on what has happened over the last five months, it'll be a new normal, not the old normal. And I think that as we're advising clients coming out of conversions, one of the things we're actually seeing, which is pretty interesting is, you know, joint ventures or partnering with companies that are in the healthcare space, for example. So the car company who's transformed their assembly line from cars into ventilators has partnered with a ventilator company who can then take on the capacity and the IP, and under a financial arrangement going forward benefit from that both from the fact that they can produce ventilators more readily, which will be needed as we go forward, and at the same time return back to what they normally manufacture. So I think that's one on an exit that we're starting to see in this environment as people are coming out of it. And then really, I think it's the assessment of the supply chain. I think what companies have learned is that they need to go back and determine, you know, do they have access to the needed product in materials in order to be able to continue to produce, you know, if and probably when this happens, again, on a global scale, and what we saw was a lot of export restrictions.

And so having your supply chain in one place to be able to access and resource materials is a too high of a risk for them to undertake so diversifying their risk and making sure that they have multiple locations and geographies where they can source materials, having the ability to have their teams work remotely. Considering how they might determine that you know what, there's portions of this we might need to outsource to a firm, or a company that does this on a regular basis has an infrastructure set up. And we'll do what is core to us where the value in the intellectual property of our business is driven. In those non-core items, we're going to outsource so all of those are things that we're talking to our clients about, as they're thinking about unwinding from the pandemic that we're in, but also understanding that it's likely to happen again at some point in the future and they need to be better prepared.

Hobbs

Yeah, I'm just echoing that point. Gijsbert I've seen you argue really quite passionately that you also believe that supply chains, the classic ways of manufacturing, have now changed forever.

Bulk

Yeah, well absolutely. And I echo Rob’s words. Those supply chains are going to change if you think of situations where, you know, the product requires 100 different parts coming from 20 suppliers in 10 different countries, then then all of a sudden, you know, you realise how vulnerable you are, but I want to add two elements there. First of all, again, automation, digitisation is playing a role in this field. 3D printing is going to become bigger than it already is, I think, and it’s going to allow companies to make sure that they manufacture parts and materials closer to where they need them. And secondly, another reason why supply chains will change, will probably become shorter, will lead to repatriation of manufacturing is simply again the trade tensions. The fact that free trade is under fire and tariffs are being applied and that will not go away. That will not go away after the November election either.

Hobbs

Okay, we're coming quite rapidly now to the end of our time. I just want to go round and get a final thought from each of you about the future. Cornelius, if I could suggest I can pick up something that you wrote on EY.com. And that is that you are very focused on what you believe will be an acceleration in the volume of work for in house legal departments and that in order to be resilient to that, they're going to have to increasingly look to external providers of legal advice. Where does that volume of work come from that you're so worried about?

Grossman

Well, we touched a couple of these items already and let me just, you know, recap. Obviously, you know, employment law issues will be coming up in every instance. There are product liability issues. There's an adjustment of the supply chain which requires change of contractual arrangements and general terms and conditions. There are IP infringements or IP protections which need to be considered off and overall the regulatory change will only increase and not decrease. And at the same time, the legal functions are under cost pressure, they need to do more with less. You know, I think that the COVID pandemic will be the triggering event for massive transformation of legal functions. I think this will lead to different sourcing, it will lead to digitisation of processes and technology applications. It will drive efficiency and transparency into these functions. And at the end of the day, I think, you know, the operating models of legal functions will significantly change after this transformative practice.

Hobbs

Gijsbert, I know one of your main areas of concerns and one of your main interests again is the digitisation of data more broadly, as we look to VAT, GST and so on. You've got this, this two edged situation where they've cut taxes to help people. But you think that there's going to be a massive swing back as people attempt to fill those, those holes in their public finances or desire to hike taxes. Specifically I think you've mentioned extending taxes on digital services, as we've seen maybe in India and Indonesia. Is the landscape changing, do you think, in particular for big tech here?

Bulk

Yeah. Obviously you’ve got to give it to governments, they have been stimulating the economies across the globe with huge packages and, you know, they need to fill their coffers again. And yeah, one great way to do that is via indirect taxes that are, you know, typically levied in times of war and catastrophe because they're not related to income. And so they're relatively easy to get in. And yeah, we'll see a lot of focus on VAT, GST sales tax, what eventually we'll see, you know rates that will go up. We've seen that in the 2009 financial crisis as well. In a couple of years time the average VAT rate in Europe went up from 19% to 21%.

And then there will be new indirect taxes, new taxes as well like Digital Services Tax. Which you know, it's not just the countries you mentioned, India with the equalization Levy, but it's also France and UK that have now enacted and implemented that Digital Services Tax and we'll have to see how that goes. There will be new levies on energy and on carbon, for instance. The EU has announced the introduction of those. So yeah, there's going to be a lot of change in the in the landscape there, Simon.

Hobbs

Okay, we're basically the end of our time. But I want to leave you with something that Rob wrote on EY.com. Whilst a global pandemic might not have been a top scenario for any risk management plan, its consequences are something that all businesses encounter during their lifetimes. Business interruption, supply chain disruption, and staffing dilemmas. Rob, as you put it, it's having to deal with all of them at once that makes this challenge so distinctive.

Weber

Absolutely. And I think, as we've talked about throughout this session, you know, we do expect that it will happen again, certainly within our lifetime and probably, you know, more times than any of us would want, and as our clients are thinking about how do we move forward, we're in a very different dynamic going forward. And the expectation is, you know, thinking about, you know, for our clients, how do you make sure that from a tax and legal perspective, you are connected into the leadership of your organisation, so that you understand the business strategy and the sensitivities to your supply chain, your legal liabilities, as well as you know, your tax opportunities and risks in a manner where you can be nimble.

And ultimately, at the end of the day, very proactive about making sure you're providing the right level of advice to your C suite in a manner that's going to allow you to execute when this does occur again, and so, you know, really, it's great to have a three to five year plan, but you need to be able to pivot quickly and do things and really what that's going to take is acute connectivity to the business and the strategy, the ear of leadership and ultimately at the end of the day, and I think Gijsbert hit on this a couple of times, access to the data, and so transformation technology investment and an ability to see ahead and what's coming from around the corner is going to be critical so that you're able to quickly react.

Hobbs

Rob Weber in New York, Gijsbert Bulk in Amsterdam, Cornelius Grossman in Berlin. Thank you all. I'm Simon Hobbs. It's been a pleasure to meet you, all be it from 9000 kilometres away. That basically brings us to the end of this edition of the EY podcast. For more, visit EY.com. A quick note before I go from the attorneys: the views of third parties set out in this podcast are not necessarily the views of global EY organisations or its member firms. Moreover, they should be seen in the context of the time in which they were made. This podcast Tax and Law in Focus is brought to you by EY. EY: building a better working world.