Multinational corporations have long benefited from the hodgepodge of global tax rules to reduce their tax burden. But now that more countries are adopting updated uniform standards for how global companies are taxed, multinationals need to reassess not only their tax strategy but the very way they do business.
The basic goal of these new tax guidelines—called the Base Erosion and Profit Shifting project, or BEPS—is to prevent companies from artificially shifting profits from high-tax countries to low or no-tax nations where they have little presence. To do this, countries are implementing rules to tax companies based on where most of their operations—both people and physical assets—are actually located. In essence, taxes will be levied wherever a company creates value within its organization. The new rules are a significant departure from the international tax norms of previous decades.
Read more on the ripple effect of BEPS reforms.
The BEPS guidelines—which are being proposed by the Organisation of Economic Co-operation and Development—are gaining traction among countries because they combat the perception that multinationals have a tax advantage over local businesses. Each country would still have its own tax system, but these new guidelines, which many countries will follow when considering taxation rights between countries, represent a significant departure from the previous guidance. There would just be more uniformity in where—and how—multinational profits are taxed.
For multinationals, the changes aren’t just about taxes. The ripple effect from BEPS is impacting the end-to-end global value chain and causing closer alignment between value chain, operating model, and tax structure. The disruptions could be substantial as multinationals will need to reevaluate not just their tax planning, but where and how they run their business operations.
Compliance could be among the increased challenges. Companies may find it difficult to convince local tax authorities that they are reporting the proper amount of profit in that country. And countries are likely to disagree on where—and how much—value is created within their borders. Multinationals could end up being doubly taxed on some operations.
There are other forces at play as well. Multinationals are facing a rapidly changing business landscape where technology and evolving consumer demands are forcing them to be more nimble, cost efficient and adaptable. And of course, there’s the possibility of major changes in the U.S. tax system.
So how can multinationals respond? While there’s no one-size-fits-all approach, here are four important factors to consider:
- Start with data insights. Before making any meaningful changes, multinationals need to understand how the tax guidelines and other factors affect where and how they create value. So a vast amount of data needs to be collected to map out the activities an organization undertakes that are its core value creating activities. This type of analysis can also give company leaders insight into their existing capabilities to determine how they may be impacted by continuous business disruption.
- Get the right people on board. Multinationals need to be sure the right people are involved in making decisions about a company’s operations, value chains, tax structure, and their location. So when making high-level strategic decisions on these matters, in addition to experts in tax and trade issues, companies need to include experts in strategy, IT, finance, operations, logistics, supplier management, procurement, and customer experience.
- Collaborate and communicate. Each of these stakeholders need to be talking to one another and collaborating. To encourage this, multinationals should develop a common framework around the company’s core values and how they apply to this initiative. This way, stakeholders have the same frame of reference before they tackle complicated issues about their future operating model.
- Align the Operating Model. With the right people on board, companies will need to find the new equilibrium for their operating model. This may mean resigning to the reality of a larger tax bill or modifying the current operating model to ensure value-creating activities happen in tax-favored jurisdictions.
As multinationals reconsider how and where they create value, they need to be aware that the process will be far from easy or risk-free. But if done right, the potential rewards can be significant.
Read more on the ripple effect of BEPS reforms.
