It is obvious that the world of business tax has been experiencing significant disruption to the status quo in recent years. However, it is far less obvious how to design and implement a tax strategy which is both flexible enough to optimise emerging business opportunities and robust enough to mitigate fiscal risk in the face of such rapid change.
There are two mega trends in the macro economic environment which are driving a need for reassessment of tax strategies:
- Accelerating disruption to business models - this flows from the exponential emergence of disruptive technologies, changing consumer demands, evolving markets including disruptive market entrants and changing workforce patterns such as the growth of the gig economy
- A fundamental shift in the international tax environment - there is increasing focus on the ‘substance’ underpinning international value chains, increasing tax competition between national governments, and common historical approaches to managing tax profiles are declining due to legislative change on the way or already enacted.
The practical force of these disrupters is exacerbated by continuing growth in tax controversy, driven by increased transparency in reporting and greater cooperation between international fiscal authorities. Businesses should now expect forensic reviews of how they operate and the extent of alignment to the claimed tax outcome.
These disrupters are affecting two of the core components of any business: the business model and the corporate strategy. Ultimately, they manifest and intersect at the level of the operating model (the third core component of any business). Any change to the business model needs to be effectively operationalised, and this must account for tax risk and opportunity. Likewise, there is increasing focus on the delivery of tax value and mitigation of tax risk through operational change within the value chain, but it needs to be real operational change.
Your tax strategy
The current business and international tax environment means that tax strategy cannot be determined in a vacuum from the business (to the extent it ever could be); there needs to be operational alignment between the two and a constant feedback loop that enables rapid response to change from either side. A tax strategy is only effective as long as it aligns operationally with the functions of the business: and it must be able to flex as those functions change. A business model evolution (or revolution) will only fully realise its potential if changes in functional activities are actively managed as part of the tax strategy.
To ensure success, businesses tax professionals and their advisers need to collaboratively address the following questions (amongst others):
- How will we globalise most effectively in a world of increasing local risk?
- How do we implement governance without restricting innovation?
- How will we maximise certainty whilst evolving what we do?
- How will we future proof when the only certainty is change?
- How will we price and optimise value driven by our intellectual property when our value chain is constantly evolving?
- How will we best incubate and unlock value when we do not know which of our bets will pay off?
- How will we capture where our people drive value from in an increasingly mobile and digitally enabled world?
- How will we balance tax efficiency with business capability and requirements?
These are not simple questions to answer, and there is no ‘one size fits all’ answer to any of them. However, we can only hope to answer these questions effectively if we facilitate open dialogue across a wide range of stakeholders that focuses on the operational approach to change. Now more than ever, businesses need to ensure that they have robust processes in place for monitoring, assessing and implementing operational change. Locally executed business innovation requires global coordination, and local governance needs global implementation. And someone needs to be tasked with bringing thinking together.
Historic wisdom has been to lead with your heart, then with your head. As continuous changes push up FDs’ pulse rates, will our heads be able to keep up?
To discuss your international tax strategy, structuring and compliance management please contact Ross Robertson.
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