• The omnichannel dream

    What are the tax challenges and opportunities for international retailers?

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The omnichannel dream: What are the tax challenges and opportunities for international retailers?

21 May 2021

Providing users and shoppers with a consistent and seamless experience across channels and devices has long been the product manager’s dream. However, intra-channel seamlessness as a technical achievement remains elusive for many retailers. There is a multitude of different reasons including:

  • The challenge of providing a familiar and usable brand experience across an array of devices where interactions occur and then extending that further to physical stores. 
  • Supply chain challenges, which mean the logistical effort involved in reaching those shopping in physical stores versus those consumers buying on line and wanting delivery are very different.
  • The challenge of system change: Retailers who have traditionally run separate channel experiences to best meet the respective demands and now need to adjust processes to increase the synergies between them.  

One view is that those retailers who developed as bricks and mortar businesses first, are still seeking to develop the right mind-set and tech capability to bridge the journey from offline to online and to make the experience seamless for the customer. Here there is a need to respond to a gap in digital expertise at all levels of such businesses but in particular at strategic and board level where investment and governance decisions are made.¹     
 
COVID-19 has accelerated the growth of e-commerce and, even as we expect a return to the high street, the consumer demand for closer links between channels is increasing at pace (and we expect will continue to do so). We are seeing this as stores transform to act as showcases for the online experience, support and incentivise online purchases as well as delivery hubs for collections and returns. Omnichannel specialist Dixons Carphone has been well placed to capitalise on this trend, with their UK & Ireland division seeing like-for-like sales increasing 12% in the 17 weeks to 29 August 2020.²  

Just as there are business opportunities and challenges in the move to omnichannel so too are there a number of opportunities and challenges from the tax perspective. We have highlighted five:

​1. Developing the appropriate IP ownership structure

International branded retailers who have focused on their physical markets are well versed in responding to the tax issues that come with developing, exploiting and maintaining their trademarks and associated intangible assets (IP) such as design rights. E-commerce operations have often been a smaller and separate channel often with material outsourcing to access the technology assets and skill sets required.

Now the business focus on digital retail operations and the closer integration between channels requires retailers to get to grips with the tax opportunities and requirements around technology IP developments such as websites, coding, algorithms, and data. This requires a more technology focused tax skill set.

Key questions include how to flex the tax and transfer pricing framework to reflect new value creating activities and new IP and how to compensate for the sharing of such old and new IP between channels all of which needs to be developed in close alignment with changing business operating models.

There is a further opportunity here in identifying innovative and ground-breaking activities as digital operations are developed that could carry the potential for R&D tax credits and innovation incentives – not something that many bricks and mortar retailers have previously had cause to consider - find out more.

2. Accessing tax value for store related spend

As part of an omnichannel approach, retailers are redesigning stores to focus on providing a consumer experience and to support their focus on e-commerce sales. Tax input is required at the early stages to understand the potential to claim tax deprecation on such as capital allowances on fixed asset spend. The recent budget proposals for a two year 130% super deduction for spend on certain assets increases the potential value of such claims.

3. Managing the tax aspects of changing international footprint and supply chain

Retail supply chains are evolving to meet the demands of international omnichannels and this often means change in the international geographic footprint of retailers. Customers spread across more jurisdictions means there are more territories where retailers need to be sure they understand and can meet the customs and VAT obligations of servicing their international customers (including the new ecommerce VAT developments in the EU) – supply chain mapping is key.

In addition, there is the move away from a single large European distribution centre with smaller more localised inventory holdings that allow faster delivery to online customers and, indeed, a very real example of omnichannel is that retailers want to use in store stock to satisfy on line sales. Geographic footprint change requires businesses to think about the nature of their tax presence in each territory and ensure they have the appropriate legal entity model to meet their tax and transfer pricing obligations.

4. Designing an appropriate tax and transfer pricing transaction model for omnichannel

International retailers have often used different transaction models for their wholesale/retail operations and for their digital operations based on the business lines operated in very separate manners. Often international wholesale/retail operations are housed within local group distribution entities while direct sales are made to international customers from a single e-commerce operating entity located in one jurisdiction. The increasing integration of operations with increasing overlap between local marketing, supply chain and other operations puts pressure on this dual model and causes many to consider whether a single combined transaction model would be more appropriate for the business.

5. Tracking tax policy change and understanding the potential implications for the business and adapting accordingly

The taxation of ecommerce is a political hot potato at the moment with a plethora of local country unilateral action responding to the growth of the digital economy. This means that retailers with international customers need to have in place good procedures for tracking and responding to these changes.

In addition there is potential for significant global policy change that could impact all channels based on current OECD proposals. One of the central questions is the appropriate taxable reward for the country that provides the market of consumers. As retail businesses consider the most appropriate tax and transfer pricing models going forward they need to anticipate how these developments could unfold to ensure their models are sufficiently flexible to respond.

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How can we help?

As retailers adapt and enhance their omnichannel strategy, these tax challenges and opportunities will need to be addressed so that retailers can assess and model the cash tax impact and prepare for any required changes, be it systems, compliance or indeed, pricing.

For more information on any of the above and how to prepare, please contact Julia McCullagh and Anton Hume.

At BDO we play a leading role in the retail market and work with many of the biggest brands in the industry. We understand the challenges and industry issues our clients face. Our retail team aim to deliver an integrated, full service offering, to provide practical financial advice on everything from mergers and acquisitions and tax planning to auditing and accountancy. We are also well connected with a wide range of retail professionals and works closely with banks, private equity houses, brokers, as well as lawyers and property professionals who specialise in the retail sector. To find out more visit our retail hub.

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References:
[1] BDO |Shopping the future : New horizons in ecommerce eBook
[2] BDO | Retail forecasts report 2021