Why the best new plans are tax inclusive

22 February 2021

When businesses rethink their operating models and for the post-Covid, post-Brexit and post-Trump business environment, it is vital they understand the after tax impact of any changes being considered. Bringing your in-house tax team and tax advisers to the table from the start is key to understanding and delivering on your projected outcomes. As your business evolves, understanding the after tax return is an critical metric as far as your shareholders and stakeholders are concerned. 

Here are ten reasons your tax experts should be involved whenever new plans and business transformation is being considered. 

1. Tax Trade-offs

There are often trade-offs between achieving business’s objectives and managing tax risk and costs. The earlier you can identify any increased tax exposure or tax savings during the business modelling process, the more likely it is that plans can be revised to manage risk and potentially improve your returns after tax. Your tax team and advisers can help guide strategic developments so that they achieve the best overall net result for the business. 

2. Tax incentives

Spotting what tax incentives (such as R&D tax credits) could be available in the countries and regions in which your group or business operates can have a significant impact on the net of tax return for a group. Of course, you also have to understand how likely they are to continue to be available throughout the time horizon of your plan, whether any adjustments needed to qualify for the reliefs fit in with your operational plan and how you will capture the data required to claim. Innovation is high on most business agendas right now so tax incentives could drive additional value and cash flow benefits.

3. Doing the right thing in the right place 

You need to understand what activities and resources create value across your business. Once you have a clear picture of your ‘value chain’, this will guide strategic choices such as investment strategy, interactions between functions and even location choice. 

International transfer pricing rules generally result in higher profits being allocated to higher value creating activities. Different countries have different tax rules for different types of business income and gains. Even within the EU, there can be significant differences when it comes to corporate taxes, indirect taxes and employment taxes. Balancing all these factors is a major task can yield significant efficiencies. Reviewing your international tax model and transfer pricing policies for business change in the post-Covid environment should be an absolute priority. 

4. Optimising supply chains

Do you know where and what your customs and VAT liabilities are post-Brexit? Have you understood the new procedural requirements and efficiently incorporated them into your procedures and systems? Are you confident your pricing and contracts with international customers adequately considers indirect taxes?
If you are importing and exporting materials and goods, where you buy raw materials and components from and where you send the finished products to can affect the customs duties and VAT you or your customers will pay. You need to do everything you can to reduce the impact of friction and costs at borders. 

5. Cross-border transfers – what is the cost of getting to the new normal? 

The risk of incurring tax costs goes up exponentially if your transformation plan involves moving group assets or functions across international borders. Aside from the immediate need to consider DAC6 reporting where an entity based in the EU is concerned, there are possible exit charges to consider as well as the impact on the group’s transfer pricing policies and on-going profit profile. Will these need to change to remain optimal?

6. Financing your new plans  

Most transformation plans will require finance and the choices around debt or equity funding have tax consequences. While interest is generally tax deductible this can be subject to restrictions. Equity funding can bring capital taxes or stamp duties. Financing across borders always requires careful consideration from a tax perspective; for example, understanding any withholding taxes payable. It is important to also work through potential tax costs associated with any interest, dividend or capital gains return flexing for various alternative realisation or exit strategies.

7. Managing tax risk

Tax authorities want comfort that businesses have processes and controls to manage tax risk and compliance. Identifying tax implications that arise from business plans from the start will mean that appropriate risk management can be undertaken and gives the opportunity to streamline procedures across a group. In the UK, the Senior Accounting Officer is responsible for certifying that the company establishes and maintains appropriate tax accounting and reporting processes. 

8. Resourcing and technology for the new tax compliance work

All new business plans will have an impact on your tax compliance processes and it is best to tackle that head on. Getting your tax team and advisers involved from the start will help them identify new compliance obligations and prepare to upskill and recruit for or outsource new tasks. Your tax advisers can help you implement the changes and adopt the right tax technology to streamline compliance work. 

9. Matching tax and business strategy 

If your new business strategy conflicts with the group’s tax and transfer pricing strategy, this will create tension and lead to increased risk. Including the tax team at an early planning stage will enable the group to ensure tax and business strategies are aligned. 

Of course, even the best new business plans will evolve over time so ensuring your business strategy and tax model remain synchronised is an ongoing challenge. For example, many businesses are moving to a ‘virtual team’ and flexible working model post-Covid. This can work well for attracting and retaining key team members but it can open up issues such as permanent establishment risk when the team is internationally based. 

10. Modelling the after tax payback period

Major changes to your business model or operation will inevitably mean comparing a range of options and modelling the impact of the most favourable. In many cases, it will be very hard to compare like with like unless you can calculate, or at least approximate, the net of tax return to the business under the new normal, all transactions costs and, finally, the expected payback period and return on investment.

Including your tax team and the right advisers from the start will make it much easier to get to robust figures, enable you to weed out any non-starters before management have invested too much time in them and focus on those initiatives that will drive after tax value for the business.    

Learn more about Rethinking business models.