A NEW GLOBAL BUSINESS MODEL FOR A NEW ERA OF GLOBAL BUSINESS By Bridget Walsh, EY EMEIA Area Managing Partner - Tax and Matthew Mealey, EY Global International Tax and Transaction Services’ Innovation Leader
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he global tax landscape has undergone significant shifts in the past decade, driven by a range of political and economic factors, including the need for governments to close significant tax gaps by increasing revenues. As a result, tax has risen steadily up the boardroom agenda, with the tax function integral to corporate strategy, business operations and workforce planning. Tax costs, including access to tax reliefs and incentives offered by governments, are but one of many variables corporations consider when designing business models. For many decades, the traditional principal company model, where multi-national corporations centralize ownership of assets and business functions in certain locations, has been favored or being the most cost-effective. However, rising tax costs as a result of tax legislative and regulatory change, as well as the expense of managing rising tax controversy around transfer pricing and permanent establishment issues in some jurisdictions, is causing a re-examination of the value of existing models. This phenomenon, occurring in the wake of the OECD’s Base Erosion and Profit Shifting initiative (BEPS) is affecting industries as diverse as consumer products, life sciences, technology, media and advanced manufacturing. The combined effect is that there is a growing rationale for multi-national companies to rethink and reorganize their global businesses, with multi-hub operating models proving to be a compelling business alternative. This approach involves sharing assets and centralized functions across more of the countries and jurisdictions that represent an organization’s
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These pressures have also led to a range of public policy initiatives. These include the EU’s new industrial strategy, “Made in China 2025”, “Buy American” executive orders on US supply chains, and the UK’s changing trading relationships with the EU post-Brexit.
The advantages of a multi-hub model
most critical business locations. This multi-hub framework can deliver financial, operational and intangible benefits, both today and in the future.
Drivers of change BEPS brought together 139 countries and jurisdictions to implement a raft of actions designed to improve the coherence of international tax rules and ensure a more transparent tax environment. The ongoing implementation of the BEPS initiative globally, combined with the recent historic agreements made at the G7 in June and the OECD and G20 last month to further reform international corporate taxation accelerates the need for multi-national organizations to re-evaluate their business operations. These tax changes have been taking place against a backdrop where globalization has been evolving, a trend which began following the global financial crisis of 2008. Protectionism, populism and pragmatic pandemic nearshoring are among the factors now combining to accelerate this trend.
In the face of such change, large multi-national organizations are increasingly questioning the status quo, and are exploring new business models, better suited to the current economic and political environment. A review of a global business through tax, trade and regulatory lenses is guiding many to consider a fundamentally different approach and the adoption of a multi-hub model where key business functions and activity are relocated to the larger economies in the G7. The benefits of this model include: • Reducing tax controversy. The BEPS initiative has been accompanied by an increase in global tax complexity and controversy. In some cases, this controversy has led to reputational damage. A multi-hub operating model can limit cross – border tax controversy, simultaneously reducing risk mitigation costs and making regulatory compliance less onerous. • Creating more stable, sustainable tax costs. Tax controversy management and closer alignment with the new tax architecture should reduce tax rate volatility, creating more predictable and stable tax costs. • Bridging the talent gap. Multi-hub models can improve talent
