Don’t forget tax, the hidden value in business model reinvention

Your company’s leaders are probably working hard to anticipate the business implications of tech disruption, climate change and other megatrends. If so, they might be forgiven if tax efficiency slips down on their list of priorities. After all, it’s the company’s future they’re determining—including how it creates, delivers and captures value. Why complicate the loftier strategic aspects of business model reinvention with something as seemingly tactical as tax?

Why? Because when you consider the tax implications of your moves, you can mitigate risk in a fledgling business, simplify its operating model, foresee the impact of regulations and trade agreements to influence strategic decision-making, and potentially increase profits by two to ten percentage points, thereby increasing the returns to the business.

In this article, we will highlight several companies that benefited by paying attention to what could have been dismissed as the so-called small stuff, and show how they used timely tax advice to improve upon their business model reinvention efforts. We have also highlighted other considerations from which companies in similar situations will benefit. We hope to inspire CFOs and their teams to add tax to their reinvention toolkit. Doing so creates incremental value and reduces cost and risk, a dynamic that helps turbocharge reinvention efforts and boost shareholder value.

Let’s start with the example of a company we know but won’t name here, a player in the extended global automotive industry. Like its competitors, the company is pursuing a new business model to monetise its proprietary customer data—making a bet that could reshape the company.

Unlike some of its rivals, however, this company had leaders who anticipated the need to simplify the new business, administratively, from the outset. Why default to the old model, the leaders thought, when the new business would be more of a tech company than an industrial one?

As a result, the company asked its tax leaders to map the implications of various strategic moves. The tax team quickly zeroed in on the need to develop a perspective on where and how customer data should be owned. At the outset, the data was scattered across the company’s many geographic business units (BUs), and it would have been easy to simply leave it that way.

The tax leaders, however, saw the potential for risk embedded in this approach, including reputational risk should the home country of one of the BUs suddenly change its posture on how customer data was managed, or otherwise politicise the issue. In response, the tax team recommended that the company buy the data from the BUs and centralise its ownership to mitigate the risk. 

Next, the team looked to see if there were any economic benefits associated with where the data was owned. The data business was a brand-new one—so why not approach related operational decisions as a blank slate? This proved smart: in the end, the company found that for every dollar the new, tech-driven BU spent on buying the data to fuel the new venture, it saved about 25 cents in tax, in part by offsetting losses in some BUs with the profits from the sale of the data.  

In addition to managing the risk and cost benefits, the tax team’s strategic thinking and leadership helped simplify the new operating model at the outset, which kept the reinvention effort moving quickly, reduced its implementation costs and supercharged its financial forecasts.

Combining speed and simplicity is vital. As our colleagues have previously discussed, the best approach to reinvention is one that takes a ‘minimum viable product’ view in order to allow the company to learn, to adapt and to generate revenues quickly. This builds enthusiasm and helps fund the overall effort.

Tax plays a role here, too, although if things are moving quickly, business leaders may see such nitty-gritty details as a distraction. This was the initial viewpoint of a second global auto industry player we worked with. The company (which operates in a part of the value chain different from that of the previous example) also had aggressive plans to optimise its data potential, and its leaders felt that untangling the jurisdictional and tax aspects of the change might be best put off for another day. The prevailing view: we can’t slow down.

In the end, they didn’t have to sacrifice speed—even though the company took an approach it hadn’t expected. That was because tax leaders quickly analysed the effects of different operating model options and showed company leadership that pushing ahead as they originally planned would, in some jurisdictions, result in forgoing up to 20 cents on every dollar in profit the new business created. In other cases, the company would be taxed on the same dollar of profit in multiple jurisdictions.

Armed with new information, the reinvention team now considered questions such as Who should own the new tech platform? Where should that revenue be attributed? Who should fund the necessary R&D? By considering these issues at the front end, the company could avoid unnecessary tax hits, mitigate risk and see a faster realisation of the financial benefits it expected. 

Organisational inertia (and the power of the status quo) can prevent companies from seeing reinvention opportunities. The status quo can also negatively influence operational decisions even when the need for reinvention is clear.

If you’re creating a new business, for example, the logic of the status quo argues for leveraging existing R&D or manufacturing capabilities—or at least co-locating new teams in the same country to make things easier. The urge to go with what you know is tempting, as it seems simpler and faster. And it can be the right call.

Except when it isn’t. This was the difficult decision facing a large consumer goods company that was working to cannibalise one of its highly profitable product lines by launching one that eliminated all plastic packaging. The move made sense from both a carbon perspective and a customer one, as the company had identified customer segments it could reach with a greener product. (Similarly, PwC’s Voice of the Consumer Survey 2024 found shoppers are willing to pay 10% more, on average, for products made from eco-friendly materials.)

Launching the new product, however, would be complicated. It would ultimately necessitate new R&D skills and commercialisation approaches, new manufacturing lines and technology, and even new supply chain requirements for storage and warehousing. The company at this point could have gone with what it knew: expanding its plants and piggybacking on its considerable operating assets. But instead, company leaders challenged the status quo and approached the issue with open minds. 

They started by looking at the full value chain, questioning where the capabilities and operations they immediately needed should be located, and asking where they might grow over time. Fast-forward to today, and the company’s nascent operating model, still evolving as the reinvention continues, is both efficient and tax-efficient. For every dollar of profits the company’s new product line earns, it already sees 2 to 3% tax savings—a number that will only grow as more of the new operations come online and scale up.

When your tax team is empowered to think and act strategically about business model reinvention, and is involved early enough, it can add value and reduce costs. Moreover, having high-performing tax teams, working in partnership with legal teams, increases the odds that the overall risk profile of your company is properly managed, your business strategy is aligned with overall tax policy and your return on investment (ROI) meets your strategic goals.

Finding the value starts with knowing where to look. We suggest exploring the following areas:

• Operating model planning. Reinvention involves myriad operating decisions—footprint considerations, potential transfer pricing arrangements, capital deployment, finance structuring, supply chain planning, compliance issues and more. All of these decisions have tax implications. Consider them as your reinvention effort progresses, to maximise value while maintaining momentum.
• Tax asset planning. Surrounding the many operating decisions are a multitude of transactions that also have tax implications. How should you manage (and time) capital gains and losses? Or plan for net operating losses, transaction structuring or ownership changes? Finally, are any new legal entities structured to address the relevant business changes and their implications for policy, tax and regulation?
• Credits and incentives. Many governments offer tax incentives that can reduce a company’s tax liability and operating costs. These may include R&D credits to invest in innovation, workforce development incentives and green incentives for undertaking environmentally friendly initiatives. Credits and incentives can be substantial. In another article, our colleagues describe how a global cement maker looking to reduce its carbon emissions discovered that government incentives equalled a whopping 50% of the roughly US$1.5 billion in plant modernisation costs the company was considering.
• Indirect taxes. The ever-evolving landscape of value-added taxes, import tariffs, free trade agreements, excise duties, special economic zones and other forms of indirect tax offers plenty of opportunities for companies that are paying attention. For example, a chemicals company we know recently began exploring how the prospect of anti-dumping regulation in a key market could spur the company to disintermediate its supplier and make a particular chemical itself. The economics of the change—informed by the tax implications—will play a big part in the company’s strategic thinking. In other situations, we have seen savvy companies use their real-time understanding of the indirect tax environment to influence transaction flows, site locations and other important business model decisions.
• New regulations. In a world transformed by climate change, technological disruption, social instability and other megatrends, businesses should constantly be anticipating scenarios where new regulations take life and develop. These may include matters as diverse as ethical sourcing, ethical AI and data privacy rules, and sudden trade restrictions and embargoes. Any of these could affect a company’s reinvention plans, and some may reveal new revenue stream opportunities, as in the case of the chemicals company mentioned above.

Business model reinvention is challenging enough. Don’t make it harder by overlooking vital operational considerations in your race to seize strategic opportunities. High on your ‘don’t forget’ list should be the tax and other legal implications of the reinvention moves you’re considering. Adding expertise in these areas to your reinvention toolkit creates incremental value, reduces costs and risks, and helps boost shareholder value.