From a new corporate profits minimum tax based on book income to a surcharge on certain stock buybacks to sweeping reforms in international taxation, US and global lawmakers and standard-setters are proposing a wide array of tax changes that could have far-reaching impacts for consumer markets (CM) companies.
As companies in the CM industry determine how to effectively prepare for these tax changes, they should consider potential actions in the context of broader business challenges. Some of these challenges include supply chain disruptions, corporate responsibility and sustainability expectations — encompassing environmental, social and governance (ESG) issues — and global operating model inefficiencies.
The considerations below are designed to help CM companies navigate these challenges while seizing related opportunities.
1. Shorten and diversify supply chains
Proposed changes to corporate taxes generally would not require a complete overhaul of a company’s supply chain. However, certain changes — coupled with broader business developments — may nudge CM companies in a new direction. These changes include the international tax changes introduced by US congressional leaders and the Base Erosion and Profit Shifting (BEPS) recommendations issued by the Organisation for Economic Co-operation and Development (OECD).
Companies already considering shortening their supply chains by moving certain sourcing, manufacturing or other fundamental operations onshore — or to nearby countries — may end up doing so, especially in light of disruptions associated with extreme weather, worker shortages, health crises, spikes in demand and political unrest.
At the same time, companies heavily reliant on one particular country may consider supply chain diversification, or business disruption and continuity planning, in lieu of onshoring or pulling out of the country altogether. Vietnam, Thailand, the Philippines, India and Malaysia are among the countries being considered as potential locations to diversify supply chains.
Each of these countries may have its own set of strengths — such as tax incentives, low-cost labor, free trade zones, pre-existing industrial parks, developed transportation and logistics systems, available land or sub-sector manufacturing specialties — as well as possible challenges.
Regardless of the approach, a company’s goal generally will be the same: increased supply chain resiliency and speed.
Certain tax changes — coupled with broader business developments — may nudge CM companies in a new direction.
Implications
Tax considerations can have an impact on a business even if they do not directly drive business decisions. Accordingly, CM companies may need to analyze changes to business operations and structures in order to remain tax-compliant in their reporting obligations and tax-efficient in their decision-making. Supply chain changes often are large in scale, and unfold over time, so ongoing monitoring and evaluation are essential.
2. Integrate ESG initiatives into planned business changes
As CM companies make business changes — such as improvements to supply chain efficiency and resiliency — they may want to consider related ESG initiatives in order to generate even more of a benefit. This could involve re-evaluating strategies in areas ranging from responsible materials sourcing to equitable employment practices. It also could encompass eco-friendly packaging and ethical privacy and data security protocols.
In re-evaluating ESG strategies, CM companies should keep tax ramifications in mind, including credits and incentives that can help increase overall return on investment. Even routine tax initiatives – such as entity simplification – can have a meaningful ESG impact by improving overall tax transparency. Weaving ESG strategies into all aspects of operations is becoming a necessity.
CM companies should keep tax ramifications in mind as they re-evaluate ESG strategies.
Implications
Companies are taking steps to quantify the financial impact of ESG. Where in the value chain those initiatives are developed and implemented may indicate where the resulting value is created. The tax function needs to understand the details related to value creation in order to determine the impact on intangible assets and transfer pricing, among other considerations.
Given the importance that consumers place on corporate responsibility and sustainability, CM companies may wish to craft a compelling narrative describing their ESG initiatives. This narrative ideally would be ongoing, rather than being limited to disclosures associated with required regulatory reporting.
In March 2024, the SEC enacted climate disclosure rules to increase transparency and comparibility for stakeholders. At the same time, consumers have been insisting that companies focus more on ESG issues. The November 2021 COP26 climate summit in Glasgow is further evidence that ESG initiatives are gaining momentum as governments around the world commit to further reduction of carbon emissions, raising the possibility that carbon trading may re-emerge.
3. Re-evaluate existing operating models
CM companies may want to re-evaluate the effectiveness of their global operating models for a variety of reasons. For example, the COVID-19 pandemic and related lockdowns required many businesses to increase their focus on e-commerce, resulting in logistical challenges to inventory management — with ripple effects throughout the organization.
In some cases, retail stores became warehouses or fulfillment centers to support the increase in online transactions, while, in other cases, stores evolved into showrooms that prioritized contactless interactions. These changes often resulted in new federal, state or international tax compliance obligations, as well as new planning opportunities focused on better aligning tax considerations with business objectives.
Tax policy and the business environment may remain fluid well into the future.
Implications
The pandemic has turned workforce operating models on their heads, with remote and hybrid work increasingly becoming the norm, especially for CM employees who do not work directly with customers. Where employees work could have an impact on state tax nexus, withholding, and other matters that CM companies need to evaluate.
Meanwhile, as the pandemic wanes, CM companies will need to refocus long-term strategies on customer demands. While the approach will be different for each company, it seems unlikely that many companies will revert to pre-pandemic business practices. Therefore, companies will need to determine what their future operating model will look like:
- Is the right model to stay the course and double down on e-commerce?
- What role will the physical retail store play?
- What is the right mix of channels, and how integrated should they be?
These are all questions that companies will need to answer sooner rather than later.
Complicating these business decisions are socioeconomic and geopolitical issues, including trade and tariff tensions calling into question past import-export preferences; global conflicts fueling resource scarcity and inflation; and unpredictable travel restrictions limiting mobility and entrance into new markets.
Add potential changes to the US Base Erosion and Anti-Abuse Tax (BEAT) and global intangible low-taxed income (GILTI) regimes, as well as the minimum tax under new OECD principles of international taxation, and the result is that historical operating models and legal entity structures may no longer be ideal.
Finally, a real possibility exists that tax policy and the business environment will remain fluid well into the future. While fluidity makes long-term planning more challenging, it also underscores the importance of scenario planning and the need for flexible operating models.
Seize opportunities, despite uncertainty and complexity
CM companies that choose to re-evaluate core business strategies related to supply chains, ESG initiatives and operating models in the context of evolving tax and business landscapes may be well positioned for future success. Using a data-driven approach — supported by technology — these companies can harness the insights necessary to make sound decisions regarding business challenges and opportunities, despite uncertainty and complexity.
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