What Supply Chain Leaders Need to Know about Global Tax Reform

Welcome to the April 2022 edition of Global Value Chain Chronicle. In this issue, I’ll examine top tax issues that supply chain leaders need to consider, based on data from the 2022 BDO Tax Outlook Survey, which surveyed 150 tax executives at U.S.-based organizations about their top challenges and priorities.

According to BDO data, 45% of tax executives are not involved in supply chain planning. It’s vital that tax and supply chain leaders work together to align tax and supply chain strategies. If not, they risk making operational changes that have outsized tax impacts which could be financially detrimental to the organization.

I’ll explore the topic of tax and supply chain strategy alignment further in an upcoming newsletter with Matt Becker, BDO’s National Managing Partner of Tax. For now, I want to give supply chain leaders an overview of tax leaders’ major concerns for 2022 to keep in mind as they plan and implement strategy.

Tax Executives’ Top Challenge is Regulation

According to BDO data, tax executives are struggling to keep pace with the rapid rate of regulatory change. Their top personal challenge is staying abreast of regulatory developments (tied with managing a workforce that is at least partially remote). Additionally, tax leaders’ top goal for their tax departments this year is to plan for additional domestic and global tax changes, as tax departments continue to grapple with an ever-changing regulatory environment. In the last four years, tax authorities have implemented some of the most significant policy changes in generations, and more are on the horizon.

As it relates to supply chain, tax executives are highly concerned about the tax impacts of operating model changes, and they already recognize how supply chain disruptions are impacting their total tax liability. These concerns highlight the importance of tax and supply chain leaders staying in close alignment, which can help ensure any operational adjustments to their network are tax-optimized. Tax should be an input for supply chain planning rather than an afterthought.?Additionally, tax executives expect the Organisation for Economic Co-operation and Development (OECD)’s two-pillar framework, if implemented, to have the highest impact on their total tax liability.

Background on Global Tax Reform

The OECD’s project began in 2013, and an action plan was announced in 2015 to mitigate global profit-shifting practices and promote tax transparency. The recent push for global tax reform, also known as BEPS 2.0, grew from that effort. Under the OECD/G20 Inclusive Framework on BEPS, participating countries and jurisdictions collaborated to develop a more inclusive framework, as overarching trends of globalized economies and digital products and services continued to proliferate.

The framework includes two pillars:

·??????Pillar 1 would change the nexus and profit allocation rules in a similar way to the result of the Supreme Court’s South Dakota v. Wayfair ruling. It would align tax obligations more closely with the location of a company's customers rather than the location of the company itself. Pillar 1 would apply to multinational enterprises (MNEs) with global revenues of more than EUR 20 billion euro and profitability above 10%.

·??????Pillar 2 includes rules that are designed to ensure companies with revenues above EUR 750 million, as defined in country-by-country reporting rules, pay a 15% minimum tax rate in each of the jurisdictions in which they operate.

Additional guidance from the OECD on the implementation of the framework is still being released, including the Global Anti-Base Erosion (GloBE) model rules published in December 2021. The GloBE rules provide further guidance on Pillar Two of the OECD framework, providing a coordinated system to ensure in-scope MNEs pay a 15% minimum tax on income arising in each jurisdiction in which they operate.

Further technical guidance on these rules was released in March of this year, and additional guidance is expected on tax reporting and how each country can adapt their domestic minimum taxes to align with the framework. For the U.S. to align with the framework, Congress will need to pass legislation to adjust the U.S. tax code. If the framework is implemented, companies that fall in scope for one or both pillars may see an increase in the complexity of their tax profile, and they could potentially see an increase in their total tax liability.

What Companies Can Do to Prepare

Companies should scenario plan to determine potential outcomes the two-pillar framework will have on parts of their business and any necessary changes in their tax strategies. They should also determine whether they need to reevaluate their business and operating models to better align with global tax policies.

Do you know if your business will be impacted by the framework? Get smart on Global Tax Reform and find out if your business is in scope here.

Stay tuned for a more in-depth conversation with my colleague Matt Becker on tax/supply chain alignment in an upcoming edition of Global Value Chain Chronicle.

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