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There are significant changes on the horizon when it comes to tax, aiming to create greater transparency, accountability, and fairness. The reforms will impact every area of large organisations, so what are the drivers of change and how are businesses preparing?

Forthcoming tax reforms

The OECD/ G20 created an inclusive framework on base erosion and profit sharing (BEPS), of 137 countries and jurisdictions, that aims to reform international tax rules to ensure multinational organisations pay a fair share of tax wherever they operate. With BEPS practices costing countries $100-240 billion (£75-£181bn) in lost revenue annually, the framework aims to tackle tax avoidance, improve the coherence of international tax rules, ensure a more transparent tax environment, and address the tax challenges arising from the digitalisation of the economy.

The European Parliament also voted to implement public country-by-country reporting (CbCR) across the EU. This requires multinational enterprises (MNEs), with group revenue of more than €750 million (£610 million), to disclose the amount of corporate tax they pay in EU countries. MNEs will need to be complying with the first provisions of the directive by mid-2024, representing a significant overall in operations. And in the US, the “Build Back Better” framework will impose a 15% minimum tax on the corporate profits of large corporations (those with over $1 billion [£756million] in profits).

As President Joe Biden says, “paying what is owed” and “putting an end to the race to the bottom”, means that businesses will have to review their entire value chain in light of global tax reforms. Moving to lower tax jurisdictions won’t be an option for many businesses, requiring a complete overhaul of operations.

ESG implications

As the march of Environmental, Social and Governance (ESG) continues, organisations need to balance tax reforms alongside these practices. The ramifications of COP26 means that many organisations will need to re-assess its transfer pricing (TP), as increases in carbon and plastic taxes – plus duties on air travel and use of landfill – will affect its cost base.

OECD tax reforms are also aimed at the ‘social’ aspect of ESG, ensuring no country is unfairly disadvantaged. Some developing countries can lose out in poor tax environments, due to a higher reliance on corporate income tax meaning they suffer from BEPS disproportionately.

ESG is an increasingly important, and unavoidable, consideration for businesses. With tax reforms aimed at creating greater transparency, businesses are expected to report on ESG practices, impact, and investment. As a result, ESG and tax professionals are moving out of silos and are working increasingly holistically across organisations to embed changes more effectively.

As Covid-19 and ESG initiatives have exposed weaknesses in supply chains, from over dependency on other countries manufacturing products to environmentally and socially questionable practices, tax reforms will also play a key consideration. Increased scrutiny over TP practices, clamping down on organisations that move profits to areas with low or no tax jurisdictions, means that supply chain transformation requires another area of consideration. Ensuring that supply chains meet tax requirements, support ESG practices, are robust enough to withstand unforeseen circumstances, all whilst chasing profits, is a complex equation for businesses to solve.

Many organisations are looking to technology to solve the equation, reforming their tax position whilst creating greater oversight of supply chain opportunities and threats. AI can amalgamate differing information across the entire value chain, enabling businesses to make better informed decisions. Projecting how differing tax reforms are likely to impact business, AI can support leaders to effectively deal with complexity, keep up with changes, mitigate risk, and create value.

Ultimately though, businesses need quality tax, supply chain and technologically savvy professionals to guide them through the process. Professionals are understandably in high demand as a result, with skills shortages in this area being felt globally.

For businesses to survive and thrive during volatile times, they need the right talent and technology on board to guide them through tax reforms, creating greater transparency and predictability in the process. Many organisations are also seeing this an opportunity to overhaul supply chain and ESG practices too, ensuring they are future proofed for trading and acting with greater accountability. Preparing for forthcoming tax reforms now, factoring in the entire value chain, is giving businesses the competitive edge – being on the front foot for when changes are implemented.