In the midst of a storm of global volatility, the past 18 months have presented multinational corporations with unprecedented challenges. The economic and social upheaval that began in Spring 2020 has taken on a traditionally difficult job of forecasting and harming business, adding dozens of new variables. And now that the world is taking its first steps beyond the shadow of COVID-19, the future offers only one guarantee: uncertainty.
Multinational corporations have always seen forecasting as a kind of hybrid between art and science, and that has never been as true as it was in the COVID era. In this year, with parts of the global economy flourishing while others continue to struggle, supply chain disruptions causing massive manufacturing problems around the world, and the global tax reform landscape in hyperdrive, it has become virtually impossible for corporate tax teams to accurately predict the future.
WASHINGTON, DC – JUNE 16: US President Joe Biden and his administration’s pursuit of a global … [+]
That’s because even emerging positive economic indicators come with hidden challenges. For example, while we see the major economies in the US and Europe return to pre-pandemic levels of mobility and economic activity, parts of Asia and South America continue to experience bouts of the virus. And while the US economy is recovering, it is a K-shaped recovery, with employment rates persistently low for the bottom third of the wage earner, while workers in the highest paid sections of the population have already recovered.
In addition, the corporate tax landscape is becoming a minefield. As I mentioned earlier, recent demands from both the United States and the European Union for a global minimum corporate tax have created a strong momentum towards a solution to cross-border revenue.
While the G-7 has agreed to support new rules for a global minimum tax rate on corporate profits and a new way of dividing the income from taxing the world’s largest and most profitable companies, the EU is working on its own framework to achieve a unified one Corporate tax norm and distributes profits between its 27 member countries, while the OECD sets its guidelines for the taxation of intangible assets. Meanwhile, some countries, like Ireland, which has no plans to cut its 12.5% rate, appear to be sticking to the whole proposal.
So how can multinational corporations find their way through this dizzying maze of ongoing economic upheaval and evolving regulatory reforms? By coming up with contingencies for as many paths as possible. Because of this, many companies have stressed out several different scenarios to determine the most likely course.
Since the early days of the pandemic, multinational corporations have relied heavily on their tax and finance teams to help stabilize operations. This trend has continued as these teams play an increasingly important role in real-time modeling and business structuring. These increased activities require the ability to free capacities in order to meet both the existing compliance requirements and the future-oriented strategic requirements for the tax function. Tax leaders have become an indispensable strategic advisor to propose and defend business model changes and supply chain restructurings, and to model the desired outcomes in response to global economic recovery scenarios.
It is an arduous task. Even the most experienced CFO or corporate tax team cannot possibly be 100 percent successful. The unforeseen can and will happen, and that is likely to lead to missteps. But as we’ve learned over the past 18 months, the companies that can act quickly and agile will be the ones that dodge craters and ultimately navigate this troubled landscape.
Optimism for 2022 is at an all-time high, and that will lead to some level of complacency. As the world begins to put the pandemic in the rearview mirror, there will be a tendency to revert to the pre-2020 predictions and expectations. But with so many changes on the horizon, vigilance and flexibility must be at the heart of any corporate tax strategy.
This will be the common link with all those who will be successful over the next 24 months. The multinationals, satisfied with uncertainty and understanding that all that is known is the unknown, will be able to weather the storm to come. And those who cannot or do not want to make these adjustments run the risk of being carried away.