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Omnichannel retailing: TP implications for consumer goods businesses

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The retail world has changed for ever, with COVID-19 forcing companies to adapt quickly. Silke Lappe, Arundhati Pandeya-Koch and Julián Guatibonza of Deloitte Germany explore the new reality and the task facing tax departments.

The COVID-19 pandemic brought with it a paradigm shift regarding how products are sold and consumed, forcing consumer goods companies to adapt rapidly not just to changes in their supply chain but also to variations in demand.

Customers have moved away from traditional bricks-and-mortar shopping towards e-commerce and expect a seamless shopping experience across various sales channels. Thus, developing omnichannel retail capabilities has become essential to future-proof consumer goods businesses.

Developing and implementing omnichannel capabilities in a short timeframe is not only challenging from a business perspective but also requires companies to navigate the continuously changing and complex tax and transfer pricing regulatory landscape.

A timely review and recalibration of existing transfer pricing and tax models is imperative to ensure that in-house tax departments not only remain ahead of the curve but also ensure the tax compliance obligations of the company are met.

Omnichannel retailing – the new norm

As supply chain disruptions continue, consumer goods supply chains are being subjected to considerable strain and their vulnerabilities have become increasingly evident. In the past, cost savings and efficiency were the key considerations for businesses while building and managing supply chains. However, the focus has shifted to resilience and agility to withstand the stress of multi-country disruptions and rapidly changing customer demands.

Generally, supply chains in the consumer goods industry vary significantly depending on the end product. Some tend to be regionalised or even localised (for example, in the case of food and beverage companies), whereas others are globalised (such as in the case of apparel). And while companies are focused on building resilient supply chains through, for example, increasing end-to-end transparency, digitalising their business, and perhaps diversifying, one trend stands out as a common factor: omnichannel retailing.

Omnichannel retailing is a fully integrated approach that provides customers with a seamless experience across online and offline channels. This means customers can buy from, interact with, and return goods to the seller seamlessly through bricks-and-mortar shops, websites, apps, e-commerce marketplaces, social media, and more (Deloitte LLP, The omnichannel opportunity: Unlocking the power of the connected consumer).

The interconnection between channels enabled by the improved flow of data leads to an increase in product availability while significantly improving inventory allocation and order fulfilment. From a customer perspective, this results in easy purchases, fast delivery of products, and ultimately a seamless and, in the best case, personalised consumer experience (Deloitte Consulting LLP, The Customer-Driven Supply Chain).

Not long ago, offering customers an omnichannel experience used to be considered futuristic and aspirational for many consumer goods companies but now it has become vital for their survival (Deloitte Consulting LLP, Tale of two retailers: A time to thrive vs. survive).

The COVID-19 pandemic made omnichannel features such as click and collect commonplace and shattered traditional sales channel boundaries. The consumer’s online shopping expectations push retail capabilities in several dimensions, such as multiple delivery options and stock levels, particularly as shopping online becomes the consumer’s choice for product categories such as home furnishings, clothing, and electronic devices (Deloitte, Deloitte Global Consumer Pulse Survey).

Challenges and strategies

To make their business models future-proof, consumer goods companies need to design and implement a successful omnichannel retailing strategy. For this purpose, consumer goods companies must be able to effectively implement strategic inventory management, logistics, last-mile delivery, and personalisation by applying digital solutions to enable their customers to use all available channels at any point in their shopping journey.

Developing omnichannel capabilities is accompanied by significant changes in business models and heavy investment in digital tools. Furthermore, some of the greatest challenges retailers face as they implement omnichannel fulfilment include managing inventory and stock, optimising the packages-per-order ratio, leveraging technology to enhance customer experience and satisfaction, and, most importantly, minimising the impact on human capital (Deloitte Consulting LLP, A road map for omnichannel fulfillment: Advancing your omnichannel retail strategy).

Additionally, competitive market environments and a pressure to react in time to consumer needs may lead some companies to take drastic action in a short span of time, leaving the in-house tax departments with the Herculean task of catching up with the rapid business change to ensure regulatory compliance.

TP implications and considerations

The integrated approach of omnichannel retailing has numerous and far-reaching tax and transfer pricing consequences.

Whether the replacement and/or enhancement of traditional sales activities (for example, in shop sales) by digital sales processes might trigger a taxable event is only one of the critical questions that tax departments need to consider with regard to the implementation of omnichannel capabilities.

For starters, the implementation of omnichannel retail strategies needs to be accompanied by a transfer pricing model that not only appropriately captures the functional and risk allocation between the parties contributing to omnichannel business activities such as e-commerce and logistics, but also ties seamlessly into the existing transfer pricing model for the traditional sales structure.

Furthermore, considering the OECD’s control over risk approach, relevant risks with regard to omnichannel retailing would need to be identified and appropriately priced. In this regard, areas within the group’s supply chain network would need to be monitored and assessed as to whether the underlying transfer pricing model continues to reflect the allocation of risk management activities along the value chain and to define which measures would need to be taken to manage any potential mismatches in this regard.

As is the case with any transfer pricing planning activity, it is essential that any recalibration of the underlying transfer pricing model is undertaken based on a holistic view, which goes beyond transfer pricing and accounts for other related tax and legal areas such as customs, VAT, good and services tax (GST), commercial law, the EU plastic tax, and carbon pricing.

A reappraisal of business functions

Interactions with the customer through various channels make it increasingly difficult to track the sales effort and allocate the sales and profits thereof to different channels and perhaps to different group companies. The answer to this question might become even more complex in the context of a transfer pricing setting for digitalised business models against the background of the OECD’s development, enhancement, maintenance, protection, and exploitation (DEMPE) functional concept for intangibles (the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations, paragraph 6.32).

Tax authorities around the globe have started not only to scrutinise the definition, allocation, and remuneration of intangible assets in such business models but also to reconsider the applicability of the significant people function approach as a primary measurement for value creation and attribution within digitalising business models.

The more multinationals in the consumer industry engage in omnichannel distribution strategies, the more they might become willing to open their organisation towards collaborative partnerships with third-party suppliers or service providers to improve customer experiences and satisfaction through an enhanced product or service portfolio.

In many instances, collaboration is executed via so-called digital platforms or marketplaces. This calls for management of the potential tax and transfer pricing consequences resulting from such strategic partnerships on the one hand and navigating new regulatory requirements – for example, new transparency rules such as the EU’s adopted DAC 7 reporting obligations for digital platforms – on the other hand.

Moreover, due to the copious amounts of data continuously generated through the interaction of consumers across different sales channels, the tax departments of multinationals in the consumer industry are increasingly facing questions from tax authorities on their tax and transfer pricing treatment of enhanced data collection and processing throughout the overall supply and value chain.

Permanent establishment risks

While following the omnichannel strategy, strategic marketing and sales functions may typically be centralised to ensure end-to-end oversight but at the same time, the role of the local functions is not necessarily declining. For example, the role of the local warehousing function out of which the online orders are completed may be adding additional value compared with the past, while serving the omnichannel strategy.

In this regard, not only is a revaluation of arm’s-length remuneration of local functions warranted but also an assessment of potential permanent establishment risks. Whether individual local activities can be considered preparatory or auxiliary in nature would need to be analysed vis-à-vis permanent establishment risks in view of the anti-fragmentation rules set out by the OECD.

For instance, if the local sales entity and warehouse in the same jurisdiction perform complementary functions that are part of an overall cohesive sales function, the combination of activities may no longer be considered preparatory or auxiliary in nature (OECD, Additional Guidance on the Attribution of Profits to Permanent Establishments, paragraph 7). The establishment of temporary sales channels such as pop-up stores may also increase exposure to permanent establishment risks.

Preparing for the OECD’s two-pillar solution

The OECD’s two-pillar solution to address the tax challenges arising from the digitalisation of the economy will shape how multinationals approach their tax compliance and prepare for a new world tax order. Despite the one-year delay in the implementation timeline for pillar two (the Global Anti-Base Erosion Model Rules, or the ‘GloBE Rules’), multinationals in the consumer industry have started to prepare their organisations, including underlying governance structures and IT systems, for the upcoming global minimum taxation rules to ensure compliance.

Planning implications notwithstanding, the implementation of omnichannel capabilities will likely add another layer of complexity to companies’ compliance obligations with regard to pillar two. In addition, multinationals in the consumer industry falling under the scope of the respective rules continue to closely monitor OECD developments regarding the pillar one rules in order to take action by the time the rules are decided and implemented (Action 1, OECD BEPS).

Proactive alignment of tax and transfer pricing models is key

Multinationals may face multiple business- and tax-related challenges while trying to move towards resilient supply chains and establishing an omnichannel retail strategy. Some of the challenges for the in-house tax departments relate to fulfilling compliance obligations and proactive preparation for tax and transfer pricing controversy. However, these developments also create opportunities for optimisation and recalibration of value creation, as well as efficiency and operational excellence in the business functions.

To fulfil their roles as strategic partners within their organisations, in-house tax departments need to be aware of, closely monitor, and react in a timely fashion to significant business changes such as establishing, or the adaptation of, omnichannel retail strategies, as well as align with the ever-changing tax and transfer pricing regulatory landscape.

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