Organisations that operate in centralised models continue to look to decentralisation, and organisations that are decentralised continue to look to some form of centralisation.
The extent of change depends upon an individual organisation's situation; some may tweak their existing model while others may make a significant shift.
Reorganisations that move towards centralisation generally consider one or more of the following models (or variations thereto):
- Manufacturing: Toller, contract manufacturer or fully fledged manufacturer;
- Sales and marketing: Agent, commissionaire, limited risk or fully fledged distributor; and
- Supply chain: Procurement, management services, principal.
With the developments in the OECD base erosion and profit shifting (BEPS) project including 15 action items to address and aggressive milestones to reach through to September 2015, the challenge for an in-house tax adviser, when dealing with reorganisation, is to ensure that the reorganisation does not fall flat once BEPS recommendations are rolled out and adopted.
At a very high level, the BEPS action plans emphasises substance, transparency, data reporting and documentation requirements in addition to curbing harmful tax practices and treaty abuse during reorganisations. Keeping these broad parameters in mind, this article aims to provide a practical guide to in-house tax advisers when handling reorganisations.
The list is not, and is not intended to be, exhaustive but aims to facilitate local tax compliance obligations and to demonstrate substance to tax authorities and external auditors (who sign-off on the adequacy or otherwise, of the tax provisions). These pointers may also be leveraged for an internal health check in respect of recent reorganisations.
1. Business purpose and benefits
The reorganisation has to be business initiated and business driven. There should be a clear business trigger for the reorganisation, for example, cost efficiencies with centralisation and scale, a need for faster market penetration strategy, consolidating a similar size or similar customer profile across multiple markets, mergers and acquisitions. A multifunctional team should be mobilised to list the pros and cons of the reorganisation for their respective function. Both qualitative and quantitative benefits assessments should be made. Analysis should also include rationale on why the reorganisation is happening now versus earlier or later. If functions and risks are moved to a different location, detailed analysis of the value drivers and where they should reside (RACI analysis), as well as the location study with rationale behind the location of choice, should be undertaken.
Formal recommendation for reorganisation and internal approval from senior management should be obtained. Strategically, reorganisation should be approved by a corporate committee of senior management and even the board of directors. Minutes of such meetings should be recorded.
2. Industry and peer review
Benchmarking with suppliers', customers' and competitors' business models should be made to support the reorganisations. Internal analysis and external consultants' reports should be developed and maintained. Third party benchmarks could serve as CUPs in tax discussions. For example, in a manufacturing set-up, where customers and competitors operate on a regional basis via a centralised organisation, to remain competitive and to service the customer effectively, the company may reorganise regionally and centrally; otherwise, the company may lose out to competition.
3. Overall end-state vision
Organisations should develop the overall end-state long-term vision immediately following the reorganisation. While some reorganisation could be undertaken as a big-bang, others may be undertaken in a phased manner. Hence, it is important that the total value proposition of the entire reorganisation, across the entire value stream, is determined and laid out upfront. An overall transition roadmap should include a step-by-step plan and milestones. Clear timelines and approacesh should be put in place and this should be based on specific business criteria. Factors such as new business, new markets, new product / customer introduction and M&A should be considered in developing transition priorities. If only certain divisions and geographies are being reorganised, exclusion of other divisions and geographies should be rationalised and documented.
4. Change management strategy and new operating model rollout
Any business reorganisation requires change management. Having a change management strategy and team, stakeholder need / reaction assessment, targeted communication plans, etcetera, will not only facilitate the change but also facilitate reorganisation. Top management needs to communicate that this change has been followed through. Reorganisations are generally smoother and better achieved if senior leadership speaks the same language and cascades the same message across the organisation. Formal announcements should be made to the board, and, if feasible, in corporate annual reports. Webcasts, podcasts, town halls, internal and external communications and announcements of changes should be included in the rollout plan.
5. Organisation and process redesign (substance determination)
Substance is not defined in the rule book. There is no one-size-fits-all. Organisation set-up, workflows and processes differ from industry to industry, company to company and often, division to division within the same company. Real substance reflects a company's true business proposition which meets business need, commonsense test and optics test.
Let us assume that a company intends to establish a centralised global supply chain organisation in a particular location. Having just the chief supply chain officer (CSO) in the centralised location would be insufficient. Regardless of the experience that the CSO may have, for the CSO to be effective, the CSO would need functional heads (such as finance, logistics, purchasing, supply chain, quality, legal, HR and other supporting resources) alongside them to effectively define, implement and monitor global supply chain strategies. In other words, the CSO would need a team to effectively and efficiently run the global supply chain function centrally. A one person, or wafer thin, organisation structure in a centralised location does not meet the sense and optic test. However, this also does not mean that anyone and everyone involved in supply chain activities has to be centralised. Distinction may be drawn between the strategic and value driver activities versus tactical and implementation activities.
The following criteria may be applied when designing a meaningful organisation and process:
(a) Mirror commercial reality
The organisation design and processes should reflect the company's commercial reality. Artificial segregation or consolidation of activities will be detrimental to a smooth operation.
(b) Stick to the basics
Focus on the fundamentals – functions, assets and risks (FAR). Ensure value driver functions are identified and treated and compensated appropriately. An appropriate compensation benchmark report based on FAR should be developed and updated, and kept available at all times.
(c) Before and after designs
With the reorganisation, one would expect the organisation structure, processes and workflows to change. Having clarity on what has changed before and after organisation charts, RACI charts, process flows and workflows will effectively demonstrate that the change is real.
(d) Operating manual
A business operating manual detailing the new operating framework should be developed and institutionalised across the impacted organisation, division and geographies.
(e) Headcount changes
Reorganisation has an impact, not just on roles but also on total bench strength. Particularly with centralisation, where the activities are consolidated, there is an expectation that certain roles will be eliminated. Likewise, where activities are transferred to another location, the transferee location should expect a reduction in roles. Capturing head count rationalisation and/or redeployment will support the transition and be reflective of process efficiencies.
(f) Key performance indicator (KPI) realignment
Often KPI realignment with the new model and new functionality gets ignored. It is important to have a new set of KPIs for the functions impacted, both at legal entity and each function level.
(g) Get the emotion out of the way
When reorganisations are undertaken, there is a tendency to define roles and locations keeping specific individuals in mind versus organisation needs. To build the right substance, start with the role-needs and ideal location, and then identify the best resource to fit the role in that identified location.
6. IT infrastructure
While technology is an enabler to the organisation, ironically, systems issues turn out to be the hardest to manage, second only to change management. Serious dollars are invested to update and / or replace existing systems. All systems-related changes, such as system process flows, infrastructure and architecture changes, etcetera, should be tracked. For example, order to cash system, new capabilities in SAP, system access grants and restrictions. Location of servers, digital trades, e-commerce business models are relevant considerations especially given the BEPS focus on these items.
7. Awareness and trainings
Extensive awareness and training programmes should be conducted across the organisation. Working sessions should be held with impacted parties so that before and after process flows and work flows are clearly understood, including rationale for the change. Trainings should be on-going and part of the new hire and role change on-boarding material.
8. Post project implementation review
Once the project is implemented, a post implementation review should be undertaken to ascertain whether the business benefits that were expected have been materialised or not. Implementation of appropriate corrective actions should be tracked. Assessments should be undertaken periodically. Such assessments and reports will assist in demonstrating that the reorganisation is business purpose driven. On-going assessments could also be the stepping stones for future reorganisations.
9. Living the model
Where companies undergo serious reorganisations with significant changes in the roles and responsibilities, it is important to ensure that the model lives though long-term. An annual review and periodic health checks should be undertaken via special review teams and/or internal audits to ensure that processes and activities are undertaken in line with the new world. Such review reports should be preserved to demonstrate governance and controls within the organisation. It is important that the top management commits to living the model and to the end-to-end process flows and RACI definition, post reorganisation. Slippages are easy, especially with new teams coming on-broad with a strong desire to challenge and change the status quo. Hence, constant commitment from the top is necessary.
10. Record retention
We all know how critical record-retention is. Reorganisations are easy targets for tax authorities. Most reviews end up in prolonged disputes. Hence, business and tax teams have to focus on documentation storage and easy accessibility on demand. Organisations should err on the side of more. Often discussions and decisions are on phones, meeting and video calls. It is a practical nightmare to collate evidence after effect and especially a couple of years down the road. Teams would have changed, staff would have moved on, laptops may have crashed, systems revamped. Hence, processes have to be put in place to collate documentation in real time. Leverage on technology for recording and retaining workflow and processes followed by the organisation is highly recommended. Commercial record retention products are gaining popularity. Traditional approaches such as minutes recording and gathering, newspaper cuttings, travel data, etcetera are equally reliable if maintained in a sustainable manner.
11. Tax defence
In today's environment, tough audits are a given and tax disputes are expected. As handling disputes is a subject in itself, it is not discussed here in detail except that companies should plan ahead and put in place upfront risk mitigation and defense strategy. Evaluation of strategies such as advance pricing agreements versus mutual agreement programmes versus domestic resolution processes is important to ensure sustainable ETR and shareholder value. Strategies for resolving differences in treatments between income tax, transfer pricing, indirect tax and customs should be part of the defence plan. Other usual tax defence preparation should be undertaken proactively.
The above list is not hard and fast but indicative and it differs based on facts and circumstances and from organisation to organisation. It is also recognised that it may not be practical for all organisations to ensure all of the above points. Larger MNCs may have more levy and resources to achieve many of the above as opposed to SMEs and many others.
The bottom line is that an uncompromised and continued emphasis on business drivers coupled with a strong substance and commercial rationale behind any internal reorganisation, which is supported adequately with appropriate documentation, is a good safety kit that companies should possess when navigating the winds of external change.
All views expressed herein are strictly his personal views and does not in any way reflect or represent the views of his present or past employers. He can be reached at firstname.lastname@example.org
Head of Tax
Vineet Rachh is a senior director and head of tax for Jabil Circuit (Singapore), based in Singapore. He leads Jabil's global business centre's tax and transfer pricing matters. His role entails developing and implementing global supply chain solutions, and handling cross border tax and M&A matters. He also manages tax compliance, audits and controversies.
In his 20 year career, he has had the opportunity to work with most tax authorities in the Asia Pacific region on various subjects including advance pricing agreements, mutual agreement procedures and audits. He was also the industry representative at OECD's Task Force on Tax and Development's sub-group on transfer pricing in 2011. Before joining Jabil, he worked for other US multinational companies and before that for big-four accounting firms.
He is a member of the Institute of Chartered Accountants of India and a graduate of the Institute of Cost and Works Accountants of India. He is also a member of several tax network groups. He is a regular speaker at tax conferences and events.
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