Amid a storm of global volatility, the past 18 months have created unprecedented challenges for multinationals. The economic and social disruption that began in the spring of 2020 has taken a traditionally difficult job of corporate forecasting and impairment and added dozens of new variables. And now, with the world about to take its first steps beyond the shadow of COVID-19, the future offers only one guarantee: uncertainty.
Multinationals have always experienced forecasting as a bit of a hybrid between art and science, and that’s never been truer than in the COVID era. This year, with pockets of the global economy thriving while others continue to struggle, supply chain disruptions causing massive production problems around the world, and the global tax reform landscape in hyper drive, it’s become virtually impossible for corporate tax teams to accurately project the future.
That’s because even emerging positive economic indicators come with hidden challenges. For example, as we see the major economies across the U.S. and Europe start to get back to pre-pandemic levels of mobility and economic activity, pockets of Asia and South America continue to experience fits and starts with the virus. And even though the U.S. economy is recovering, it is a K-shaped recovery in which employment rates for the bottom third of wage earners stay persistently low, while workers in the highest-paid segments of the population have already bounced back.
What’s more, the corporate tax landscape is about to become a minefield. As I’ve written about before, recent calls by both the United States and the European Union for a global minimum corporate tax have resulted in a groundswell of momentum toward a solution on cross-border revenue.
While the G-7 has agreed to support new rules for a global minimum tax rate on company profits and a new way of sharing the revenues from taxing the world’s largest and most profitable companies, the EU is working on its own framework to create a single corporate tax standard and reallocate profits between its 27 member countries, all while the OECD prepares to lay out its guidelines for taxing intangible assets. All the while, some countries look to be hold outs on the entire proposition, like Ireland – which has no plans to drop its 12.5% rate.
So how can multinationals find their way through this dizzying maze of continued economic upheaval and evolving regulatory reform? By coming up with contingencies for as many paths forward as possible. That’s why many corporates have turned to stress-testing multiple different scenarios to chart the most likely course.
Since the early days of the pandemic, multinationals have leaned heavily on their tax and finance teams to stabilize operations. That trend has continued, as these teams are playing an increasingly critical role in real-time modeling and business structuring. These elevated activities require the ability to unlock capacity to meet both existing compliance requirements, and the forward-looking strategic demands being placed on the tax function. Tax leaders have become an essential strategic advisor to propose and defend business model changes and supply chain restructuring, and to model desired outcomes in response to global economic recovery scenarios.
That’s an onerous task. Even the most seasoned CFO or corporate tax team can’t possibly succeed with 100 percent certainty. The unforeseen can and will happen, and that will likely lead to missteps. But as we’ve learned over the last 18 months, the businesses that can act quickly and with agility will be the ones that will dodge craters and ultimately navigate this choppy landscape.
Optimism for 2022 is at an all-time high, and that’s bound to lead to some degree of complacency. As the world begins to put the pandemic in the rearview mirror, there will be a tendency to return to pre-2020 forecasts and expectations. But with so much change on the horizon, vigilance and flexibility have to be at the center of every corporate tax strategy.
This will be the common link in all those that will succeed in the next 24 months. The multinationals that have comfort with uncertainty, and understand that all that is known is the unknown, will be able to weather the coming storm. And for those that either can’t or won’t make these adjustments, they run the risk of being swept away in its wake.