How to restructure for growth aligning operating and tax models

By: Niklas Hoppe | Published: May 15, 2018

Companies restructure to make themselves stronger and more competitive – at least in theory. In practice they often make two mistakes: they cut costs indiscriminately and harm the parts of their business that actually generate value, and they create new problems and miss out on opportunities because they leave tax out of the equation.

Getting both sides of the equation right takes intelligence and savvy, but it’s what makes the difference between a restructuring that focuses your organisation’s attention and resources, and one that saps your strength, erodes motivation, and leaves you less fit for growth than before.

PwC’s tax specialists and the consultants at Strategy& have developed a new method called Fit for Growth* and Tax that helps you align your operating and tax models to make sure your restructuring achieves sustained improvements in earnings – not just before tax, but after tax as well..

The restructuring/tax equation

The two enduring certainties for companies are restructuring and taxes. You can’t avoid dealing with either side of the equation. Even taken on its own, restructuring has always been a fragile exercise. Like pruning a plant, you have to cut back enough and in the right places to channel your energy and resources, but avoid cutting back too much in the wrong places and killing off any chances of growth. History is littered with examples of companies with plenty of potential that destroyed themselves with brutally indiscriminate cutbacks. Add an increasingly complex and unpredictable tax landscape to the equation, and you increase the likelihood that things will go spectacularly wrong.

What can possibly go wrong?

Two examples we at PwC and Strategy& have come across in our work illustrate the pitfalls.

One multinational company recently consolidated several global IT centres into one shared-services centre in the United States. But the savings generated from reducing labour costs ended up being consumed by the increase in US taxable income. By evaluating the tax implications, the company could have structured the change in a way that was more strategic and wouldn’t have negated the cost savings.

Another company sold a manufacturing facility to reduce investment in non-value-added capabilities. To keep its supply chain intact, however, it had the same legal entity that sold the plant enter into a contract with the new owner to continue making its products. Evaluating the transformation from a tax perspective would have enabled the company to structure the arrangement in a better way. If a different legal entity within the company’s multinational group located in a different tax jurisdiction had contracted with the new owner, the company’s tax obligation on its profits could have been reduced by more than 15 percentage points.

Seems obvious, doesn’t it? So why do companies fall into such obvious traps? It’s the silo thing: the restructuring experts often aren’t connected with the people who are in a position to evaluate the tax implications in today’s complex environment. The restructuring guys figure that if they do their part of the job properly, the tax side will be taken care of afterwards. Wrong. You have to think about taxes right from the very start.

What’s the solution?

What we advocate isn’t rocket science. In fact it’s pretty obvious: make sure your executives and middle managers have a basic understanding of when tax implications can come into play in a restructuring. Even if they can’t handle the tax challenges themselves, they’ll know when to ask for advice – either from people within their organisations or consultants – and do so early enough to avoid potentially costly tax-related mistakes.

This is particularly important in the unpredictable tax environment that currently prevails – and which could even get more treacherous as time goes on. New corporate tax rules in the US, the fallout from Brexit, the prospect of new tax transparency rules in the EU, and the OECD’s Base Erosion and Profit Shifting initiative – these are just some of the factors that are constantly shifting the tax goalposts, especially for companies doing business across borders and/or with facilities located in different places around the world. Restructuring know-how isn’t enough: you need to involve people who are keeping track of all these tax developments and know how to respond.

About our Fit for Growth and Tax service

  • We’re offering a Fit for Growth and Tax service combining the expertise of our tax and restructuring specialists. We figure if we can work together to get the equation right, we can encourage our clients do so as well.
  • Check out our website and feel free to contact us if you’d like to discuss your restructuring plans in more depth.
  • You can find more information about our unique Fit for Growth approach in our book.