Insight

Digital transformations through a tax planning lens

An integrated business and tax approach to digital transformations can deliver better operational and economic results.

As market pressures drive the requirement for new, digitally enabled business models, most organizations understand the need to undergo at least some form of digital transformation. For those that span geographical boundaries or that are looking at global expansion to accelerate growth, it has become a modern-day necessity.

The amount companies are spending on digital transformation is expected to grow from $469.8 billion in 2020 to $1,009.8 billion by 2025, at a compound annual growth rate of 16.5% during this period¹

With this rapid acceleration in growth of digital business models, many companies are faced with a need to move quickly and make significant investments in people and technology.

Digital transformation

Faced with this need to keep up, some organizations have taken the narrow view that technology alone is the answer – a belief that choosing and implementing a digital platform would be all that was needed to stay relevant in the modern world.

The organizations who have seen the most success from their digital transformation, however, have been those who have taken an enterprise-wide view before selection and implementation.

Digital leaders realize that true, effective, ongoing transformation requires a deep understanding of their starting position, a clear vision for where they want to be, and a defined strategy for how they are going to get there. They understand that every aspect of their organization should, and will, be impacted by their digital transformation and work collaboratively with stakeholders from their front, middle, and back-office – all of whom share the same strategic vision.

These leading organizations know that successful digital transformation isn’t just about the technology; it’s about every aspect of their business.

A common oversight

While even the most thorough organizations drive ahead, focusing on the undoubted benefits their changes will bring, some still fail to consider one important factor – the tax implications and opportunities of their digital transformation.

improved operational efficiency + reduced costs + more customers + higher revenues

increased profit

This equation is surely the reason that any organization undergoes a transformation in the first place, with each striving to achieve the same end result – increased profits. However, increased profits typically comes with an increased tax burden, potentially resulting in a downward drag on the anticipated financial benefits of the transformation.

Now, obviously, the myriad of benefits being sought by organizations as a result of a successful digital transformation would far outweigh the downside of any increase in their tax liabilities - but what if you could enjoy all of those traditional benefits while at the same time reduce the tax burden attributable to such increased profit?

And what if the tax savings could help to fund the expense of your transformation?

Digital transformations through a tax planning lens

In broad terms, in the tax world, profit should be aligned with the functions, assets and risks that generate such profit. In the case of a multi-national enterprise, it might be the case that legal entities in varied geographical locations contribute to the design and execution of any new service delivery model resulting from the digital transformation. In addition, digital transformations, more often than not, include the creation of valuable intangible property, with legal entities in varied geographical locations also typically contributing to the development and maintenance of such intangible property.

Accordingly, without much thought, at least from a tax perspective, the incremental profit generated from a digital transformation could be required to be spread like “peanut butter” across various legal entities, taxed at whatever tax rates exist in the jurisdiction of each such legal entity. On the other hand, if the digital transformation were looked at through a tax lens, it might be the case that a portion of that incremental profit could be taxed at lower rates, thereby leaving the organization with greater after-tax profits, and also additional cash to help fund the expense of the digital transformation itself.

While most organizations will consider the tax implications of their new service delivery model, when (and how) this element is taken into account can have a large impact on the overall efficiency and effectiveness of their transformation.

Treating tax as an afterthought can lead to a time-consuming, resource-intensive and costly process and involve a further need for disruptive change management if a company decides later to seek tax savings associated with its digital transformation (not to mention potential tax audit risks that might arise in connection with the company undertaking such a change). On the other hand, building the tax planning right into the overall digital transformation strategy from the start, with foresight of the tax savings and any potential complexities a new operating model may bring, ensures a far more efficient process, mitigates disruption from future audits, and minimizes risk.

By carefully considering the geographical location of where work is placed, how your organizational entities around the globe interact with each other, and which entities own valuable intangible property, not only can global operational efficiency and effectiveness be impacted, but your enterprise might be able to benefit from after-tax profit improvements.

An integrated approach

KPMG takes a strategic, holistic approach to digital transformation. Right from the start, and throughout the entire process, we build a vision and strategy that integrates operational goals with efficient tax planning.

Utilizing a proven methodology which has evolved through transforming organizations just like yours, we bring deep organizational, industry and functional knowledge, tried and trusted processes, the best in technology, and our years of experience specializing in tax, governance and compliance – driving value at every stage.

We start by understanding your current operations and goals – a thorough digital channel value lever analysis which identifies business cost takeout and free cash flow improvement opportunities – recommending an operating model design related to organizational structure and governance that would enable enhanced cost savings.

The outcome from our rapid value assessment is a digital service delivery model that will help to reduce digital channel operating costs, improve customer experience, and enhance digital channel profitability - on both a pre-tax and after-tax basis.

KPMG can help

Of course, we can (and do) provide digital transformation and tax planning services as separate offerings. However, more and more of our clients are now enjoying the widescale business benefits of a truly integrated approach.

To find out how you can align your service delivery model to maximize digital channel efficiency and effectiveness, enhance your overall customer experience, along with improving EBITDA and after-tax earnings, reach out to us today.

Footnotes