How will you navigate the current and evolving tax landscape within your industry?
Managing the virtual tax function – an industry tax perspective
The EY Industry Tax Leaders - Managing the Virtual Tax Function series of virtual events launched in the last quarter of 2020 provided broad perspectives on overall industry trends and relevant tax issues as companies navigate the current and evolving business landscape. During each session, our team of professionals delved into insightful and informative conversations on specific industries with dedicated sessions for Real Estate and Construction, Advanced Manufacturing and Mobility, as well as Consumer Products and Retail.
The following are highlights from the sessions.
Industry market trends
Real estate and construction
We are seeing an overall increase in cap rates for asset classes that have seen the greatest economic impact from the current environment in areas such as retail, office and hospitality. With bond yields at historic lows, the average cap rate spread is higher than it has been in many years.
We anticipate further cap rate increases in the coming quarters for the asset classes identified, while growth is expected to remain flat or possibly decrease. Similarly, the overall impact on the office sector will likely evolve as companies grapple with the decision between having their workforce continue to work from home and returning people to the office. Key drivers of stronger performance in the recovery phase will depend largely on sustainability and flexibility.
Advanced manufacturing and mobility
There are many considerations that manufacturing and mobility industries need to keep in mind as companies adapt and respond to the post-COVID-19 business environment. Some of these include:
- Assessing supply chains – Companies will need to look at their supply chains with an evolving view of risk and awareness based on their suppliers’ health and distress, including access to critical components.
- Developing innovative products and services – Businesses will need to innovate to meet rapidly shifting consumer needs post pandemic.
- Business restructuring – The slowing commercial vehicle market globally is forcing manufacturing companies to react by cutting costs and seeking out measures to improve operational efficiency to maintain profit margins.
Consumer products and retail
Not surprisingly, during the pandemic, e-commerce as a percentage of total retail increased significantly. How organizations engage their consumers has changed owing to the greater focus on safety, with contactless delivery, curb side pickup and click-and-collect shopping emerging as value drivers. New consumer segments have emerged, leading to more online shoppers and less frequent trips to brick-and-mortar stores, but longer shopping lists. This change in behaviour is likely to continue post pandemic and organizations will need to continue to evaluate whether the change is temporary or permanent. How are you adapting to suit the needs of this change in consumer mindset?
Managing culture in a virtual environment
Organizational culture serves as both a protector and a creator of value. Shifting culture often means prioritizing behaviors, establishing motivators and driving change through a sequence of prioritized company levers.
The pandemic has undoubtedly accelerated trends towards remote work arrangements. Consistently, more companies are transitioning to a remote model, but this new reality has its own challenges. Business leaders now face the task of maintaining employee engagement and sustaining cohesiveness in an environment where employees are struggling to feel effective, engaged and connected. What does it mean to manage culture effectively in a virtual work environment for your organization?
Cost segregation, optimization and structuring
A detailed approach to analyzing and allocating major capital project costs through cost segregation and structuring will optimize capital cost allowance (CCA) and current deductions. As a result, companies can minimize income taxes payable and improve cash flow, which can be used to fund future projects. Review of prior years’ capital expenditures can result in refunds of taxes payed, which can be used to offset Canada Revenue Agency adjustments. By appropriately classifying assets, companies can access additional incentives such as rebates and provincial investment tax credits. How can you optimize deductions related to capital spending?
Tax policy and global trade
There is considerable activity on the tax policy front, both domestically and internationally, that could potentially affect the consumer and retail sector. The main driver is the impact the pandemic is having on the economy, as well as on government balance sheets. Massive economic support and recovery programs have created substantial budgetary deficits and debt burdens. Governments need to stimulate their economies while finding new revenue sources to keep debt levels manageable.
As an example, will new rules being developed by the OECD on international corporate tax and digitalization be implemented? Canada has already indicated it will unilaterally impose a new tax on corporations providing digital services on January 1, 2022 if there is no consensus before then on a multilateral approach recommended by the OECD. Corporations will certainly need to monitor these and other tax policy developments closely and keep their boards informed so that they are considered and incorporated in operational and strategic decision-making.
Many companies are also currently facing the perfect storm around global trade issues. Trade disputes, new free trade agreements and a rapidly changing regulatory environment, further exacerbated by COVID-19, have elevated trade and supply chain issues to the boardroom. Trade costs and tariffs are continuously changing, as are additional (punitive) duties and duty reliefs due to new free trade agreements. Global trade is expected to fall significantly in 2021 as the pandemic continues to disrupt economic activity. How will your organization build efficient mitigation strategies and take action to weather this perfect storm?
Working from anywhere
As your workforce profile evolves, your mobility strategy needs to change as well. The profile of the workforce has changed materially in a short time. As remote work becomes the norm, organizations that view the pandemic as an opportunity for transformation can emerge from the current crisis with more flexibility, inclusiveness and improved employee skills while using cross-border remote working talent.
The use of cross-border talent brings certain challenges. Remote work can affect numerous functions. As a result, a coordinated approach across various stakeholders from human resources, legal, tax, payroll and technology will be important.
Some near-term actions to overcome challenges include:
- Ensuring all employees have appropriate legal documentation to be able to work in the remote location and determining the applicability of employment laws in the remote work location
- Identifying payroll withholding and social tax withholding obligations as a result of the remote work
- Determining whether the remote work could cause a corporate tax risk and related corporate obligations or reporting
- Reviewing other regulatory risks, including data protection and cybersecurity
Longer-term considerations include understanding how broader change will impact your workforce and footprint, defining the scope and qualification for long-term flexible cross-border remote work through remote work policies, and implementing the necessary operational and structural changes.
Maximizing team productivity
Recent trends and observations indicate renewed interest in identifying how to streamline data and improve processes. Many companies are now assessing what it means to be best in class versus best in cost. Some key considerations for process improvements and efficiencies include:
- Tax management portal – entity tracker, compliance tracker, collaboration with internal and external stakeholders, data repository
- Tax provision - compliance – standardize and automate provision, import to TaxPrep, export to generate return to provision (RTP)
- Automating GST/HST returns – analytics, filing summaries and audit-ready support
Learn more
To learn more on any of the above topics and explore how we can help you navigate the post-pandemic economy, please contact a member of our team.
