This points to technology, which is one of the future flash points of tension between globalization and this increasingly potent protectionism. Technology has the potential to enable greater flow of goods. It also offers multinational businesses large and small the chance to make huge gains and efficiencies through the free flow of data. But governments are increasingly taking steps to regulate data flows and tax revenue. Meanwhile, the lines between free-market and state-controlled technology are blurring, creating further geopolitical flashpoints.
Technology is fueling further potential protectionist tension by enabling the “Zoom effect.” Thanks to advances in ever-cheaper technology, service industries are increasingly offshoring headcount and talent, confident that roles can be fulfilled remotely and at a lower labor cost elsewhere. But gone are the days when outsourcing meant low-skilled work. It’s now moving into fields like telemedicine. With the rise of collaboration technology, there’s no reason white-collar roles can’t be outsourced from the West to offshore locations.
“Today, the governments are fighting the tech companies,” says Bunch. “Tomorrow, the new trade front will be around where the work is being done and the value generated. You can see a lot of hollowing out of white-collar jobs in Western countries, all shifting to offshore locations in South Asia. It will be painful, and governments will need to manage it, but it’s an inevitability that governments can’t control. As the tech moves on, services will be accelerated.”
The changing face of the trade function
Tax departments are already experiencing the shift to this fluid, dynamic operating environment.
Transfer pricing is a key challenge because it involves the allocation of company profits across the business and the tech-enabled flow of skilled services work across borders.
“Increased transparency regarding transfer pricing data, an evolving tax policy landscape and tax authorities’ asking for more data means companies need to be diligent about connecting with the business and assessing alignment with the business. Given the amount of regulatory, transaction related and organic business change, the potential for double taxation on transfer pricing matters is increasing and companies will need to improve real time processes and adopt technologies to help monitor, analyze and defend the flexibility and resilience of their structures,” says Tracee Fultz, EY Global Transfer Pricing Leader.
They will also need to get a handle on a shifting income tax picture, a key current focus of the G7. In addition, there are new and complex indirect taxes emerging, including in nascent areas such as sustainability, all of which are being applied in different ways by these increasingly protectionist governments.
“We can expect more tax liabilities in the protectionist world,” says J. Michael Heldebrand, EY Americas and US Global Trade Leader. “As these governments are increasingly strapped for money, they need to fund the reopening of markets, and they’ll do that through taxation. In the US, for example, that’s happening on a local, state, even federal level.”
In this new environment, tax needs to assume a new role, becoming an integral part of decision-making as the business works out how to manage its taxes, and how to comply with the increasingly robust regulations.
“It will be increasingly important for the tax function to be at the table,” says Bell. “It will need to be part of these operational and strategic decisions, not least in how to factor all these different tariffs and trade agreements into operations.”