Global Restructuring, Operating Models, and Pillar Two

In recent years, the global business landscape has been rocked by a series of unprecedented disruptions affecting supply chains and operating models. From natural disasters like the Fukushima earthquake to geopolitical tensions and the COVID-19 pandemic, businesses have been forced to reevaluate and adapt their strategies to maintain efficiency and meet evolving customer expectations. 

These disruptions have prompted companies to diversify their sourcing, move manufacturing closer to markets, and adopt more regionalized supply chain models, with increased reliance on artificial intelligence (AI) and digital tools for rapid supply chain decision-making and ESG reporting. 

While not the primary driver of these transformations, Pillar Two considerations may also begin to influence corporate strategies, including business model revisions, supply chain transformations, and legal entity restructuring as companies assess the tax implications and integrate them into their business cases. 

Responses to Disruption

In response to these supply chain challenges, businesses have adopted various strategies:

• Diversifying supply sources: Companies are moving sourcing and manufacturing closer to their markets to increase supply chain diversity and provide greater market responsiveness.
• Reducing dependence on China: A noticeable shift away from China as the primary manufacturing base is underway.
• Nearshoring and onshoring: Businesses are increasingly nearshoring or onshoring to bring manufacturing closer to end markets and decrease transportation costs.
• Digitalization: The use of AI and digital technologies is accelerating decision-making and enhancing supply chain efficiencies.
• Supply chain transformation: Companies are revising their supply chains to mitigate tariffs, optimize green credits, and meet ESG reporting requirements.

The Role of Pillar Two

The Pillar Two model rules (also referred to as the Global Anti-Base Erosion or GloBE rules), released on December 20, 2021, are part of the OECD’s two-pillar solution to address the tax challenges of the digitalization of the economy that was agreed to by 137 jurisdictions and endorsed by the G20 finance ministers in October 2021. The Pillar Two rules are designed to ensure that large multinational enterprises (MNEs) are subject to a minimum effective tax rate of 15% on the income arising in each jurisdiction where they operate. 

The OECD’s global minimum tax rules, which apply to MNEs with revenue of at least EUR 750 million, are not self-implementing, and each jurisdiction must enact them into their domestic legislation. Some jurisdictions have already issued legislation to enact the global minimum tax, while others are still in the process of enacting legislation. To track the status of implementing legislation around the world, see Pillar Two updates - Status of implementation around the world.

Companies are navigating a complex landscape of challenges, including the green transition, digital transformation, geopolitical tensions, talent shortages, and supply chain disruptions. The Pillar Two tax reforms intersect with these issues, necessitating a comprehensive approach to future-proof strategies and operations across people, processes, and technology.

Enterprises are responding to these disruptions through various means, from adjusting supply chains, to overhauling recruitment strategies, with some considering fundamental shifts in their business models. The rise of digitization is driving more commerce online and fostering new platforms and subscription-based models. Simultaneously, the increasing emphasis on sustainability and ESG factors is prompting organizations to reevaluate their core objectives and success metrics. 

In this context, Pillar Two is emerging as a significant consideration factor in business transformation.

While not yet a catalyst, it is gaining influence around operational restructuring and relocation, with an increasing percentage of MNEs planning major structural changes due to Pillar Two. The new tax landscape is prompting a reassessment of optimal locations for people, functions, assets, and risks, as companies no longer see as strong a business case to centralize in one location to obtain very low tax rates via incentives.  

Pillar Two is becoming more prominent as a cost factor due to its potential to increase costs and impact strategic plans. MNEs anticipate a significant rise in effective tax rates due to Pillar Two, adding to existing cost pressures. Companies that fail to incorporate Pillar Two considerations into strategic planning will likely be impacted by unforeseen costs and erode profitability. Early action on implementation can provide a competitive advantage in navigating the evolving business landscape.

BDO Perspectives

The landscape of supply chain and operating model disruption is complex and continuously evolving. As a best practice, businesses should take an integrated approach to adapt to these changes, considering the location of people, functions, assets, and risks, diversifying their supply sources, leveraging digital technologies, and adapting their strategies in response to environmental, social, and regulatory changes. Moreover, the shift towards decentralized, regional hub models is gaining traction, moving away from the traditional centralized models to enhance flexibility and resilience. 

Pillar Two adds another layer of complexity and issues to consider, further pushing companies to reassess their operations and strategies comprehensively. As businesses move forward, the ability to adapt and innovate in response to these disruptions will be important for long-term success and sustainability.