The hidden cost of restructuring

If there are two things that are certain for companies, they restructuring and taxes. Although restructuring is on the front lines of corporate life, taxes are often an afterthought, and usually that can be a costly mistake.

Many executives do not restructure their companies correctly. They choose to cut a percentage of costs across the board instead of focusing on their strengths.

Too many companies cut the wrong costs: They cut the good costs (the muscle) they need for future growth along with the bad costs (the fat); they cut costs across the board, forcing a certain percentage reduction in every area of the company. One other common error is that they do not change the ways of working that led to the inefficient cost structure in the first place. All of this only ensures that those cost reductions will be temporary of nature.

Even when executives do restructure in a way that’s smart, they often overlook important tax implications. This can weaken the impact of the restructuring, and it may even negate the impact altogether, leaving companies weaker than when they started.

Whether you’re switching locations, adjusting your supply chain, or making almost any other structural change, it can have implications for the amount of tax your company will pay.

Companies often have shared services or global business services that can deliver their support services (such as IT, finance, and HR) more efficiently and effectively.

Implications

Many times, these service organisations are located in countries or states different from those of the organisation’s headquarters. Such moves, as a result of operating model changes, could have tax implications.

Although executives intuitively know that taxes are important to the company’s ultimate profitability (and income available to shareholders), they often don’t evaluate these costs as part of the restructuring effort.

Instead, taxes are treated as a cost of compliance, after the major decisions are made. Consequently, this creates either tax inefficiencies or it results in missed opportunities to put their companies in a better tax position than they were under the old structure.

Leaders should proactively consider tax implications if the restructuring includes changes to the business footprint, the legal entity structure, or the flow of goods across taxing jurisdictions.

Why is such a seemingly simple concept so often missed?

The answer is very simple: The people thinking about restructuring issues (mostly operational staff) are often unconnected to the specialised experts (sitting in finance and tax) who can properly evaluate the potential tax implications in today’s complex tax environment.

It is very difficult to optimise taxes after a restructuring has taken place. The key is thus to create awareness with executives and middle managers in a company to reach out for the tax advice they need early enough to avoid wasted time and lost profits.

So next time you think about a restructuring, take a moment to stop and think about the potential tax impact.

* Credit for article based on extract from “The Tax-Savvy Company Restructuring”, issued by PwC Strategy& LLC.

Johan Nel is a partner: corporate tax service at PwC Namibia. This series on tax is published in Market Watch bi-monthly on a Monday.