An often-hidden cost, tax can create unexpected expenditure, compliance obligations, and cash flow impacts. As companies focus on creating value using emerging Industry 4.0 technologies, they should consider the resultant tax risks—and potential opportunities.There is little doubt that Industry 4.0 increases the productivity and agility of supply chains and will likely continue to shape the evolution of manufacturing over the coming years.1 The speed of change heralded by Industry 4.0 constitutes a key challenge for businesses. Klaus Schwab, executive chairman of the World Economic Forum, notes an underlying theme in his conversations with global CEOs, namely that “the acceleration of innovation and the velocity of disruption are hard to comprehend or anticipate, and that these drivers constitute a source of constant surprise, even for the best connected and most well informed.”2. Planning is therefore key. In this environment, manufacturing business leaders typically face two main challenges: how best to realize the potential efficiency and operational gains offered by emergent technologies; and how to grow the business by accessing new markets, creating new products, and navigating additional ways to engage with customers. With this in mind, companies must decide how, where, and when to invest in new technologies, and identify which options can create increased value for its stakeholders. Consequently, the management of operational costs, specifically related to tax, is crucial.In many instances, business leaders simply do not consider tax when examining the cost of operations, yet tax issues are critical to the health and planning of any organization. Thus the potential tax impacts should be examined whenever businesses are considering Industry 4.0-driven opportunities. Beyond simply the cost benefits, a changed tax position can create additional compliance obligations as well as an increase or decrease in tax obligations, resulting in potential changes to cash flow.The potential tax impacts should be examined whenever businesses are considering Industry 4.0-driven opportunities.In this article, we examine the tax implications of Industry 4.0 as organizations seek to use advanced technologies to improve operations or drive business growth.The Industry 4.0 technologies that enable digital manufacturing enterprises and digital supply networks involve the integration of digital information from many different sources and locations to drive the physical act of manufacturing and distribution. This integration of information technology and operations technology is marked by a shift toward a physical-to-digital-to-physical connection. Industry 4.0 combines the Internet of Things and relevant physical and digital technologies, including analytics, additive manufacturing, robotics, high-p
Industry 4.0 is changing the speed investment decisions are made. That means tax regulators and business leaders must understand how to develop and implement regulations and strategic growth plans while working with governments to create global solutions.Industry 4.0 has rapidly become a global priority for enterprises and governments alike due to multiple benefits: It can enable developed nations to reindustrialize, and it can lower the barriers to entry for developing nations. Realizing these benefits, however, necessitates a profound transformation in business models: from economies of scale to on-demand manufacturing; from standardization to mass customization; from a linear, reactive supply chain to an agile, connected organization that can anticipate and respond to changes in the market.1. Subscribe to receive related content from Deloitte Insights. This article is featured in Deloitte Review, issue 24. While we are beginning to understand the economic, business, and social impacts of these changes,2 the impact of Industry 4.0 on tax policies is still largely ignored. The foundations of the current international tax system were built a century ago to address the changes of the Second Industrial Revolution, and have been updated only slightly to address the changes brought forth by the Third. Historically, tax systems have been developed to reflect the cost optimization strategies defining industries during the 20th century.3 Examples vary, from tax incentives for investment, to transfer pricing regulations targeting complex supply chains.The Fourth Industrial Revolution, however, brings with it profound change. New industrial strategies are based on revenue, not cost. And that revenue comes from multiple sources, with supply chains growing leaner, more customized, and flexible in the face of an on-demand economy. Our international tax system is simply no longer fit for an age where predictive maintenance, artificial intelligence , and smart factories rule the day.How can an international tax system built around the traditional model of manufacturing cost-saving strategies deal with a data-driven, connected, and self-adaptive network?The concept of Industry 4.0 incorporates and extends digital connectivity within the context of the physical world in digital enterprises and digital supply networks. This drives the physical act of manufacturing, distribution, and performance in an ongoing cycle known as the physical-digital-physical loop (
In the wake of the COVID-19 pandemic, organizations are speeding their move to cloud-based ERP solutions—and leaders are increasingly recognizing the importance of seating tax at the planning table.As the COVID-19 crisis has made crystal clear, agility is key to survival in the face of disruption. Those organizations foresighted enough to have digitized, automated, and cloud-enabled their back-office processes have been able to pivot toward recovery. Those still pushing paper and working with on-premise systems have struggled. In a matter of weeks, the benefits of cloud-based back-office environments became painfully obvious.Explore the global tax and legal COVID-19 resource center. Recovery and the data-enabled tax department: The key to effective digital transformation. Go straight to smart. Get the Deloitte Insights app. Perhaps unsurprisingly, the pandemic has catalyzed many organizations to step up their move to cloud-based enterprise resource planning solutions. And leaders are increasingly starting to recognize that, if tax isn’t at the planning table, organizations may be missing out on significant upside opportunities. They could even be opening themselves up to new and unforeseen risks.The reality is that, since the start of this crisis, the tax function has become a cash generator for many enterprises; indeed, in some organizations, tax has been the only source of cash while operations remained closed. The pandemic also demonstrated the benefits of integrating the tax function into organizationwide ERP and enterprise project management systems. To chart a path forward, leaders have needed tax to develop and articulate the tax implications of a range of different scenarios—and many tax functions have floundered to get timely access to the enterprise and tax data necessary to run those sophisticated scenarios.The pandemic has accelerated a journey that was already underway. Long before this crisis, the major ERP vendors had signaled they would be phasing out their on-premise solutions in favor of cloud-based solutions.1 Some were planning to stop supporting older generations of their solutions altogether, albeit with an option to pay for individual support extensions.At the same time, many leaders were already looking for increased agility and better market insights for business functions across the organization, including the global tax function. They understood that the world was unpredictable—and they knew they needed to prepare their organizations for uncertain futures. Leaders also increasingly recognized that their existing technologies, processes, and data-management approaches were dated; there were already newer technologies and capabilities that offered better, faster, and cheaper ways of doing things.
The tax function is no longer all about compliance. Cognitive technologies and new digital models are driving changes in how tax leaders are looking to the future, aiming to add both value and transparency.As the forces of globalization, digitization, and social transformation take hold, the way companies operate has changed dramatically.1 The pressure on the tax function to transform has never been greater.Indeed, it is hard to miss the signals of change: in business’s adoption of cognitive technologies in the workplace; in the new digital models being rolled out by tax authorities around the world; in the continued demand from corporate leaders for improved back-office efficiency and cost structures; in the growing public scrutiny on, and calls for greater transparency from, corporate taxpayers.Constrained by time and resources, most tax teams simply strive to remain compliant in an ever-changing world. In fact, Deloitte’s “Reporting in a digital world” survey showed that tax teams spend almost half of their time creating and updating reports.2. While many tax functions regularly implement new technologies, they are generally responding to a specific regulatory or reporting change, and put in place sub-optimal solutions rather than innovative programs. Furthermore, the tax function is an area that can’t exactly exhort people to fail-fast-fail-often as enthusiastically as other parts of the business.3. But some tax leaders, feeling the pressure of these increasing demands, are beginning to recognize that the status quo is simply no longer good enough. They are starting to explore the value that technologies utilized in other parts of the organization could deliver to the tax function. They are recognizing that when properly adopted, integrated, and managed—and when viewed in the context of pairing people with machines rather than replacing people with machines—these technologies are able to unlock new efficiencies and enhance agility.This report does not advocate for a specific operating model or technology for tax. Rather, it draws on Deloitte professionals’ experiences to look at some of the pressures for change, cognitive technologies and their application in the tax function, and practical steps to establishing the tax function of tomorrow, today.Tax functions have been coming under increasing pressure for years. It’s not only the way that tax codes and rules change at an exponential pace. Further, the environment in which the tax function operates is rapidly evolving.Three distinct pressures are reaching a tipping point in which tax functions are struggling to keep up: the digitization of business, the evolution of tax authorities, and the continued demand for efficiency in the back office.
The recently introduced tax reform bill has evoked mixed—and, sometimes, extreme—responses. So is it really great for the economy, as some believe, or is it simply increasing the wealth of high net worth individuals, as others claim?Here, we provide our perspectives on some commonly asked questions.Just listen to some people talking about the economic impact of the recent tax reform bill. Depending on who is speaking—or writing—it’s either the greatest thing for the economy or it’s a generous gift to people who do not need it. Any debate quickly gets caught up in a web of claims about economic data and models. In addition, part of the plan is temporary . . . maybe. So the plan’s impact may look very different five or ten years from now. It all depends on whether a future Congress decides to make the “temporary” changes permanent.Here’s a guide to thinking about the impact of tax reform on the economy, and sorting out which claims are sensible and grounded in proven economic theory.A: Individuals would get a net tax cut of $75 billion in 2018, out of total personal income of about $18 trillion, rising to $139 billion by 2025. Businesses would get a net tax cut of $130 billion in 2018, but the tax cut would be about $49 billion by 2027.1 Some of the business tax cut is offset by higher tax collections on the international income of US corporations.Q: Why did you give the individual tax cut for 2025 but the business tax cut for 2027?
The Organization for Economic Co-operation and Development introduced an initiative during 2019 to address the tax challenges relating to the digital economy. The initiative is divided into two pillars, with Pillar One relating to the new nexus and profit allocation rules, and Pillar Two relating to a minimum tax regime . These global tax measures potentially could create serious constraints on mining economics. To mitigate any unexpected tax obligations, mining companies should be aware of these changes and understand how they could impact their tax affairs.Download the full Tracking the Trends 2020 report or create a custom PDF. Learn about Deloitte's Energy, Resources & Industrials services. Go straight to smart. Get the Deloitte Insights app. The mining industry breathed a sigh of relief when the OECD Secretariat Proposal document released in October 2019 assumed that extractive industries and commodities would not be subject to the new tax approach being proposed under Pillar One.1. As eluded to, Pillar One seeks to reset the nexus rules that have been the basis of the international tax system for decades. Under the nexus rules, a company can be taxed only in countries where it has a “nexus”—which has typically been defined as a physical presence. In today’s digital economy, however, the OECD Secretariat Proposal argues that companies should pay taxes where the consumer of the product resides. For mining companies this would have meant that the country purchasing minerals or metals could establish the right to tax the profits, even if the mining company concerned is not physically located there.The extractive sector’s assumed exemption from this, however, doesn’t mean it will not be subject to new international tax rules. Pillar Two may subject mining companies to minimum tax in instances where little to no tax is paid in the mining jurisdiction in which such companies operate. “Although the sector may be exempted from the proposed new nexus rules, the BEPS 2.0 deliberations have spurred tax authorities and nongovernmental organizations alike to revisit some of the tax rules that apply to resource companies,” explains James Ferguson, Global Mining & Metals Tax Leader, Deloitte UK. “As a result, mining companies may once again find themselves being challenged by the ever-evolving rulebook for tax in the host countries and the international chain back to their investors.”Transfer mispricing disputes seem to be increasing with a number of commodity-related transfer pricing cases subject to litigation in recent years. According to the International Trade Center, transfer pricing litigation has risen notably in commodity-exporting countries, such as Australia, Canada, and Russia.2. Three practices, in particular, are coming under greater sc
The call for simplifying the tax code has been getting louder, but do citizens and businesses really understand how it will impact their income and the current tax benefits they enjoy?View the Behind the Numbers collection, a monthly series from Deloitte’s economists.Not long after the ink was dry on the landmark Tax Reform Act of 1986, many US citizens and businesses started crying out for further simplification and modernization of the tax code. Even today, many see it as increasingly outdated given the changing shape of the economy and the way in which major trading partners have reformed their tax codes. Increasingly, Members of Congress from both political parties have been working to turn these ideas into law. With such broad support, why has a meaningful solution to this problem stayed out of reach?There are many reasons of course, including the often gridlock-inducing nature of twenty-first-century politics. However, one of the biggest substantive barriers to tax reform is the sheer number and variety of behaviors that the tax system has been designed to encourage or, in certain cases, to discourage. The tax code has helped support diverse activities such as home ownership, delivery of employer-provided health insurance, research and development, and clean energy production. Those receiving particular tax benefits generally view them as a “good” thing, not as a complication or an unfair deal. With individuals and businesses benefiting from specific provisions at such varying degrees, there is little agreement among taxpayers as to which tax benefits should be scrapped in return for increased simplicity and lower rates.At the tax-rate level, the US tax system is fairly straightforward. Individuals pay progressively higher rates on their taxable income according to seven tax brackets, starting, in 2016, at a 10 percent rate for single filers on their first $9,275 of taxable income and rising to 39.6 percent on taxable income of more than $415,050 for single filers .1 Individual filers not only include those who earn wages from employers but also those with earnings from non-incorporated businesses and partnerships. On the corporate side, there are also seven bands, moving progressively from 15 percent on the first $50,000 to 38 percent on taxable income above $15 million, before reverting to a flat tax of 35 percent for taxable income over $18.3 million.2. However, getting to the determination of how much tax a given individual, family, or business is required to pay is anything but straightforward. Businesses and individuals must first wade through a host of possible exclusions, exemptions, and deductions from gross income and then consider provisions that provide special credits, preferential rates of tax, or deferral of tax liability—items collectively termed tax expendit
Industry 4.0 creates significant and multifaceted challenges in indirect tax compliance. This article explores the benefits of applying some of the more common Industry 4.0 technologies – sensors, digital ledger and artificial intelligence – to the indirect tax reporting challenges that they create in the manufacturing industry.As businesses invest in Industry 4.0 technologies they should consider not only how they can be used to deliver operational benefits but also how they can benefit the tax function through improved use of the data they generate. That wealth of data can in turn drive detailed analysis to enhance the accuracy and efficiency of indirect tax compliance.Before looking at the benefits that new technologies can bring to indirect tax accounting, it is worth pausing to consider the status quo and reflect upon the current challenges faced by both taxpayers and tax authorities.Current indirect tax reporting requirements rely, in many cases, on manually inputting key data such as client and delivery addresses. Such detail is key to determining the appropriate VAT/GST treatment of supplies of goods and services and the subsequent declarations that need to be reported for these transactions.From a VAT/GST perspective, it is vital to obtain and retain documentary evidence to support not charging VAT/GST on a supply where goods physically leave the jurisdiction in which they are located. In many jurisdictions, the current evidence requirements comprise a variety of different forms. For example, in order to confirm the VAT/GST treatment that has been applied, the tax authorities often request the supporting shipping evidence and customs declarations as part of a routine VAT/GST inspection. Therefore, ensuring that a business has the appropriate documentation can be an onerous process for many businesses. Yet without this evidence, tax authorities routinely issue VAT/GST assessments in respect of underpaid VAT/GST and in some cases penalties and interest, too.It’s not just VAT/GST that creates indirect tax challenges. From a global trade perspective, customs duties are a real cost to business, intrinsically linked to the classification of products for duty purposes. Classification can be a time-intensive and complex exercise. The task can be exacerbated by changing of the classification of goods,1 affecting both declarations and ultimately the duties payable. In additive manufacturing, for example, businesses may previously have been importing end products. But the increase in 3D printing means raw materials are being imported for printing, provoking a change to classifications, and, in some cases, to origin.A change in the nature of a product increases complexity in terms of classifying a product for customs duty purposes; and classifyi
Can you cut the trade deficit with taxes on foreign goods?A little accounting helps explain why economists think it’s not so easy.The United States buys more goods and services from foreign countries than it sells to other countries. That’s been true for many years—the last time the United States sold more goods and services abroad than it purchased was in the first quarter of 1976.1 In 2015 alone, the US trade deficit for goods and services—the difference between the value of imports and the value of exports—amounted to $500 billion. That may seem like a lot of money, but what does it really mean?And how does the United States manage to buy more than it sells year after year?The optics of trade deficits may seem pretty clear. One country buys more goods and services abroad than it sells to foreign countries. Some commentators claim that if buyers in the United States only turned to domestic suppliers, more people would be put to work in the country and everybody would be better off. So the trade deficit may look like a problem, but a problem with an easy solution.But this is economics, so of course it is more complicated than that. To better understand the problem, however, we turn to accounting, rather than economics—not company cost accounting, but balance of payments accounting. This is the system that government statisticians use to classify all international transactions. It’s a double-entry system, and that means that the balance of payments …well, balances. Which can make cutting the deficit on the trade account—a sub-account of the total balance of payments—challenging.The BOP accounting system, like other systems, starts with two columns. A country records credits when it sells something and debits when it buys something. As mentioned earlier, it’s a double-entry system. Every entry in the debit column has a countervailing entry in the credit column.For example: A US retailer orders shirts worth $100 from a Chinese supplier. This is a US import, which is recorded as a debit on the BOP . . Since it’s a double-entry system, there will be a corresponding credit entry recording the fact that the Chinese supplier now has an additional $100 in the bank. The US purchaser “sold” that cash to obtain the shirts, so it shows up as a credit for the United States. Because the United States “sold” an asset , it is considered an “export” of capital.Of course, the Chinese supplier can’t pay its workers with dollars—it needs Chinese currency . To exchange dollars for renminbi, it has to find somebody that wants the dollars to purchase something from the United States. Perhaps a Chinese airline needs dollars to buy parts from a US company to fix an
More than a trillion dollars of dry powder has been accumulated in private equity funds. With COVID-19, that money may be poised to come off the sidelines.The COVID-19 crisis has had a damaging impact on the economy—in a matter of weeks, once-safe assumptions about the economy have evaporated. Government policymakers are racing to pump billions of dollars into small businesses to help keep them from shuttering or laying off workers. The impacts will likely reverberate for months to come.Go straight to smart. Get the Deloitte Insights app. In time, perhaps this year or next, it is hoped, the virus will subside, and economic life will begin to return to normal. But by whom?Other than governments and central banks, very few entities have the kind of dollars that may be needed to help restart company growth, make vital investments, rehire workers, and restructure debt. Even then, deciding where to invest and what to save is a rare skill.That’s why it’s important to recognize the role private equity firms can play in this environment. While they are perhaps best known for buyouts—and the political fire such deals often inspire—private equity firms can create far more value through their work in particularly challenging economic moments. The firms have the ability to take positions in out-of-favor companies and sectors, guide portfolio company management, and help grow businesses steadily over several years. The outsized returns these firms are able to generate—and for which they are sometimes reviled—often only emerge when the economy, and the companies they own, fully recover. In short, private equity firms often invest when so many others are afraid to act.Such fear is in full force. An increasing number of companies and economic sectors are under severe pressure. Even if they were healthy and well-capitalized before COVID-19, today is a different story. Millions of jobs have been lost and thousands of businesses are at risk.This is a classic scenario where private equity can play a role. Those with the greatest prospects may not have been for sale before; now, they may be considering additional funding alternatives. Private equity can bring capital to the table, potentially preserving jobs, restructuring debt, and helping managers lead their companies through these next few months.In these first few weeks of confronting the COVID-19 crisis, perhaps it was hard to see that outcome, but some of the leading private equity firms are already envisioning how to get there. What’s more, they’re collectively sitting on at least US$1.5 trillion of dry powder to help keep their existing portfolio companies going, potentially investing in firms suddenly in distress, helping transform companies and entire industries, as well as pursue other growth and value-creating measures.