The current economic context highlights the need for multinational groups to realise savings, optimise cash movements within the group, rationalise management structures and/or reorganise their supply chain. Globalisation and also single sourcing of products (often only from China) made companies vulnerable for a disruption of their supply chain as has happened with many by this epidemic. Corporate simplification is a strategic process that can lead to cost-efficiency, supply chain rationalisation and several other operational, financial and tax benefits that may help groups in navigating the complexity of their global business.
Item #12: Corporate simplification: transitioning into a cost-efficient, substance-based and sustainable corporate structure
Corporate simplification usually happens on three different levels, which are all key when transforming a company and provide different kinds of advantages.
Alignment of the management model
Firstly, the alignment of the management model can improve the speed of decision-making, reduce duplication of activities by centralisation and improve alignment between management responsibilities and corporate structure. This can also boost resilience and crisis management going forward.
Simplification of the operational model
On the second level, if well-structured and aligned with the corporate strategy, a simplification of the operational model should lead to supply chain rationalisation, improved business control and a substantial reduction in both intra-group transactions and working capital. Moreover, centralisation of the operating model is an opportunity to create and sustain value throughout the value chain.
Entity reduction
The third level, reducing the number of legal entities, is the most known form of corporate simplification. There are different options when reducing the number of legal entities, from eliminating dormant companies to centralisation and transformation into a single entity structure.
However, perhaps the most important benefits of a simple, clear structure are the intangible benefits. Simplification makes a group more flexible, allows finance (and cash) to move efficiently within the group and helps to be more successful overall. As highlighted previously, efficient repatriation of cash and reserves leading to less legal requirements and avoiding cash traps can be very relevant in these challenging times.
Meanwhile, corporate simplification is not only about reducing costs and flexibility. From a tax perspective, increased transparency, substance, anti-abuse and reporting requirements developed by the OECD force groups to rethink their structures and their ways of doing business.
Such an exercise undeniably brings forth many benefits on all operational and cash levels, but it is not without any tax risk. Appropriate attention should be paid to ensure that none of the steps of a corporate simplification project trigger an immediate tax cash-out. Also, tax reporting obligations need to be observed and appropriate valuation work is required to avoid adverse tax consequences.
We know, corporate simplification can be hard to combine with daily management. However, never waste a good crisis… Times like these, once the most pressing and immediate concerns are under control, can be an opportunity to rethink business structures and initiate a strategic corporate simplification process.
While most companies have applied for the COVID-19 measures available by now, we see that quite some groups struggle to monitor closely their short-term (and certainly mid-term) cash position and how to manage and optimise it further to steer their company through this crisis in the best way possible. We meanwhile have created the following email platform: be_covid19@pwc.com in order to give you a sounding board in these challenging times.
