What’s the alternative?
A loose definition of a multi-hub model is one in which a single, centralised structure is replaced by one with high value business functions located in multiple countries. Its benefits include increased agility, the ability to tap into wider and deeper talent pools in different jurisdictions, closer proximity to customers, and an improved ability to customise goods and services to meet their specific needs.
Furthermore, by adopting a fully distributed tax operating model to reflect the business operating model and spreading income in a more decentralised manner, an organisation may be better able to deal with future tax risk.
Indeed, from a tax and talent point of view, organisations may find themselves having to deploy a more significant number of people, functions, and assets in certain countries to meet economic substance requirements. The multi-hub model lends itself to such actions.
Supply chain resilience
The fragility of highly complex global supply chains was exposed during the COVID-19 pandemic. Traditional just-in-time production models simply ground to a halt resulting in global shortages of everything ‑ from cars to kiwi fruit. The response has been to increase supply chain resilience by nearshoring or onshoring.
However, as organisations seek to reshape their supply chains, they must also be aware of the tax consequences, be it corporate tax, indirect tax, etc., as they shift substance across jurisdictions.
Geopolitical dimensions
Moves by governments around the world to increase trade regulation is another factor driving decentralisation. For example, the UK’s exit from the European Union has added a new layer of complexity to trade with that country and may necessitate companies to consider establishing an in-market presence. At another level, regulations curbing the activities of overseas companies in certain markets may also require companies to establish operations with real substance in those territories if they are deemed of sufficient value to them.
Sustainability matters
LATTE isn’t just a coffee drink, it is also the acronym for local, authentic, traceable, transparent, and ethical consumer products. Increasing demand for these ethically sound goods is accelerating the drive to nearshoring and onshoring and consequently the move to a multi-hub, decentralised business model.
It is not enough to just apply a label to a product to make it appeal to ESG conscious consumer cohorts. Businesses will need to have the right people located in-market to customise products to meet local needs and preferences.
The pros and cons
A fear of inadvertently increasing the effective tax rate paid by corporations has been one of the main obstacles to the adoption of the decentralised model. However, the BEPs process will all but eliminate the potential cost difference, while the increased focus on the taxation of income from intangibles on the part of a number of major economies is further reducing the perceived tax advantages of the centralised model.
There are also concerns that the administration of a decentralised model may be more complex than traditional models, but arrangements can be put in place to eliminate that complexity.
That said, any organisation considering a switch to a decentralised model should carry out a thorough cost benefit analysis and business risk assessment to ensure the benefits outweigh any potential increases in cost and complexity. While the model may not suit every organisation, and is more important in some industries than others, it is clear that many global businesses would benefit from the move.