Agents of Chaos: How Tax Leaders Are Adapting to Global Disruptions
Here are five ways tax groups can help senior leadership respond to uncertain times

This is not your parents’ inflation, but it will have wide-ranging implications for tax departments. Previous corporate playbooks for responding to external disruptions cannot begin to address the unique challenges posed by the current global economic decline following three consecutive shocks, ongoing trade wars, geopolitical unrest, and supply chain snarls. The recent supply shock initially affected corporate costs, and now demand-side inflation will affect revenue. Tax departments will need to find new and practical ways to help their organizations adjust and thrive in a difficult economy. This article examines how tax professionals should consider several forms of economic volatility and identifies five opportunities for tax groups to help senior leaders respond.

Tough times tend to bring out the best in people—and in organizational leaders and their teams. Tax executives and professionals are no exception. Many chief financial officers leveraged the difficult task of complying with the Sarbanes-Oxley Act of 2002—a sweeping business regulation that rivaled the scope of the Securities Exchange Act of 1934—in the wake of the dot-com crash to enhance their strategic credibility with chief executive officers and boards. Finance executives also rose to the occasion during the 2008–2009 global economic crisis while staving off liquidity risks during the early stages of the COVID-19 pandemic and the consequent economic downturn. Human resources leaders recently earned their seat at the strategic decision-making table by keeping employees safe, productive, and connected while executing the largest workforce mobilization in modern business history—providing everything from commercial offices to spare bedrooms and kitchen tables.

Tax executives may have their own strategic moment in the months ahead. This opportunity exists because a tangle of external disruptions—call them “agents of chaos”—are interacting in ways that will require tax groups to conduct more comprehensive and varied tax planning and analysis while equipping C-suites and boards with more frequent strategic updates and insights. It may be time to bring the accountant and the economist into the tax department with the lawyers and examine tax policy through the wider lens of macroeconomic and fiscal events that will impact business decisions for some time to come.

By any measure, the world and the global digital economy represent highly complex systems with many rapidly evolving parts.¹ Tax executives should spot these emerging complexities and be ready to anticipate and address various crises. Economically speaking, complexity does not necessarily mean “complicated.”² Tax leaders should recognize that the world has undergone three consecutive shocks: the Great Recession of 2008, a global pandemic, and the Russia-Ukraine war. Each of these shocks has economic and fiscal consequences that will continue to reverberate while ushering in a new era of tax and fiscal uncertainty and intensifying risk.

In other words, relegate those “perfect storm” analogies to the twentieth-century dustbin. Current drivers of change have created what the World Bank describes as an “extraordinary era of overlapping global crises.”³ Historically high inflation, rising interest rates, a talent war, trade wars, war-war, COVID-19 flare-ups, ongoing supply disruptions, and currency value disparities force businesses to make high-stakes decisions quickly and execute those shifts with speed and precision. Many responses to the volatility of these pivots—such as pursuing mergers, consolidations, or divestitures or redesigning capital arrangements—now have more multifaceted tax compliance and cross-border audit implications that should be swiftly examined and then addressed with minimal friction.

As more tax professionals confront their strategic moment, tax leaders need new game plans to contend with the rugged landscape of economic and fiscal policy chaos. They’re not alone. McKinsey recently published an inflation-navigation playbook for CEOs. The consulting firm notes that more executive teams have developed “inflation nerve centers to manage the potential downside of inflationary pressures by breaking down silos, enhancing transparency between functions, and concentrating on the crucial leadership skills and organizational capabilities required to get ahead of events rather than react to them.”⁴ McKinsey’s playbook encourages CEOs to ask themselves, and senior leaders of key operational areas, pointed questions about inflation. Some of these questions call for the tax group’s expertise and involvement, including:

• What is the fastest way to stabilize and redesign stretched and, in some cases, broken supply chains?
• What direction should I give to help procurement leaders create value? and
• What can I do to attract and retain employees in today’s shifting labor market?⁵

To help business leaders respond to inflation, supply chain woes, and other external volatility, tax leaders should differentiate between what they can and cannot control, recognize and monitor the business and tax implications of external forces beyond their control, and optimize every aspect of their tax functions.

Understanding the Agents of Chaos

Much has been made of the fact that few current business leaders have experience addressing the challenges posed by the last period of sustained inflation and rising interest rates, from 1979 through the mid-1980s. While accurate, this observation is misleading. What worked four decades ago when business leaders took on stagflation—the combination of persistent high inflation, low demand, and high unemployment—will not necessarily provide relief today. Again, this is not your parents’ inflation. Although the fundamentals of our domestic economy remain strong, the factors driving up prices and interest rates differ from those that materialized in the 1980s. However, these factors can still flare up, if the stabilizing process is not cautiously managed.

The same holds true for supply chain volatility, global trade battles, geopolitical conflicts, and the current labor market. Even though tax leaders do not need to become economists, they should maintain a high-level understanding of the large external disruptions affecting their companies and, by extension, their tax functions. This high-level comprehension will help tax leaders design game plans that ultimately carve out more time and space—and better data-driven tax insights—for their teams to plan and analyze, allowing them to help drive business strategy. It will be particularly important for tax executives to track the following sources of business volatility.

Escalating Inflation: How High and 
How Long?

In early June, David Malpass, president of the World Bank Group, articulated the interconnectedness of the forces driving inflation and the challenges that inflation gives rise to. “Several years of above-average inflation and below-average growth now seem likely,” he noted. “The path will depend heavily on supply decisions taken now, especially for energy; and on central bank policies to encourage business investment as interest rates normalize.”⁶ A few days later, the US Bureau of Labor Statistics released its monthly report showing that the Consumer Price Index increased 8.6 percent for the twelve months ending in May (energy prices, a key component of the CPI, rose a staggering 34.6 percent). The 8.6 percent jump marks the index’s largest twelve-month increase since the period ending December 1981.⁷ Tax leaders should recognize that higher prices will likely linger and spark manifold challenges. They also should keep in mind that:

• Inflation is essentially a (wider economic, though not fiscal) tax. Besides its near-term effects on consumer and business behaviors and decisions, inflation also affects private and public finance structures, sometimes dramatically, over the long term. Inflation acts as a tax by reducing the value of corporate reserves and the purchasing power of affected currencies, consumer savings, and other assets. Hence, inflation is essentially a tax on a tax.
• Inflation triggers tax policy responses. In response to inflation, tax jurisdictions often enact tax increases or tax-base expansions or both. Jurisdictions often pull this lever because tax bases are typically designed and established through legislation before inflationary spikes materialize, and few of these laws contain mechanisms for adjusting to future price increases. Transaction tax changes, through raising tax rates or widening the tax base, represent a convenient way for jurisdictions to address inflationary and post-recovery effects. Although many states presently have healthy cash reserves, budget rebalancing is always around the corner. Tax leaders should be prepared for the pace of rate increases for sales taxes and value-added taxes (VATs) to accelerate in the coming year. Federal, state, and local governments may also respond to rising inflation by escalating excise duties, typically by incorporating more goods and services or, less commonly, by adopting new levies or fees.
• It’s 2022, not 1982. The inflation the United States experienced from the 1970s to the early 1980s stemmed primarily from surging demand. Back then, the rising thirst for gasoline, combined with the growing cost of petroleum extraction and production, sent gas prices soaring. Although gasoline prices have risen dramatically, our current inflationary period began with a supply shock that created global cross-sectional disruptions—thanks to COVID-related closures, trade wars, and weather-driven production shutdowns. Combined, this situation created greater scarcities and stimulated higher demand, which in turn is creating demand- and sector-specific inflation.

Supply Chain Disruptions

Supply chain disruptions have strained many organizations, and tax groups play an important role in addressing these disruptions and helping their organizations develop more resilient supply chains. In many cases, supply chains have not been disrupted but shattered, and transforming into more agile digital networks will not be painless or simple until some modicum of order and equilibrium returns to global trade, even if not as we once knew it. Onshoring or reshoring will also be difficult, costly, risky, and tax inefficient for some time to come.

Ripple effects from Russia’s war on Ukraine and COVID-driven lockdowns in Chinese manufacturing hubs represent the latest in the series of major supply chain disruptions that have occurred more frequently in the past decade. High inflation combined with trade barriers, geopolitical risks, and labor shortages is focusing executive- and board-level attention on supply chains. These leaders want their organizations to develop and redesign supply chains so they can withstand global disruptions more effectively and efficiently.

Tax departments can help their organizations operate with more agility and create resilient supply chains by ensuring tax compliance as tax policies, rules, and rates change. Similar tax agility will be needed as companies enter new relationships with suppliers, trade intermediaries (economic agents), and customers in new countries (and tax jurisdictions) by forming new, resilient digital supply and financing networks. This will be difficult given that:

• globalization is transforming and will be redefined and regionalized in the very near future;
• US legislative changes appear likely to result in more state and local transaction taxes;
• recalibrations of international trade institutions and rules are underway, changes that will have major effects on all forms of commerce, including e-commerce;
• VAT and other goods and services tax (GST) changes, including those related to e-commerce, are occurring at a fast clip; and
• businesses continue to respond to new risks and opportunities by expanding global footprints, transacting on new e-marketplace platforms, and investing in new internal systems.

Getting the right strategy, technology, and talent in place will help address those difficulties—and give tax executives additional bandwidth to focus on supporting their organization’s market position and supply chain transformations. Leading tax groups equipped with advanced tax automation and the right tax professionals will quickly and easily adapt to new enhanced and burdensome tax compliance requirements after their companies pivot from a key supplier in one country to a replacement supplier in another region. Leading tax groups also tend to nurture healthy collaborations and tight technology integrations with their procurement partners, which helps procurement groups invest less time in transactions and more energy and creativity in value-generating activities.

Policymaking

As global policymakers address overlapping crises, many of their responses will directly impact corporate tax groups.

Most of those impacts are likely to add to the burden of complexity that tax groups contend with when it comes to transaction taxes. This indirect tax complexity stems from three main sources:

A fundamental tax policy shift. Over the past fifty years or so, historical data makes it clear that indirect tax increases, by raising rates or broadening the tax base, help governments weather economic downturns more effectively and efficiently than does raising income taxes or property taxes. This realization is reflected in the growing volume of changes taxing jurisdictions make to sales taxes, VAT, and other indirect taxes. Vertex research shows that 2021 set a near record in the United States for the volume of new transaction taxes that came online combined with the number of enacted sales tax increases.⁸

The adoption of e-commerce capabilities and omnichannel strategies. Multichannel sales capabilities deliver substantial customer experience benefits and revenue growth. The bad news is that these capabilities also increase tax determination and compliance complexity. Delivering products and services via customers’ preferred channels creates higher volumes of transaction data that need to be accurately collected, stored, cleansed, and analyzed according to a dizzying number of compliance requirements.

The growth of enhanced compliance models. More tax jurisdictions worldwide are putting forth new e-invoicing and real-time reporting mandates, or “enhanced compliance models.” These measures have been implemented outside the United States for several years. The trend seems all but certain to reach the United States as state and local jurisdictions adopt more digital tools and technologies.

Five Ways Tax Can Transform Chaos Into Coherence

What tax leaders can control in the face of intense volatility and uncertainty—variations on people, process, and technology—will sound familiar. How these enablers are designed, deployed, orchestrated, and optimized requires leading-edge thinking and creative execution.

According to The Economist, the “stagflationary challenge requires a different tool kit that borrows from the past and also involves new tricks.”⁹ A similar dynamic applies to supply chain disruptions, geopolitical confrontations, COVID closures, and other external chaos agents. Tax groups should update their tool kits to address these challenges.

From a people perspective, tax leaders must find innovative ways to address a bruising talent shortage but should also nurture relationships with business partners and functional leaders throughout the organization. These increasingly strategic collaborations, particularly with finance and information technology (IT) leaders, will help tax leaders get the budgets and technology investments they need sooner and with less difficulty.

Tax groups that apply a blend of pragmatic improvements and innovative optimization to the following areas position themselves to create more time and to plan, analyze, and make informed decisions when responding to external volatility and to the C-suite’s own responses to those challenges.

1. Pricing. To manage profit margins and increase cashflows in a period of rising rates, companies will deploy a blend of cost reductions and price increases. Both actions require a delicate balance. Ill-timed or ill-chosen cost cuts harm the organization’s ability to sustain profit margins. Price increases that pass a certain threshold can result in less demand among cost-conscious customers, which can stifle profitability. As prices fluctuate and as product and service mixes change, tax determinations and calculations must remain accurate. Companies recalibrating prices should have tax automation solutions in place to ensure that prices are updated immediately and that the right data is accessed from the current product catalog.
2. Transfer pricing. Higher inflation can also throw existing transfer pricing models out of whack, which affects intercompany financial transfers as well as cost and profit center allocations. The pricing of some components increases more dramatically and more frequently than others in different regions. This has implications for research and development, intercompany loans, and the manufacturing and distribution processes in disparate markets. All of these shifts change how profitability is allocated across global companies and in participating jurisdictions. In periods of lower inflation, tax teams often adjust transfer pricing models quarterly or even twice yearly. Today, those adjustments may need to be made every other month or even more frequently. These adjustments also must be captured in transfer pricing studies and consequent documentation, reflected in certain disclosure requirements of publicly listed companies, and able to withstand critical cross-border audits and, conceivably, renewals and adjustments to advance pricing agreements.
3. Talent. Although cost cuts will ultimately increase unemployment levels, the tight labor market is unlikely to ease uniformly across all professions. Competition for technical professionals whose work involves the use of software and advanced technologies will remain fierce for some time. Earlier this year, a Big 4 firm announced a $160 million investment in pay increases for its 30,000-plus workforce, a move made to stave off poaching from competing accounting and consulting firms as well as corporate tax departments.¹⁰ Other factors also appear to contribute to longer-term tax talent supply shortages. Prior to the pandemic, the annual number of accounting graduates (at both the bachelor’s and master’s levels) was trending downward, according to the Association of International Certified Public Accountants.¹¹ Competition from the high-tech sector—especially for tax and accounting professionals with technology expertise—has also intensified in recent years. The pandemic’s work-from-home shift has given companies able to satisfy remote-work preferences an advantage over other hiring organizations. Demographic shifts, including boomer-generation retirements, are also at play. Tax leaders should be aware of these challenges while finding new, more innovative ways to attract and retain talent.
4. Automation. In recent years, many tax groups have implemented advanced tax automation solutions, particularly in support of sales and use tax and VAT. More tax groups, in conjunction with their IT colleagues and other parts of the business, also are working to automate the data that feeds their tax-reporting applications. More companies of all sizes now automate or outsource their sales tax returns or both. This is all good news, especially at a time when the demand for tax planning and analysis, as well as for tax leaders’ involvement in strategic planning, is poised to increase substantially. Getting advanced tax automation in place can also provide recruiting and retention benefits. In-demand tax professionals are more likely to accept a role in which they spend less time on repetitive, transactional tasks and more time honing their strategic contribution. The opportunity to develop skills and expertise related to current business systems and advanced tools also helps retain top tax talent.
5. Relationships. Tax leaders should start collaborating with partners throughout the organization even when macroeconomic and geopolitical conditions are relatively tranquil. Regular interactions with operations, corporate finance, the IT department, the treasury function, and the procurement team help tax groups stay ahead of changes that create new tax compliance challenges. In turbulent times, these relationships are crucial to maintain via a regular cadence—monthly, in most cases. Tax groups should know about pricing changes, new product launches, decisions to enter new geographies, changes in capital structures, purchasing hedges, and systems implementations that could potentially include tax automation upgrades well before any of these efforts move forward. Tax leaders should also consider reaching out to their internal audit counterparts to request that they review internal controls around tax management processes. Those assessments can help tax groups identify and correct controls issues before they become major problems while helping to lay the groundwork for more compelling budgeting and technology-investment requests.

A Strategy for Getting More Strategic

When the US Federal Reserve raised interest rates by seventy-five basis points in mid-June—its largest increase in more than twenty-five years—strategic-minded tax groups sprang into action. Some suggested reallocating sourcing mixes to reduce imports and the customs duties and global trade taxes that accompany them. Other tax groups huddled with business unit leaders to debate price increases. These tax groups also remain ready to respond to other scenarios with different analyses and actions. Once inflation returns to a more modest rate of three to four percent, these tax teams might discuss the possibility of forward contracts or hedging with their supply chain and procurement colleagues.¹²

Leaders of strategic-minded tax groups establish their strategic credentials over time through decisions and actions, such as conducting valuable due diligence ahead of mergers and acquisitions, completing tax technology implementations on budget and on time, raising important considerations during scenario planning exercises, and identifying the tax risks and opportunities associated with business growth plans.

Making these contributions requires tax groups to make all of their compliance work as frictionless as possible through the right combination of skills, processes, relationships, and supporting automation. Sustaining that compliance efficacy and efficiency frees up more of the tax team to focus on the planning and analysis required to help the business get ahead of disruptive events, allowing it to thrive in a chaotic era.

Michael J. Bernard is the vice president of tax content and chief tax officer of transaction tax at Vertex Inc. and a former TEI member. George L. Salis is principal economist and tax policy advisor at Vertex Inc.

Endnotes

1. Scott E. Page, “Understanding Complexity,” The Great Courses, 2009, www.thegreatcourses.com/courses/understanding-complexity, and John H. Miller and Scott E. Page, Complex Adaptive Systems: An Introduction to Computational Models of Social Life, Princeton Studies in Complexity 17 (Princeton, NJ: Princeton University Press, 2007).
2. Page, “Understanding Complexity,” and Miller and Page, Complex Adaptive Systems.
3. “Opening Remarks by World Bank Group President David Malpass During the Launch [of] the June 2022 Global Economics Prospects Report,” The World Bank, June 7, 2022, www.worldbank.org/en/news/speech/2022/06/07/opening-remarks-by-world-bank-group-president-david-malpass-during-the-launch-the-june-2022-global-economic-prospects-re.
4. Asotush Padhi, Sven Smit, Ezra Greenberg, and Roman Belotserkovskiy, “Navigating Inflation: A New Playbook for CEOs,” McKinsey, April 14, 2022, www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/navigating-inflation-a-new-playbook-for-ceos.
5. Padhi, Smit, Greenberg, and Belotserkovskiy.
6. “Opening Remarks by World Bank Group President David Malpass.”
7. US Department of Labor, Bureau of Labor Statistics, Economic News Release: Consumer Price Index Summary (June 10, 2022), www.bls.gov/news.release/cpi.nr0.htm.
8. Vertex EOY Rules and Rates Report, Vertex Inc., January 2022, www.vertexinc.com/resources/resource-library/vertex-eoy-rules-and-rates-report.
9. “How to Run a Business at a Time of Stagflation,” The Economist, June 11, 2022, www.economist.com/business/2022/06/08/how-to-run-a-business-at-a-time-of-stagflation.
10. Sean McCabe, “KPMG US Announces $160M Increase in Salaries,” Accounting Today, January 25, 2022, www.accountingtoday.com/news/kpmg-announces-160m-increase-in-salaries.
11. “2019 Trends in the Supply of Accounting Graduates and the Demand for Public Accounting Recruits,” Association of International Certified Public Accountants, 2019, us.aicpa.org/content/dam/aicpa/interestareas/accountingeducation/newsandpublications/downloadabledocuments/2019-trends-report.pdf.
12. Andrew Blau, Tom Schoenwaelder, and Lauren Lubetsky, “The Inflation Outlook: Preparing for the Unpredictable, Deloitte Insights,” Wall Street Journal, May 5, 2022, deloitte.wsj.com/articles/the-inflation-outlook-preparing-for-the-unpredictable-01651523112.