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Economic Substance and the Emerging Distributed Company

  • Posted on June 2nd, 2020
  • in CTO, Strategy
  • By Brandon Caruana

According to the Oxford English dictionary, substance can be defined as any of the following:

  1. A type of solid, liquid or gas that has particular qualities;
  2. The quality of being based on facts or the truth; or
  3. The most important or main part of something.

The third definition best represents the legal definition of substance, “essence; the material or necessary component of something”. Similarly, it also aligns with the current warning from the Organization of Economic Co-operation and Development (OECD), evoking the need for low tax jurisdictions to prove they are meeting the new economic substance requirements. However, it is the second definition that we should be paying attention to.

The COVID-19 pandemic has compelled many companies to reconfigure their operations, moving beyond a defined physical boundary and adapting to a remote work model. This model has proved that a distributed workforce is easily attainable and more affordable without sacrificing productivity. It is no longer financially responsible for a business to restrict their resource pool to a single physical radius as demonstrated by Amazon, Google and Facebook. The same goes for smaller, rapidly scaling businesses with 20 employees or less. Before this pandemic, a handful of companies operated with fully remote workforces. GitLab (a software source code and project management company valued at $2.75B) is one of the largest, with over 1200 employees operating out of 65+ countries. GitLab even has a dedicated website that outlines their “All Remote Workforce Manifesto” to help other organizations implement this model.

A parallel of this systematic operational change can be seen in the emergence of cloud computing. Before cloud computing, a business would be required to purchase, configure, connect, maintain and secure servers in the pursuit of launching a business, requiring immense cost and expertise. Even if the business had nothing to do with technology, the burden of all this infrastructure put undue pressure on the operations. Cloud computing has changed all these overhead requirements and made it accessible for anyone to launch a company. The excessive infrastructural overhead is no longer required to manage their digital presence. A business selling surfboards or a bakery selling daily, freshly baked bread, can now, in a matter of days, have a fully automated digital presence from a sales website with Shopify and a direct to consumer marketing campaign.

Companies are adjusting to the high cost urban real estate market, and conscious of the major implications associated with the cost of living in these large cities. Working remotely is a pragmatic approach that adds value back into the company as money and time are conserved. By retaining significant capital saved on commercial leases, companies can prioritize culture by re-administering these funds for engaging, offsite corporate events.

Similarly, human resource departments are no longer limited to a talent pool by physical constraints. Board of directors will be distributed across the world, executives and decision-makers will collaborate instantaneously by using digital tools such as Zoom and Slack, and coworkers will be able to communicate more efficiently and effectively.

By adjusting to the new standards of business, the legal and the OECD definition of economic substance is soon to be outdated. Rather than focusing on the realities of the current world economy and the benefits of real-time collaboration that results from distributing company substance around the world, the OECD is implementing policies that adhere to the 1990 economy.

If the entirety of a company including employees, board members, decision-makers are globally distributed, who will designate their home jurisdiction? As these unprecedented times continue, and the standard shifts, it is going to become more challenging for tax authorities or the OECD to claim a company based on the jurisdiction of their registry.

Large metropolitan locations may be invigorating on the weekends, but with that comes an exorbitant cost of living and extensive commute times. Both of which attribute to long work weeks, minimal family time and a poor standard of living. Not only does the Cayman Islands, an acreage in Nothern Ontario or a country home overlooking the White Cliffs of Dover offer economic advantages, but they also provide a better quality of life for individuals and families without having to sacrifice a company’s performance or productivity.

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Brandon Caruana
Brandon Caruana

Recognized for building bridges between technology and business divisions, Brandon forges successful working relationships with all levels of team members, encouraging communication and cooperation to effectively provide easy to use systems which improve efficiency and increase profitability.

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