The second rule of building a group of companies without signs of artificial fragmentation.
The second rule concerns what tax lawyers and consultants usually call a “business goal”, which taxpayers often start looking for exactly at the moment when they receive a notification about the appointment of an on-site tax audit.
What usually goes wrong:
there is no causal relationship between decisions made to change the legal structure of a group of companies and changes in the effectiveness of business processes;
Changing the model of a group of companies entails only tax consequences: nothing else changes at all;
The goals explained to the court are not supported by evidence according to the rules of Art. 65 of the Arbitration Procedure Code of the Russian Federation (Part 1 of Art. 65 of the Arbitration Procedure Code of the Russian Federation “Each person participating in the case (note of the authors – both the tax authority and the taxpayer) must prove the circumstances to which it refers as the basis of its claims and objections”).
A continuous analysis of arbitration practice shows that practically nothing is presented by the taxpayer as evidence.
But either there is too little legal formalism left in us, or the term “business goal” is really too lifeless and refined, in any case, we will be discussing categories that are more mundane and understandable in a simple daily entrepreneurial life.
In a broad sense, the definition of business goals, business motivation is inextricably linked with such a concept as a “business model” – that is, on whom, how, through which you earn and where do you get the resources for this (Building business models: Handbook of a strategist and innovator, Pignet Yves, Osterwalder Alexander, 2020).
The business model is assembled from the following components (from right to left):
clients, their wishes and the resulting categorization of clients (according to preferences, territoriality, etc.);
sales channels (geographically separate sales, local, Internet trade, tenders and government contracts, network sales, etc.);
ways to maintain relationships with customers (from banal loyalty cards to, what is there, no less banal all kinds of rewards, retro bonuses and other material incentives);
product (product, work, service) – what we satisfy it;
business processes – how we create what we satisfy the client;
resources – from what we create a product (here, for the purposes of building a group of companies, we are primarily interested in fixed assets, raw materials, financial and labor resources);
suppliers – from whom we buy resources (suppliers of raw materials, contractors, employees, financial and leasing organizations, lessors).
The right side of the business model – from product to customer – gives us an understanding of revenue; the left side is costs. The difference is our profit.
Accordingly, from the point of view of a business platform, we can be “sharpened” to create something special (a product, work or service that favorably differs from competitors … we emphasize that it is beneficial for us, and not only for the client), or like no one others know how to maintain relationships with customers, or we have a pool of exclusive suppliers – all this makes our business model unique.
Some or all of the business model may turn purple (similar to Seth Godin’s purple cow concept (The Purple Cow, Seth Godin, Mann, Ivanov & Ferber, 2019)) making your company stand out. However, we are interested in the “purple elements” from a completely different angle. It is they that form the basis of what must first of all be subordinated to ownership control, including by legal means. But more on that in the Business Founder Protection Program chapter.
In the original concept of the “business model” by Pignet and Osterwalder, there is one more element missing for our purposes discussed with you – time. I mean, at what speed, with what clock frequency our business model works.
By adding the time factor to understanding your own business model, you can build a Profit Formula:
We “subtract” the cost structure from the income generation model (taking into account the cost management tools), then we multiply the difference by the time factor (resource turnover, the rate of added value creation or productivity) and, finally, we introduce the influence of risks (informational, motivational, etc.), multiplying by a certain reduction factor (you must admit that it does not happen that everything always works as it should).
What does artificial fragmentation have to do with it? Very simple. Before deciding to change the legal model of a group of companies, in spite of the lulling whispers of tax advisors (… or friends – “Yes, everyone does that”), you should think about what will change in the Profit Formula as a result of the changes. If at least one indicator in it changes, then we are not acting for reasons of tax economy and we will have something to say in court, justifying our business motivation.
In other words, the guidance for implementing Rule # 2 boils down to a simple statement. “Changes in the legal model of your group of companies and the business structure in general should have an impact in some way.