Implementing a Tax Efficient Supply Chain Management Platform to Address Global Business and Tax Disrupters Impact on Operational Structures and Supply Chains
Global business and tax disrupters, such as COVID-19, Trade Wars, and changes to global tax laws are requiring MNEs to evaluate the impact of such disrupters on both their organizational structures and supply chains.
The main objective of global supply chain management is to achieve the greatest value possible at the lowest cost possible. It is important to remember tax represents 20% of the costs incurred in the global supply chain. Tax, in some form, is imbedded in virtually every transaction. To fully appreciate the planning opportunities available by implementing a Tax Efficient Supply Chaim Management Platform (TESCMP), one must first appreciate the components of a globally integrated supply chain. The globally integrated supply chain starts with Global Suppliers and ends with Global Customers, in between is the processes of Global Logistics, Purchasing, Operations and Market Channels.
Global Logistics – Is the part of global supply chain management that plans, implements and controls the efficient and effective forward and reverse flow and storage of goods, services, and related information between the worldwide point of origin and the worldwide point of consumption to meet global customer’s requirements.
Global Purchasing – Tales place in the inbound or upstream portion of the global supply chain, it involves buying something (such as raw materials, component parts, work in process, products or services), and it should be strategically and tactically integrated with the elements of the production cycle for MNEs.
Global Operations – is the mechanism utilized by an enterprise to implement the MNE’s corporate strategy and facilitate the enterprise being market driven. It involves the worldwide management of make-or-by decisions in global supply chains, global production and manufacturing, competitive priorities in such supply chains, total cost analyses in global supply chains, process-based quality standards, guidelines within the supply chain operations reference model, and decisions on the usage of operational providers within the realm of global operations across the supply chain.
Global Market Channels – involves the part of the global supply chain management that includes all activities related to sales, service, and the development of relationships, preferably long-term relationships with customers. A critical component of market channels is the last mile of the supply chain.
Organizations face increasing pressure to avoid future disruption while reducing costs within the supply chain. These pressures permeate though out each part of the supply chain. Some of the more common items include:
- Jurisdictional selection and physical location of the MNE’s logistics, purchasing, and operations;
- Choice of suppliers and their physical location, focusing on manufacturing and distribution locations;
- Examine when, within the supply chain, goods are branded and therefore value is added. This exercise determines the situs of taxability and the value of goods for both income and property tax purposes.
- The ability to attach value to certain intellectual property may impact customs and duties charged on the importation of goods.
TESCMP is an approach of overlaying tax strategies, transfer pricing, global mobility, indirect taxes and trade and customs to a company’s business processes. The first step in implementing TESCMP is to map transactions flows and sort the activities within each process as high value versus routine functions. High-value functions drive companies’ strategic decisions; they determine what products to produce, which markets to enter and how best to execute the corporate strategy. High-value functions entail risk and should concomitantly earn higher returns.
It is people, however, who execute functions and manage risks. By redeploying decision-makers — and the functions and risks that they manage – to centralized and possibly tax-favored jurisdictions, companies may realize material operational and tax benefits through efficiencies and by earning a greater proportion of their profits in a tax-efficient location. Routine activities, deriving a smaller amount of taxable profits, might remain in higher-tax jurisdictions or re-locate elsewhere as business needs dictate. In an environment of hyper change where supply chains need to be nimble in order to avoid disruption, it is important to remember tax represents 20% of the costs incurred, thus planning for this cost is important to drive both operational and financial success.