In today's competitive operating environment, businesses are striving to increase efficiencies on all levels, including tax management. This article outlines a few ways where you can make your supply chain more tax-efficient.
International tax and supply chain planning are frequently viewed as unrelated activities. Supply chain managers and tax directors have different proficiencies, and their reporting relationships differ. As a result, these departments may not collaborate, at least historically, and supply chain and income tax decisions are often made by different organizations operating independently. Also, tax and supply chain organizations often attempt to achieve different objectives, which discourages collaboration.
Why become more tax-efficient?
The supply chain includes two subprocesses. The first, production planning and inventory control, includes manufacturing and inventory storage policies. The second, distribution and logistics, delivers finished goods to customers. Distribution costs can include shipping expenses, tariffs, and all other costs related to delivering finished goods to customers.
Companies seeking to maximize profits by relocating must balance tax savings against other important factors, including supply chain costs. Therefore, companies may want to become more tax efficient such as by reducing income tax.
When it comes to making your supply chain more tax efficient, one way is to reconsider your operating locations and plan for tax savings. As with MNCs, there exists multiple locations, such as states or even countries, for manufacturing, distribution, and retail. Optimizing locations with the best tax rates for the activities performed is surely going to make your supply chain more tax-efficient.
Consider the following example. A supply chain manager must decide between two manufacturing locations. The first location minimizes supply chain costs and is closer to suppliers and customers. The second location is farther from suppliers and customers, and wages are higher there.
If a supply chain manager’s goal is to minimize supply chain costs, the first location is superior. Wages and logistics costs (for both inbound and outbound logistics) are lower. But reducing supply chain cost does not necessarily maximize net income. The income tax impact may outweigh supply chain savings. If income taxes are considered, the second location may be superior.
While option one minimizes supply chain costs, option two maximizes net income.
The competitive environment in a global economy has accelerated change among MNEs. Companies are increasingly focused on product specialization and optimization of their entire value chain. Business restructuring is often geared towards centralizing key functions and decision making, and this is enabled by more transparency and availability of data through information technology.
Centralization strategies refer to the act of bringing together information, people, and activities within a supply chain to streamline direction and goals under one entity. For instance, one of the most frequent suggestions is the centralization of demand information, that is, providing each stage of the supply chain with complete information on customer demand.
In helping your supply chain become more tax efficient, centralization strategies may help to design a structure that suits your very own workflow. For example, within each supply chain, distribution centers receive finished goods from the manufacturers, and later deliver products retailers. They add value by reducing the number of delivery nodes between manufacturing organizations and retail customers, by consolidating storage, and by efficiently and promptly delivering customer goods. Companies do not need distribution centers in each country in which the firm sells products. The enterprise can determine how many are needed by focusing on customer requirements and cost management. Companies frequently centralize distribution activities will be able to achieve economies of scale. Many MNEs create regional distribution centers to service several countries. Centralization strategies may create an opportunity to design an income-tax-efficient supply chain.
Third, it is important to ensure that documentation is current, legal agreements between business entities are still valid, and the impact on transfer pricing policies is documented. Costly tax mistakes can be easily avoided by having your documents regularly audited, and paying attention to individual countries' tax regulations. Collaborating with local expert tax accountants will also give you advantage in being able to spot inefficiencies within your centralized approach.
Sources: Simchi-Levi (2000), Webber (2011).
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