Managing indirect taxes in the supply chain

Rapid globalization, the global financial crisis and rapid advances in technology are driving radical changes in international trade patterns.

Few global companies today do business in the same way or in the same places as they did even five years ago. They are extending their reach into new markets and seeking to thrive in developed economies by operating more effectively and efficiently.

These developments are having profound effects on global supply chains — changing how and where materials and products are sourced, manufactured, distributed and sold.

Indirect taxes — such as VAT/GST, customs and excise duties — are typically based on trade flows and transactions, not on profits or income. They are inextricably linked to supply chain activities.

Changes in the ways companies are doing business are having a profound impact on these taxes and on companies’ supply chains, influencing where activities are carried out, the cost of finished products and delivery routes and timing.

Increasingly, companies recognize that effective management of indirect taxes, grants and incentives is essential to support growth and reduce the costs and risks of doing business internationally.

The changing supply chain

World trade patterns are changing

At the start of the 1990s, global trade was dominated by the developed nations; by 2010, the advanced economies accounted for a little more than 60% of global merchandise exports. New markets are opening, companies are exporting to more countries than ever before and trade routes are changing.

China is now the biggest trading partner for Australia, Japan, South Korea, India, Russia and South Africa and is increasing its share of trade with Europe and the US. As markets such as Brazil, Russia, India and China see slower growth rates, other developing economies such as Vietnam and Cambodia are keen to be passed the baton.

Supply chains are transforming

For many companies, supply chain activities such as:

1. Product engineering
2. Sourcing
3. Manufacturing
4. Logistics

are now widely dispersed around the world. As activities are outsourced, centralized and streamlined to gain efficiencies and maximize scarce resources, corporate structures and functions are also being transformed.

Indirect taxes in the supply chain

Changing global supply chains create indirect tax challenges

Because supply chain transformations are intended to obtain operational and financial benefits, indirect tax considerations may not be at the forefront of decisions, even if the company’s compliance obligations and the customs regimes and incentives that are available may be seriously different as a result of any change.

Changing indirect taxes challenge global supply chains

Governments around the world are increasingly relying on indirect taxes to bolster revenues and fund tax reforms in other areas. Global companies need to be aware of the main trends in indirect taxation and their impact not only on supply chain transformations but also on their existing supply chains.

Recent changes include:

1. Increasing tax rates for VAT/GST and excise taxes
2. The adoption of new taxes as emerging markets introduce VAT/GST and developed markets introduce new excise and “green” taxes to influence consumer behavior and protect the environment
3. A reduction in customs duties through new Free Trade and Preferential Trade agreements
4. An increasing range of tax incentives and grants aimed at stimulating job creation, particularly higher-value, high-wage activities and non polluting industries.

Companies should also be aware of the growing emphasis by tax authorities on full compliance with indirect tax obligations. Increasingly, they are turning to advanced technologies to track and manage reporting obligations, to collect information and to audit companies’ activities.

Although a growing number of countries are imposing requirements on companies to submit electronic data, there is still little harmonization of indirect tax reporting requirements in different jurisdictions, adding to global companies’ compliance burden and the risk of making errors.

Meeting indirect tax challenges in the supply chain

Effective management of indirect taxes is essential to support growth and reduce costs and risk. If these taxes are left out of the picture, the expected benefits of a supply chain transformation may not be fully maximized or, in extreme cases, may not be realized at all.

In our full report , we look at seven common supply chain challenges that global companies face as they move into new markets and operate more effectively and sustainably.

We outline leading practices to reduce risks and boost performance in VAT/GST, customs and international trade, excise duties and environmental taxes, export controls and incentives.

Although each of these areas present different issues and opportunities, some common themes emerge for adopting an effective management framework for indirect taxes and incentives including:

• Identify and quantify the indirect taxes and incentives your company currently pays and receives
• Identify and quantify areas of current and future risk and opportunity, including the costs of related compliance obligations
• Assign clear responsibilities for managing your organization’s indirect tax performance and incentives “assets”
• Centralize management of indirect taxes and incentives to mirror your business structure and capitalize on knowledge and experience
• Standardize processes to spread leading practices throughout the organization
• Outsource and co-source compliance and reporting functions that rely heavily on specialist or local knowledge
• Involve all the parts of the organization that have a stake in managing and improving your business performance, such as tax, finance, operations, logistics, HR and real estate
• Measure your management of indirect taxes and incentives by adopting key performance indicators related to your supply chain goals

Managing indirect taxes in the supply chain

Do you agree with above observations? Anything to add?