Uncovering Supply Chain s Hidden Taxes

Transcription

1 The Office for Business Architecture enabling businesses to build remarkable companies This Article Appeared in the Aug-Sep edition of Supply Chain Europe Uncovering Supply Chain s Hidden Taxes There are tens of millions of pounds in tax savings opportunities that can only be realised by developing smart supply chain operations. By Bill Bronsky, OBA. Supply chain design is unique to each industry and in many cases to each company. The measurement of supply chains effectiveness can be based on a number of different metrics. In most circumstances, managing costs and delivering high levels of customer satisfaction are the most common measures. Rarely is tax a focus, yet there are huge opportunities to markedly improve your companies P&L by combining Tax and Supply Chain Planning. The challenge for supply chain managers today is to respond to the need for increased speed through supply chains created by accelerated changes in trends, technology, competition and volume. In some cases this has led to a split in supply chains within the same organisation and the creation of distinct, unique ways of operating e.g. lean operations for high volume products and agile operations to create distinctive customer offers. The processes and technologies required to optimise a given enterprises supply chain have also changed. Increasingly companies are developing stronger relationships with their suppliers, including the sharing of information once thought of as being sensitive. There has also been a bigger reliance on technology hardware and software. Adding to this, two further complexities: Integrated Business Management (where companies have organised around global functions and now struggle to create cross functional accountability) and the internationalisation of the supply chain. From an operational perspective, this has resulted in new thinking, more flexibility with commercial relationships (internal and external) and a drive towards standardisation common simple but effective processes. In an environment where supply chains are trying to respond to these sorts of pressures, a focus on tax has not seemed the most obvious or relevant course of action. It can however be complementary to most of these changes and at the same time deliver significant benefits.

2 Tax Efficient Supply Chain Management (TESCM) uses a business model that integrates the planning between supply chain and tax; it has created huge opportunities in re-aligning both business and tax structures for many companies. The benefits have proven to be significant, impacting both P&L and of course shareholders. There are well over 100 companies (many in the FTSE 100) who have significantly restructured their business operations in order to optimise their tax position. This has resulted in substantial improvements in levels of profitability (up to 25%) and can be the single biggest lever for improving profit margins (ahead of cost efficiences and marketing spend). This type of restructuring is gathering momentum and growing in awareness. It has significant implications for competitiveness, company culture and the organisational model, as well as fiscal relationships. Contract Management Working Capital Management Pricing Strategic Policy Setting Business Forecasting Procurement Logistics Manufacturing Planning Risk Activities Business Operations Risk Value Added Activities Business Operations Tax Efficient Supply Chain Management Company Strategic management of: Procurement Supply Chain Planning Brands Intellectual Property Table 1. Creation of a Centrally Managed Tax Efficient Supply Chain The principles behind the model are relatively straightforward. Direct tax follows profit, and profit is determined (in the eyes of the tax authorities) by those functions which are perceived as added value (i.e. profit generating) such as brand management or strategic policy setting, or risk management activities such as working capital decisions or pricing (see Table 1 above). Combining the risk management activities with the added value activities and developing a new supply chain configuration changes the physical location of where the risk is incurred or where

3 these activities take place. This therefore has implications on how much tax is paid. Identifying and then centralising these key activities allows companies to choose how and where they will pay the bulk of their tax - this is the multi-million opportunity. pound Using the TESCM model companies have been able to move from Effective Tax Rates (ETR) of 35% (fairly typical) before TESCM to an ETR of under 15% after a TESCM restructuring. When you consider that the average rate of corporation tax across the four regions (see Table 2.) is over 31%, then there is significant scope for improvement. 33.0% 32.0% 31.0% 30.0% 29.0% 28.0% 31.4% OECD The TESCM approach need not be adopted in its entireity (ie there is no requirement to place all of the companies profit generating functions in a centralised low tax jurisdiction). Each function on its own can make a contribution to the profit pie and will therefore attract the requisite amount of tax. 32.5% EU 30.2% Latin American Table 2. Average Rates of Corporate Tax 31.0% Asia Pacific Some companies have started with one or two key functions and then transitioned others over time, and some have stopped short of implementing the full model by implementing say a tax effective procurement function, or the supply chain planning function generating significant rewards on their own. From an operational perspective there are several functions that can play a real role in unlocking significant tax opportunities, either separately or combined: Procurement From a tax perspective, ownership of the procurement transaction (i.e. the ability to determine what is purchased, how much and where) of taxation can be the single most crucial function to own. Ownership will determine where tax is paid. The ability to value the importance of this function within the organisation and therefore to charge related entities (e.g. manufacturing) for its services can create significant tax efficient opportunities. Further, owning this transaction allows companies to reduce the exposure created by mis-compliance. Brand Management For many companies brand management is the essential value driver of the organisation. The ability to control the look and feel of the customer experience

4 is essential to maintaining the company s position within the marketplace. The tax implications of brand management are: The determination within the supply chain of where goods are branded and therefore where the value is added. This significantly determines where tax is liable The ability to license and protect intellectual property associated with the brand, such as copyrights, patents, trademarks and trade names can have a significant impact on how much and where tax is liable. Customer Relationship Management (CRM) Increasingly companies are seeking to manage the data collected from a myriad of contact points and customers. Contact points include data gathered in surveys, interaction with customer service representatives, orders placed online, and dealings with warranty personell. This information is critical to companies because it tells them, from a customer perspective, the relevance of their products or services in the marketplace, and the effectiveness of their marketing efforts and the efficiency of their delivery system. The tax implications of building the infrastructure to compile and store this data include: Due to the extremely high value of customer data, there are country income tax implications as to where CRM data is stored and maintained. The ability to license and protect intellectual property associated with this information will often impact the jurisdiction of income taxation. Manufacturing and Logistics Management In an era of continuous replenishment, manufacturing and logistics management is a critical function. Efficient management of distribution centre (DC) functions and of the related transportaion and merchandising is a key component of creating a cost efficient supply chain. There are significant tax impacts on these functions as well, for example: The strategic aspects of network optimisation (including manufacturing footprint) is a key value driver, the location of these strategic functions will determine how much tax is paid. Often, distribution activities, if not segregated into separate legal entities, can cause a company to expose its major profit centres to unnecessary multicountry income taxation. In General, the greater the profit the greater the opportunity for tax savings. For example, a European Chemical company, reconfigures its supply chain management and centralises Purchasing and Network Optimisation Decisions and

5 uses different tax rates as part of the decision making process of where to locate it saves 55M per annum in direct tax. Companies are quickly reaping the benefits of the TESCM model. In the longer term, as competitors continue to lower their cost levels and increase the efficiency of their supply chain, companies will have little choice but to look seriously at implementing TESCM. The increased complexity of the supply chain and the increased cost awareness in many industries will foster the number of implementations of TESCM. The global survey (OBA & London Business School Business Restructuring Tax Effectively) of over 100 multinationals who have undertaken tax efficiency initiatives will determine just how beneficial this model has been and also look at the operational impact of restructuring for tax efficiency. The TESCM operating model is equally applicable to FMCG, Chemical, Oil, Manufacturing and High Tech industries; it tends to be less common in Financial Services. The TESCM business model requires that the linkage between supply chain and tax functions has to be strong. Whilst it is not necessary for supply chain executives become tax experts, or vice versa, a working knowledge of this area can pay huge dividends as a company plans and implements supply chains that cut across different tax regimes. It is critical to take into account tax issues and deal with them while the company is reconfiguring the supply chain. It is more difficult to pick up the pieces and reverse the changes once inappropriate tax structures have been established. Developing smart supply chain operations that are tax efficient will be a complex challenge. It requires creating the mutual awareness of tax and supply chain decisions in the first place, establishing the right KPIs (pre and post tax measures) to drive regular multifunctional behaviour, and creating an inclusive approach to strategic decision making. Nonetheless, many companies (those considered best in their sector) are overcoming these functional barriers, increasing their ability to compete and reaping the benefits. Bill Bronsky is the Managing Director of The Office for Business Architecture (OBA). For further information please contact; bill.bronsky@obaconsulting.com or alternatively visit;