For so many businesses, success can be attributed to how effectively the supply chain is managed and its impact on growth, costs and profitability. So many aspects including overall cost, supplier sourcing, manufacturing strategies and distribution network structure are impacted by the accelerating globalisation of business combined with taxes and duties differing wildly across trading borders.
Many businesses find themselves obstructed from including taxes and duties in supply chain design practices because of the inherently complex nature of tax laws. This is particularly relevant in countries such as Brazil and with a global average tax rate above 20%, the ramifications could be staggering. Millions a year may be going to waste. Yet it is possible to optimise taxes and duties to counter this so that total costs are driven right down and competitive advantage is elevated.
If businesses cannot react fast enough to dynamic rules and complex regulations, they are also likely to face dramatic consequences, both financial and operational. It can be a vital component in building competitive advantage and global positioning to recognise the impact of taxes and duties in future strategic moves, such as mergers and acquisitions and supply chain capacity planning.
While locally focused tax calculations may currently be taking place, global optimisation with both tax and logistics considerations, aligned with P&L standards, is also likely to be a more compelling proposal for stakeholders. With this in mind, clear communication of tax and duty-related challenges and opportunities internally is imperative in order to drive the most effective changes in the supply chain.
Successful businesses must strike the right balance between supply chain costs and tax and duty obligations. Consider the risks of doing nothing: a failure to consider regional customs regimes or trade concessions, for example, puts an organisation at risk of missing out on potential savings; and if free trade agreements are not included and used, it can severely reduce cost-competitiveness.
Using modelling technology for tax optimisationBy including tax costs and tax credits, as well as operational/logistics costs in supply chain design, global businesses can minimise their total costs.
Modelling technology can be used to optimise the supply chain by providing a holistic view of duties and taxes, with the ability to perform ‘what-if?’ scenario testing on regulation changes, transfer prices, and so on. Supply chain strategy can be redesigned around regulation changes, quantifying the benefits from free trade zones and regional trade concessions. The impact of various taxes, like VAT or corporation tax, can also be measured.
Brazil, for example, has a complex tax structure that levies imposts on movements of goods between states while remitting credits to companies for movements into a given facility. These systems of credits and debits create significant incentives that should be considered in supply chain design. Design without tax and duty considerations can lead to inefficiencies and lost cost-saving opportunities.
Companies often form multiple corporate entities in countries with complex tax structures in order to minimise their tax burden. In these situations, technology will optimise not only the logistics but also tax and duty implications, providing a complete picture of how to run a network.
An understanding of international markets is also essential. For example, in India, supply chains need to be redesigned to best manage the transition involved in the shift from VAT and CST (Central Sales Tax) to the more consistent regime of the new Goods and Services Tax (GST). The new system should be easier for companies to track and manage but may also lead to higher costs. While the old tax structure incentivised the creation of distributed corporate entities for tax avoidance, the new system will allow for more centralisation of facilities. Effective transition plans will be needed to determine where consolidation should occur and how aggressive the timing of such changes should be.
Setting out to optimise taxes and dutiesIn order to be successful and establish quick wins, companies should start on a small scale and build up to more complex modelling to answer wider-scope supply chain questions. As the project develops they should evaluate the resulting benefits and refine their approach with different technologies and approaches that are best suited to the business strategy.
Optimising complex tax and duties within supply chain design practice requires tight alignment across several areas of the business. The fiscal team may not typically be involved in supply chain modelling. Yet when incorporating complex tax and duties calculations with annual regulatory changes, it is imperative to involve the financial team from the outset. This team may also review and approve site selection, along with open/close and capital expenditure proposals recommended by the models.
When evaluating supply chain changes on a more long-term basis, trade-off analysis should also be aligned with corporate planning and strategy. This enables a company to capture all the pieces of information required for supply chain redesigns which are accurate and which can feasibly be implemented within the business.
A task team that includes fiscal, finance, supply chain and design capabilities can be a recipe for success in supply chain design, providing comprehensive inclusion of tax modelling for more robust agility and competitiveness.
Jon Nicholas is professional services director at LLamasoft