The Tax-efficient Supply Chain Part II: Tax-efficient Procurement

From a supply chain perspective, companies in every industry should seek to move their procurement function from a transaction-based burden into a strategic tool capable of delivering significant sustainable competitive advantage.


For many companies, the information technology (IT) systems/investment required for implementing a tax-efficient procurement platform is modest, particularly when compared with the massive dollar amounts spent acquiring, customizing, installing and testing complex supply chain software platforms.

Key Factors in Creating a Competitive Advantage

A competitive advantage exists for those companies that look beyond tax compliance and toward tax self determination. However, in evaluating this objective, perspective is key. If tax determination is viewed either as simply a cost-center necessity or, alternatively, as "too complex" to be understood by key operational decision makers, then meaningful tax efficiencies cannot be achieved.

Instead, a holistic approach is required to properly envision the desired efficiencies, create an actionable plan to achieve those efficiencies and put together a coordinated effort to execute the plan. In order to achieve sustainable supply chain, procurement-based tax savings there needs to be functional coordination between procurement professionals, the tax department and the IT department. Further, there needs to be an understanding of the issue, an appreciation for the importance to the organization of the effort and the buy-in of every department impacted. This perspective is essential in order to ensure shared ownership of the effort and shared credit for the results.

Why Isn't This Type of Thinking Common?

Unlike many of the complex issues in business, which take mounds of data and hours of intense analysis of which to make any sense, the reason that this type of thinking is not common in most businesses is quite simple: tax departments and supply chain executives seldom, if ever, talk to each other. Further, the two groups view operations from widely different perspectives. Supply chain and procurement executives are viewed as, if not profit centers, certainly profit drivers within organizations. The savings they are deemed to create are seen as contributing directly to the bottom line of profit-hungry consumer and industrial products companies. In contrast, tax departments are considered cost centers. Tax departments are viewed, often unfairly, as the source of issues that hamper operations and cost the organization money.

Corporate perspectives toward resource allocation also come into play. Systems or processes that reduce the cost of acquiring goods are deemed mission critical. As such, when requests are made to spend millions of dollars on sophisticated supply chain, point of sale, inventory management or electronic data interchange projects, such projects often receive swift approval, frequently based on similar expenditures by competitors.

It is also important to note that most of the planning talent and effort within the tax departments of most large corporations is devoted primarily to corporate income tax issues, not sales and use taxes. In addition, when the proposed prospective sales and use tax savings are dependent, in part, on the tax department's understanding of, or willingness to modify, existing information systems supporting tax reporting, such ideas seldom attract enthusiasm from the tax department. Why? Many tax "technicians," those who understand, in detail, the tax laws with which a corporation must comply, are not technologically proficient, nor do they care to be. As such, people migrate to activities in which they have a high level of comfort. Moreover, traditionally, when tax departments have made IT resource requests within organizations, such requests tend to be put on the back burner. Finally, tax departments are often required to make extraordinary justifications for any proposed additional resource expenditures for a "cost center" function. Such exercises have put a bad taste in the mouths of most corporate tax professionals.

Conclusion

Anyone who goes to business process improvement seminars will frequently hear the often-repeated phrase "thinking outside the box." The application of that phrase is commonly understood to mean that if you want to succeed in a highly competitive economy you have to think about that which others are not. The concept of "thinking outside the box" is easy to understand but difficult to execute. Why? Because people don't tend to think about things they don't know about. It is the cross-pollination of ideas from discipline to discipline that separates the players from the pretenders.

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