Tax and supply chain management are often considered to be two distinct disciplines, but this view misses an opportunity to leverage the business benefits achieved by an automated and integrated tax department.
The evolution of transaction tax management is a rapid affair. In the early 1990s transaction tax specialists were mostly the domain of the big accounting firms. Now any self-respecting multinational wouldn't be seen without at least one international transaction tax specialist.
A second evolution is occurring. Tax departments are benchmarking their headcount and services to be best-in-class. There is more focus on value creation, and on how much time is spent on compliance versus more value-added activities, such as planning and business advising. Within transaction tax such opportunity exists in the world of supply chain management — a world of logistics, global sourcing, customs duties, incoterms and free trade agreements.
Rarely are transaction tax and supply chain management mentioned in the same sentence. Yet there are many dependencies where the tax department and the supply chain team need to be working together:
Understanding Transaction Tax Impacts on the Supply Chain
- Procurement. Any procurement team performing global sourcing should be focused on landed cost, which is the true cost of the commodity including freight costs, customs duties and brokerage costs. The foreign supplier may well be 20 percent cheaper than the local supplier, but is that still the case when calculating the full costs of getting it to your door? Any procurement team that is not considering transaction taxes in their landed costs could be making an expensive mistake as normally recoverable value-added tax (VAT) and goods and services tax (GST) can sometimes become an expense that should be factored into landed cost.
- International Logistics. Drop shipments, multi-national contracts and triangulation have long been the staple diet of the transaction tax specialist, but too often this is focused on the outbound supply chain to the customer at the expense of in-bound supply chain or manufacturing models. If the logistics team is tinkering with the supply chain, trying a few new routings or looking at direct shipments, the transaction tax specialist needs to know about it.
- Incoterms. Incoterms, such as Ex Works (EXW), Free Carrier (FCA), Delivered Duty Unpaid (DDU) and Delivered Duty Paid (DDP), govern the buyer's and seller's responsibilities. These are normally well understood by the transaction tax specialist, because some can impact the importer of record and who has the liability to import VAT. Who in your company determines the incoterm policy, and who handles any exception requests from customers or suppliers? Probably not the tax department. Decisions on incoterms, without the involvement of the transaction tax specialist, could be a financial risk, and failure to use incoterms to help structure tax-efficient international transactions could be a missed opportunity.
- Cast Flow. This is the king of the business world. Transit times, incoterms, rapid customs clearance, sourcing decisions and pipeline inventory all impact cash flow. Any supply chain presentation has cash flow impact as the bottom line. Yet consider this: With an average international transaction tax rate of 15 percent on most sales and purchases the transaction tax specialist has a greater impact on cash flow, even if, eventually, it washes through.
- Customer Satisfaction. When your invoicing system calculates an incorrect amount of transaction tax, the reaction is often to think about compliance impacts. But the customer will either get frustrated if you can't get your invoicing right, look at it as an opportunity to defer payment or make a short payment (pay the net, but not the tax). Adding tax errors as a metric to drive credits, re-bills and payment issues may increase awareness that incorrect tax is a customer issue, not just a compliance issue.
- Audits and Compliance. It is now pretty common for the tax team to be involved, or at least aware of, customs audits, especially if they are focused on valuation and transfer pricing. Does the tax department always gives the customs team a heads up on transfer pricing policy changes, advance pricing agreements (APAs), transaction tax audits and other such events? In addition, Sarbanes-Oxley requirements and the increased focus on corporate governance drives the need for greater collaboration across the entire supply chain.