Managing indirect taxes in the supply chain

Businesses today frequently look to better supply chain management as one of the most effective ways to cut costs. But such extensive changes to the supply chain have had a profound effect on the indirect tax burden that companies face.

According to the 500 senior tax and finance executives questioned for Ernst & Young’s 2011–12 tax risk and controversy survey*, companies today face a more challenging tax environment than ever before. In addition, indirect taxes emerged as one of the greatest causes of risk for companies, second only to the complexities of transfer pricing.

It is crucial that companies undertaking supply chain reorganization factor indirect tax implications into their decisionmaking from a very early stage.

While the latter has been a concern for tax executives for many years, indirect taxes have never featured so highly on the list of corporate concerns.

Although indirect taxes can increase supply chain-related costs and the risk associated with globalizing these activities, tax incentives provide an opportunity to offset these costs and decrease supply chain risk.

Every company is different, but these three leading practices apply to any company seeking to effectively apply incentives throughout the supply chain.

  • Select a core incentives team
  • Match supply chain spend with available incentives
  • Review alternative supply chain jurisdictions for potential further cost reductions

Companies are responding in three ways. Firstly, they are further developing their existing supply chains to drive cost-efficiencies and boost margins in their mature market operations. Secondly, they are adapting their supply chains to support rapid expansion and capitalize on the growing number of middle-class buyers in emerging markets, while managing risk. And thirdly, they are developing policies around sustainability, and adapting how they source materials and manufacture and distribute finished products to reduce their impact on the environment and the communities where they operate.

Risks can be avoided by involving indirect taxes as part of any supply chain transformation project from the start. In fact, looking critically at indirect taxes and grants and incentives may highlight new opportunities to strip out costs, reduce financing and improve operational efficiencies.

In a tough economic climate, companies that are able to make the necessary changes, not only to manage indirect taxes, but to exploit them to their advantage, will have a major advantage over their competitors.

2011-12 Tax risk and controversy survey: a new era of global risk and uncertainty, Ernst & Young, 2011.

The complete article was written by:

  • Dr. Philip Robinson
    Global Director, Indirect Tax, Ernst & Young, Switzerland

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