ATC 2012: Supply Chains and the critical indirect tax factor

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Many companies seeking to tap developing economies are en route to Africa, but the paths to market are varied and complex. This is not least because of indirect taxes, such as VAT/GST, customs and excise duties, which have a profound effect on supply chains. Carefully managing the impact of these taxes is essential to ensuring that the cost of expanding into Africa is not prohibitive, says Charl Niemand, Director in the Indirect Tax division of Ernst & Young, speaking at the firm’s annual Africa Tax Conference.

Given that import duty in some African jurisdictions can reach a high of 135% on certain products, customs duty often accounts for a significant component of the total delivered cost of goods. Apart from investigating potential export incentives and processing relief schemes, an appreciation of what savings opportunities are available also involves understanding the investment propositions offered by Africa's regional integration.   

In this regard there are two main evolutions taking place, explains Christina Horckmans, Executive Director, Ernst & Young, Belgium. “These are the creation of a tri-partite free trade agreement between the EAC, Comesa and SADC and the formation of ECOWAS (the Economic Community of West African States) into one customs and monetary union. Companies must keep in mind the different dynamics for business that are being created by these initiatives, especially on the indirect tax side”.

Niemand says that when devising supply chain models, the goal should be to evaluate total delivered cost, from raw materials purchase through to finished goods delivery in end markets. This will involve an assessment of whether the best available current and future customs duty rates are being used on existing flows, and, if not, finding alternative raw material sources or end market sourcing locations.

Few would dispute the advantages of the free movement on the African continent of labour capital goods and services. However, there is more to regional integration than removing custom duties and tariffs, says Horckmans. Beyond this, lies the task of de-fragmenting Africa.

“This entails addressing on-the-ground constraints, such as poor infrastructure and shortage of skills that hinder the daily operations of ordinary producers and traders and which significantly dampen opportunities for cross border trade within Africa. To date, Africa has integrated with the rest of the world more than it has with itself.” Regulatory reform and capacity building are called for and international donors could do much to reduce resistance to integrative reforms by developing an understanding of the political economy behind them.

As trade liberalisation advances, the relative weight of customs duty will diminish and it is likely that this gap will be filled with higher taxes on consumption. The dynamic nature of the indirect tax landscape makes it prudent for multinationals to factor it into their supply chain planning as early as possible.

In the meantime, for companies doing business on the continent, there are some proven ways to overcome existing supply chain barriers, says Niemand. Among these are building strategically placed regional centres of excellence, collaborating internally with a view to strengthening the role of logistics and creating a single set of planning and execution processes to reduce complexity, enhance service consistency and instill a common “operations language.”