How tax implications affect the supply chain operating model
▉ Insight 1
Geopolitical affairs are creating pressure to shift production from global to in-region, or even local.
Such changes have important supply chain and tax implications.
In the US, the Tax Cuts and Job Act of 2017 created incentives for businesses to move production closer to home. Meanwhile, a shift in global demand toward high-growth markets, particularly China, is changing global trade patterns. In addition, civil unrest and instability in some Asian countries are also causing companies to rethink their supply chains.
Tax consequences associated with global supply chain operations can overshadow other supply chain costs, a dynamic that poses a trap for businesses consumed by other considerations.
Tax impacts can be felt via indirect taxes, such as customs duties, or through direct taxes – levies placed on profit realized in a specific location.
Another valid concern arising from global supply chains is the cross-border risk of potential blockages or delays of critical shipments. These hazards can shut down production lines or otherwise degrade service to key customers.
But tax implications should be top of mind even for organizations with domestic supply chains. For example, companies that miss opportunities to avail themselves of tax credits and incentives when locating a new manufacturing plant can put themselves at a competitive disadvantage.
▉ Insight 2
Our experience shows that on average, tax-savvy companies can see a 10% to 20% reduction in duties and improve management of their effective tax rate.
Some tax savvy companies have cut their cost by 10% to 30% while improving their compliance.
Others have reduced their cost of goods sold by 5% to 15% by implementing a route-to-market plan that incorporates global trade leakage mitigation strategies. Ultimately, these types of actions enable enterprises to access new routes and improve speed-to-market.
▉ Insight 3
A tax-efficient, risk-mitigated supply can be a vital differentiator.
Gaining visibility across the entire supply chain is a critical first step.
An array of options can help enterprises realize the type of tax-efficient, risk-mitigated supply chain that can be a vital competitive differentiator. One crucial component is to take steps to gain visibility across the entire supply chain.
This means both tactical visibility – near-real-time visibility of inventory that is in transit globally – and strategic visibility, which allows the business to detect and evaluate risk types across supplier networks and logistics hubs. Strategic visibility helps companies identify potential mitigating factors and informs their decisions on reconfiguring the supply chain.
▉ Insight 4
Consider new sourcing options and manufacturing footprints that mitigate risk regarding supply chain and tax implications.
Including nearshore or alternative locations.
An example involves diversifying the supply base away from Asia — if possible — to reduce risk and instead consider nearshore or alternative sourcing locations. Enterprises should also review customs classifications for materials, so they’re equipped with options to reclassify items to reduce customs duties on imported goods. A related action is to understand and take full advantage of tools such as free-trade agreements, country-of-origin benefits, and duty deferral and drawback mechanisms.
▉ Insight 5
A careful evaluation of costs can be accomplished by using supply chain and global trade analytics.
These tools provide a holistic understanding of total landed cost, including customs duties, for product sourcing and manufacturing to serve each market.
Organizations should work to integrate electronically with trading partners, logistics service providers, and tax and customs authorities to provide more efficient and effective control of trade data, systems and daily operations.
▉ Insight 6
Companies can benefit by incorporating an operating model that manages tax with shared-service supply chain operations.
For instance, operating a principal company in a commercially friendly jurisdiction with efficient transfer pricing between affiliates.
These moves have aided a variety of types of companies. In one instance, EY assisted a multinational food and beverage company with its supply chain flow optimization, a project that included design through operations, manufacturing consolidation, and global planning and strategy. The client realized $400 million in direct cost savings, a simplified manufacturing footprint, and an annual revenue increase of $4 million through automation and innovation.
EY also assisted a multinational luxury vehicle manufacturer with a global strategy for duty costs implemented in major markets that accounted for most of the client’s global export sales. The organization achieved an annual savings of $150 million in global duty costs. In addition, we are helping several apparel and technology companies redesign their supply chains in response to impacts brought on by deteriorating international relations, civil unrest and trade disputes across the globe.
Direct cost savings
Annual revenue increase
Global duty cost savings