Indirect Taxes On The Global Supply Chain

Published Date: 02 Nov 2017

Indirect Taxes on the Global Supply Chain

Submitted to:

Professor Ankush Guha,

Sr. Lecturer Supply Chain Management

Submitted by:

Rezwan Quamar (134)

Binoy Ezhuthasan (244)

Indirect Taxes on the Global Supply Chain

Executive Summary

Changing global supply chains challenge indirect taxes

Changes in world trade and in supply chain models present challenges for indirect taxes (including taxes on consumption such as VAT/GST and sales taxes, customs duties and environmental taxes, as well as grants and incentives) and excise duties. Because supply chain transformations are intended to obtain operational and financial benefits, indirect tax considerations may not be at the forefront of the decision

despite the fact that indirect tax treatment of transactions, the company’s compliance obligations and the customs regimes and incentives that are available may be seriously different as a result of any change.

Changing indirect taxes challenge global supply chains

Governments around the world are increasingly relying on indirect taxes to bolster revenues and fund tax reforms in other areas. Global companies need to be aware of the main trends in indirect taxation and their impact not only on supply chain transformations but also on their existing supply chains.

Broadly, recent changes include: increasing tax rates for VAT/GST and excise taxes; the adoption of new taxes as emerging markets introduce VAT/GST and developed markets introduce new excise and "green" taxes to influence consumer behavior and protect the environment; a reduction in customs duties through new Free Trade and Preferential Trade agreements; and an increasing range of tax incentives and grants aimed at stimulating job creation, particularly higher value, high-wage activities and nonpolluting industries.

Companies should also be aware of the growing emphasis by tax authorities on full compliance with indirect tax obligations. Increasingly, they are turning to advance technologies for reporting obligations, to collect information and to audit companies’ activities. Although a growing number of countries

are imposing requirements on companies to submit electronic data, there is still little harmonization of indirect tax reporting requirements in different jurisdictions, adding to global companies’ compliance obligations and the risk of making errors.

Global supply chains increasing indirect tax

One reason for the increased volume in international trade in recent years is the globalization of supply

chains, which cause goods to cross national boundaries several times during the production process. Each time goods cross a border, they are potentially subject to a host of indirect taxes and indirect tax compliance obligations, including:

Export licensing

VAT/GST reporting and documentation (to support an export exemption)

Customs and excise duty reporting and compliance documentation (duty suspension regimes, etc.)

Customs reporting and documentation

Customs duties on importation

Excise duties on importation

VAT/GST and other sales taxes on importation

VAT/GST reporting and documentation (to support input tax recovery)

Export compliance obligations

The impact of indirect taxes

The effective management of indirect taxes is crucial to operating successfully in today’s global market place. As supply chains grow longer and become more international, understanding the impact of VAT/GST, excise duties, customs duties and export controls is not just an issue for the tax function. Indirect taxes must be actively managed throughout the business if they are to work with, not against, the strategic agenda.

Considerations include:

Cost base — avoiding irrecoverable VAT, excise duties and customs duties

Cash flow — delayed VAT refunds and pre financed duty payments

Compliance burden — managing customs and excise warehouses, applications for incentives, VAT returns and VAT registrations, VAT invoicing, excise returns, customs documentation requirements, managing export compliance obligations

Tax accounting — real-time VAT reporting, tax provisions

Corporate risk — reputational risk, penalties, fines and criminal liability for errors and omissions

Growth opportunities — incentives for setting up new productive activity, intelligent sourcing from or producing in markets where import preferential customs duty rates apply

Efficiency — customs and excise simplifications, goods held up at customs, business disrupted by tax

audits and new activities delayed for incentive grants

Six global indirect tax trends

There are six common global trends for indirect taxes that are likely to be significant in 2012 and beyond:

1 Increasing VAT/GST rates

2 Broadening of the VAT/GST tax base

3 Refinement of consumption tax systems

4 Increased focuses by tax administrations on compliance and tax avoidance, using advanced technology

5 A continuing rise in excise duties

6 Decreasing customs duties from increasing free trade

Each time goods cross a border, they are potentially subject to a host of indirect taxes and indirect tax

compliance obligations.

Indirect taxes: A growing source of global risk

Tax risk is what companies face when they are unsure of having planned their taxes with foresight, accounted for their taxes correctly and complied with all relevant tax laws. And tax controversy is

a polite term for the disputes that arise alas, with greater frequency between corporate taxpayers and tax authorities.

The complexity of transfer pricing has long been a bone of contention between taxpayer and tax authority and that is still the number-one contributor to tax risk and uncertainty. But indirect taxes were the clear number two and they are the fastest-rising concern.

The dramatic shift in the global economy has changed tax policy and enforcement, forcing companies and governments into more disputes. Supply chains cross far more national boundaries now and extend into many new markets, including emerging markets, multiplying the customs and VAT considerations.

Also, legislators have been lowering their corporate tax rates to attract business, but they still want to

increase spending year over year, so they are all the more likely to raise their indirect taxes. However,

even if legislators are convinced that indirect taxes are the best way to raise substantial new revenue,

individual taxpayers often disagree. If their protests prevent the rate increases, tax administrators find

themselves in a tough situation: they are expected to collect much more without a substantially higher

rate.

But tax administrators do have new technological and institutional tools that allow them to collect more,

such as formalized cooperation with other tax authorities. Tax authorities have more data and information

about taxpayers and their economic activities than at any time in history.

Indirect tax policy as a source of risk

Over just the past few years, between 60% and 70% of European Union member states have increased

their VAT rates at least once and the assumption that no state would go over 25% has ended with

Hungary’s new 27% rate.

These rate increases will continue because when governments urgently demand more revenue, they often

turn to indirect taxes, especially the VAT or GST because this broad-based tax produces so much

revenue with each rate increase. And even if governments slow their spending growth, they will have to

confront their accumulated debt and to do so they will need more revenue.

Since the beginning of 2010, governments have not only been demanding more revenue, they have

been demanding it quickly. Italy even announced a one percentage point increase in VAT effective from

the following day.

VAT compliance mistakes are more costly when the rate is higher and mistakes are more likely when

companies have so little notice. Even governments not in such dire financial straits as Italy are expecting

taxpayers to react with uncommon alacrity to tax changes. At the end of 2011, China introduced a

complex VAT pilot in Shanghai with only eight weeks’ notice.

Indirect tax enforcement as a source of risk

Tax controversy related to indirect taxes is growing at a quick pace as tax legislators constantly adjust the

base and raise the rate. This leads to more frequent errors such as:

• VAT paid to suppliers (input VAT) is not reported and recovered on the VAT return

• VAT paid to suppliers is reported but not recovered because tax authorities find the supplier’s VAT

invoice to be invalid

• VAT paid to suppliers is recovered when it does not qualify for recovery

Tax policy-makers said they expect indirect taxes to be their leading source of new revenue over the next

decade, while tax administrators and taxpayers view indirect taxes as a key source of risk over the next

three years.

An increasingly global approach needed to managing indirect taxes

Although companies in our survey reported that indirect taxes are their second leading area of tax risk,

they also reported that these taxes were managed by the finance or accounts department more of the time

(48%) than they were managed by the tax department (44%). They also reported that a global indirect

tax officer was resident in the tax department of only 21% of companies.

Interestingly, this percentage fell to just 12% in the largest companies (those with US$5b in annual

revenues or more), indicating that the larger the company, the less likely it was to have a dedicated

indirect tax officer. Looking forward, increasing the number of resources focused on indirect tax in the

next two years was foreseen by only 30% of companies. These disconnects merit close attention,

particularly as tax administrators and tax policy-makers alike tell us that indirect taxes will be more

important to them in the future.

This insight into the current management of indirect taxes shows that amid uncertainty, there is an

opportunity for global businesses.

Some companies will seize that opportunity. They will do a good job of planning around the rapidly

changing rates and rules and foreseeing where future changes are likely, including what supply chain

decisions are wise. Some companies will quickly and efficiently account for new or forthcoming VAT

and GST laws, customs and excises. Some companies will comply with all applicable laws, paying all

taxes that are due where and when they are due; similarly, they will reclaim all refunds that are due when

and where those refunds can be collected. And by following these leading practices, they will avoid

indirect tax controversy wherever possible and deal with it quickly and efficiently when it’s unavoidable.

These are the companies that will gain a competitive advantage in the years ahead.

Centralized VAT/GST accounting and reporting

Using a shared service center approach for global or regional indirect tax compliance and reporting can

increase effectiveness while potentially reducing overhead costs. By improving VAT/GST compliance,

shared service centers may help to reduce risks and penalty costs.

For example, a centralized compliance function may allow groups to maximize the use of standardized

automated processes. However, some global companies that have a decentralized VAT/GST compliance

model may be concerned that a shared service center compliance team may not have the detailed local

knowledge necessary to ensure that all returns are completed accurately and to identify underlying

VAT/GST issues. Although this is a genuine concern, increasingly, global companies are addressing it by

Combining a centralized VAT/GST reporting model with local review of processes, perhaps

using a third-party provider.

VAT/GST

VAT/GST is a multi stage tax on consumption that applies to the supply of goods and services at

each stage of production, distribution and sale. This broad-based tax is levied on most goods and

services, with notable exceptions (such as financial services, insurance, health and education).VAT/GST

is charged on the importation of goods and services based on their value, including any customs duties.

In contrast, exports of goods and services do not generally attract VAT/GST.

Since it was first introduced, VAT has been an unstoppable tax success story. Some form of VAT/GST

now applies in more than 150 countries worldwide, with the US being the only developed economy that

does not currently levy a VAT-type tax. And an increasing number of emerging markets are adopting

VAT/GST in preference to single-stage sales taxes or a range of local sales taxes. In January 2012, China

launched a VAT pilot scheme in Shanghai with a view of eventually replacing its Business Tax

(BT) and VAT with a broad-based VAT throughout the whole country. India is also undergoing reform in

this area, recently finalizing its "negative list" for excluded supplies and bringing the introduction of a

new, centralized GST one step closer.

The VAT/GST compliance burden on business

As a tax on "consumption," VAT/GST is generally borne by the final consumer, but it is collected and

remitted by business entities that supply taxable goods and services. VAT/GST is charged on transactions

at each stage of the supply chain and it also generally applies to imports of goods (without the need for a

transaction). Businesses are treated as VAT taxpayers who collect and remit the tax. VAT taxpayers

charge VAT/GST on their sales (output VAT) and recover VAT paid on their business purchases and

overheads (input VAT). Therefore, businesses effectively account for VAT on the value they have added

at that stage in the supply chain.

This method of charging and collecting tax from non-taxable persons using VAT registered businesses

makes VAT/GST a highly cost-effective form of taxation from a government perspective, but it places a

heavy burden on businesses. They must report and remit VAT/GST payable to the tax authorities on a

regular basis (generally monthly for large companies) with 100% accuracy. However, this task is

complicated by the fact that each country has its own system with its own rules about how, when and

where taxis charged. Documentation and reporting requirements also vary greatly between tax

jurisdictions.

The impact of VAT/GST on business cash flow

VAT/GST is a "neutral" tax for most businesses, but the cost of funding VAT/GST is still a factor.

Negative cash flow may arise from the sales or purchase functions:

• Sales — The supplier typically has to fund VAT/GST charged to customers that has not been paid by

the time the tax return is due (generally monthly) or that is never paid, especially in countries where no

relief is given for bad debts.

• Purchase — Waiting for VAT/GST refunds can greatly add to the effective VAT/GST burden for

businesses with large VAT/GST credits. Although the VAT/GST is creditable or repayable,

many governments do not repay tax quickly. For example, one-off VAT/GST credits may accrue from

start-up or merger costs or as a result of increased capital investments. Persistent VAT/GST credits may

result from undertaking business activities that are not subject to VAT/GST, such as exports, or to the full

rate of VAT/GST, such as books, foodstuffs and pharmaceuticals.

The increase of VAT/GST rates worldwide has a number of important implications. For businesses,

higher tax rates increase tax risk, as the amount of VAT/GST that must be managed is greater and the

consequences are more severe in the case of non-compliance and mistakes. Non-recoverable indirect

taxes raise the costs of doing business, making production more expensive and requiring increased

efficiency to make up for the increased costs. For governments, as VAT/GST income becomes more

important, so does effective enforcement. The fight against fraud and the monitoring of taxpayers

becomes more pressing, leading to increased compliance obligations, more aggressive tax audits and

harsher penalty regimes.

VAT/GST under management

VAT/GST throughput is all the VAT/GST that a company has to manage. It includes all VAT/GST on

purchases and sales plus the full rate of VAT/GST potentially chargeable on lower-rated, zero-rated and

exempt activities.

Measuring VAT/GST risk

To understand the importance of managing indirect taxes, you need to measure the full impact on the

Business by looking at costs, negative cash flow and the amount of VAT/GST throughput or VAT/GST

"under management" that represents the level of tax that the company has a statutory obligation

to manage effectively. Our experience working with global companies around the world indicates that the

VAT/GST under management, regardless of the size of the company, is generally more than 30%

of non-US sales income.

The complexity of the VAT/GST supply chain — looking below the surface

In considering how to manage VAT/GST transaction flows, it is important to recognize that most

VAT/GST supply chains are highly complex, involving multiple suppliers and customers and

cross-border transactions.

The complexity of the VAT/GST supply chain increases the level of tax risk. For example, risks may

arise from the incorrect application of the tax, problems in communication between suppliers and

purchasers or a lack of supporting documentation. The whole transaction chain must be mapped and

understood if it is to be adequately controlled.

End-to-end VAT/GST: who owns the process?

In considering the management of VAT/GST issues, it is necessary to identify the relevant transactions

and the parts of the organization that have ownership of the information and the process. Table 1

outlines how an examination of fictional Company Z’s VAT/GST end to‑end process might identify

goals, areas for investigation and improvement and the functions within the company that would be

responsible for each part of the process.

Table 1: Company Z’s VAT/GST end-to-end process

Type of Goal

Actions

Functional Ownership

Strategic

Identify the VATable transactions

Business units/Tax

Determine the correct VAT treatment

Tax

Assess the risks/opportunities — what is the VAT

burden in terms of absolute cost and cash flow?

How can it be adjusted to mitigate adverse effects?

Tax

Finalize the VAT treatment/model — make business

case for alterations to current or planned model

Business units/Tax

Communicate to IT/Finance/BUs

Business units/Tax/ Finance/IT

Operational

Processing and accounting for VAT — record to report

Finance/IT

Compliances

Completing and filing the VAT returns

Finance

Audits

Finance/Tax

Single-stage consumption taxes

VAT/GST is the tax on consumption that applies most widely around the world. However, a number

of countries do still apply single-stage consumption taxes at the national, federal and municipal level,

such as the sales and use taxes levied in the US and China’s Business Tax (BT). These single-stage

taxes may apply at any stage of the supply chain, including production, importation, distribution and

retail sales. Multiple single-stage taxes may apply in some jurisdictions.

The main business drawback of single stage taxes is that they generally are not creditable or available for

offset, which means that they may add to the cost base. For goods that undergo multiple processes,

single-stage taxes may apply at multiple stages, creating a cascading effect (as taxes paid at an earlier

stage form part of the taxable base) that leads to very high effective tax rates.

The compliance burden may also be an issue in countries that levy a large number of single-rate taxes. In

the US, for example, there are more than 7,500 potential taxing jurisdictions for sales and use tax

purposes.

Customs Duties

Customs duties are taxes levied upon importation of certain goods into the customs territory of a country

to raise state revenue or protect domestic industries from competitors from abroad. In most cases,

customs duties are raised as a percentage of the customs value of the goods, but they may be levied on

the basis of other parameters, such as weight or volume.

In addition to standard customs duties, other duties as part of anti-dumping measures and countervailing

Measures may be levied on the importation of certain goods. These are intended to protect the home

market against imported products being dumped on the market or benefiting unlawful or dramatically

different subsidies abroad.

In principle, when importing goods into a country, customs declarations need to be filed on a

transactional basis for each incoming shipment and these declarations need to be validated by the

respective customs authorities. However, there is a tend toward simplifying the declaration process (e.g.,

consolidated reporting on a monthly basis) even to the point of self-reporting customs duties. And as

more customs authorities require the electronic filing of customs declarations, special automated systems

have been developed that can deal with multi country customs reporting.

In principle, the level of customs duties depends on the customs value, tariff code and the origin of the

goods being imported. In order to identify the various types of goods, specific tariff (HS) codes have

been agreed upon internationally to determine import duties (often expressed as a percentage). But the

origin of the goods is also a factor. Many countries have agreed bilateral and even multilateral free trade

agreements (FTAs) that call for reduced or zero-rate tariff duties for goods originating from a preferred

trade partner.

Furthermore, specific valuation methods have been agreed within the World Trade Organization to

properly determine the value of the goods being imported. In most cases, the transaction value (price

actually paid or payable) can be used as the basis for the customs value. As a result, any price

adjustments after the moment of importation (e.g., due to transfer pricing changes) need to be properly

reported to the customs authorities.

Customs duties represent a bottom-line cost

Customs duties — unlike VAT/GST —represent a cost for the importer of the goods. A reduction of

customs duties immediately improves the cash flow and costs of importing companies. Consequently,

various customs procedures have been designed to reduce or avoid the customs duty burden. For

instance, goods placed under a bonded warehouse regime can be stored under duty suspension and

re-exported to third countries without customs duties being due in the initial country. Economic customs

regimes such as processing under customs control and inward and outward processing relief allow

companies to reduce the duty burden of imported goods, provided certain conditions are met.

Customs supply chain optimization

An appropriate (re)design of a company’s supply chain may reduce the company’s customs duty burden,

landed costs and lead times. Supply chain optimization projects typically involve trade route

rationalization with a maximized use of FTAs and appropriate strategies to reduce customs compliance

costs. Combined with the available customs procedures, these strategies can significantly drive down the

costs of customs duties and compliance.

For example, goods with preferential origin status could be routed to destinations where preferential

Origin reliefs can be claimed and goods to be re-expedited could be stored under a customs duty

suspension regime to avoid import duties in the country where the storage facility is located

(and potentially to safeguard the preferential origin to be claimed in other countries). In this type of

arrangement, potential issues to be considered include reverse logistics and online sales, which may

represent additional challenges. Further efficiencies also may be obtained by combining a project of this

type with the introduction of automated customs systems.

Specific tax-effective supply chain models for procurement and manufacturing also may provide for

significant benefits. For example, buying commissions may be excluded from the customs value, thereby

reducing the amount of import duties to be paid. In addition, alternative valuation methods (cost plus or

resale minus) can be used by toll manufacturers and provide for additional efficiencies in an optimized

supply chain.

Reduction of customs duty burden

Various customs planning methods can be combined to reduce the duty spend by price unbundling,

where non-taxable elements (e.g., buying commission, sole distribution rights, advertising and

promotion costs) can be excluded from the customs value. Similarly, proper branding and intangible

property (IP) management may provide room to further reduce the customs value. In addition,

the "first sale for export" principle (available in both the EU and the US) allows the customs value of

goods to be based on an earlier (lower) sales price under certain conditions. Provided that certain

contractual arrangements are made in advance, volume rebates also may be used to decrease the amount

of customs duties paid.

Reduce the trapped duty burden and value leakage

Sound analysis and consideration of earlier importations may reveal that significant import duties have

Already been paid earlier in the supply chain (trapped duty), which may drive up cost of goods sold

(COGS) and reduce a company’s margins. Optimization of customs procedures and adaptation

of contracts with suppliers may provide for significant customs duty savings earlier in the supply chain,

thereby reducing purchase prices.

Customs and trade facilitation programs

On an international level, customs authorities have expressed their intention to facilitate global trade

through a secure, smooth physical trade process within the World Customs Organization’s SAFE

Framework. A key concept is the recognition of Authorized Economic Operators (AEOs) who have

Demonstrated their "trustworthiness" from a customs and trade perspective. AEO status provides for

additional customs benefits and trade facilitations. Customs authorities around the world have

developed trade facilitation programs such as the Customs Trade Partnership Against Terrorism

(C-TPAT) in the US, AEO (in the EU) and the Secure Trade Partnership (STP) in Singapore. As a

result of the mutual recognition of trade facilitation programs, goods that are shipped between territories

that mutually recognize each other’s programs are subject to little or no inspection.

Excise duties and environmental taxes

The other main classes of consumption taxes in the supply chain are excise duties on specific classes of

goods. With the broad appearance of modern VAT/GST systems in the 1970s and 1980s, many

product-related taxes were abolished. But in recent years they have once again gained importance,

mainly because they are seen as a good tool for steering consumption and influencing consumers’

behavior while significantly contributing to overall government income.

Excise duties also add to the cost base of production, as they represent a bottom-line cost and are not

creditable. In recent years, the rates for alcoholic beverages, cigarettes and hydrocarbon oils have

increased in many parts of the world. In addition, as excise duties are normally part of the VAT/GST tax

base, any increase in excise duty rates also implies an increase in VAT/GST. Especially in the case of

hydrocarbon oils and tobacco products, the revenues raised from taxes are high and the total tax burden

on fuel (mainly excise duty plus VAT/GST) often exceeds 100% of pre-tax prices.

A wide range of products are subject to excise duties in individual countries around the world (such as

chocolate, coffee and orange juice). However, the three principal product groups that are globally liable

to excise duties are alcoholic beverages, hydrocarbon oils and tobacco products. In addition, new taxes

are being introduced that seek to influence societal behavior, such as snack taxes on "unhealthy" food

(recently introduced in France, Hungary and Denmark) or carbon taxes aimed at reducing climate change

and air pollution, as in Australia.

In most cases, excise duties are raised based on the volume or value of the excisable products consumed

in a specific country. Excise duties can be raised on the importation or production of excisable goods or

when they are made available to consumers.

Reducing the excise duty cost

Excise duty rates are often very high and may represent a significant part of the price of an excisable

product. Therefore, it is important to strategically use excise duty reduction, exemption and suspension

regimes. As excise duties are typically due at the moment of consumption, companies should make sure

that the excise duty is paid only once in the country of actual consumption by using excise suspension

regimes (such as a tax warehouses). In addition, various reduced rates and even exemptions may be

available under certain circumstances.

Excise compliance burden

Non compliance with excise laws may lead to significant fines (up to 1,000%) and potential criminal

prosecution. The excise duty compliance burden and the associated risks may be alleviated by making

full use of suspension regimes (to avoid excise duty becoming due) and procedures to delay excise

payment as provided for in local legislation. In addition, simplified procedures may be established for

excise duty reporting. Finally, companies should pay particular attention to the excise guarantees

that need to be deposited, which may represent significant amounts, as some jurisdictions have

rocedures to reduce these guarantees.

Export controls

Export controls are laws and regulations designed to support national concerns and security policies.

They aim to enhance global security by preventing the proliferation of weapons of mass destruction and

related terrorist activities. Although these laws and regulations are not new to the international trade

community, the need to manage business risk in this area is growing as supply chains become more

complicated and far-reaching.

The differing export control laws and regulations that businesses encounter when trading internationally

can cause delays in meeting deadlines and contractual commitments. They also can expose businesses to

a range of risks that include monetary and criminal penalties, reputational risk, reduced share-price and

other punitive measures used by national governments.

Companies that proactively manage their compliance obligations in this area throughout their global

Supply chain operations may gain competitive advantage. The US export control regime is often

perceived as being the most restrictive and complex. US companies are leaders in high-tech

manufacturing and many global businesses are headquartered or operate in the US. Therefore, the US

rules are likely to touch the global operations of many companies, either directly or indirectly through

their extraterritorial element. Of course, the European export controls regime and its implementation in

individual member states have significant positive and negative impacts on operations.

The European export controls and their differing administration through national governments create

additional regulations for global companies to understand and comply with. Compliance failures are

often seen within businesses that create processes and procedures accounting for only one set of rules

(often, in practice, based on the US rules). Companies should analyze their operations and create

a compliance framework of expertise, knowledge, processes and procedures to enable compliant trade

from all relevant countries.

Partnering export controls and export compliance management with a company’s associated customs and

trade compliance functions, across multiple jurisdictions, not only provides a logical means of effectively

managing compliance obligations, but it also offers greater visibility throughout the end-to-end supply

chain. A more efficient and effective compliance function safeguards against the future cost of non

compliance while producing faster, more efficient transactions and delivering cost savings.

Incentives

Various incentives exist

Business incentives are measures taken by authorities around the globe to influence desired economic behavior and activity in specific regions and areas of industry. These measures are often targeted at specific activities, including:

• New investments

• Job creation, retention, training

• R&D investments and activity

• Sustainable development and green operations

Business incentives can be either statutory or discretionary and can include tax and non-tax benefits.

Program offerings differ

A wide range of activities can be impacted by incentives. Programs targeting these activities are available around the globe. Table 2 indicates the types of incentives that could be applicable to different activities in the supply chain.

Figure 2: Supply chain activities and applicable incentive types

Research and

development

Sourcing and

Supply

Production and

manufacture

Distribution

Delivery

• R&D incentives

• Hiring incentives

• Training benefits

• Property tax relief

• Tax incentives

• Other incentives

(especially customs

and trade related)

• Tax incentives

• Hiring incentives

• Property tax relief

• Green incentives

• Training benefits

• Other incentives

• Tax incentives

• Hiring incentives

• Property tax relief

• Green incentives

• Training benefits

• Other incentives

• Tax incentives

• Hiring incentives

• Property tax relief

• Training benefits

• Other incentives

How incentives fit into the supply chain framework

Although indirect taxes can increase supply chain-related costs and the risk associated with globalizing these activities, incentives provide an opportunity to offset these costs and decrease supply chain risk. Incentives parallel supply chains in two important ways that can allow companies to leverage these

programs to decrease cost and risk and to increase flexibility and responsiveness across global supply chains.

First, incentives are broadly applicable, with programs that target many aspects of business operations. Given that incentives reach across a variety of business activities, they overlap well with supply chain planning and touch many functions within a business. As a result of this overlap, incentives can provide benefit across the layers within a supply chain. By taking advantage of the opportunities on multiple levels, savings will build throughout the process and companies can effectively reduce costs.

Second, in addition to being applicable across a broad range of supply chain activities, incentives are vital to a government’s development strategy. Therefore, it is likely that incentives that apply to a company’s operations will be available, regardless of the geographic footprint of its supply chain.

This availability is the result of recent trends in incentive development and the prevalence of incentives around the world. Despite the diversity of government agendas and policy, many activities — hiring and training, R&D, customs and trade, sustainability — that represent critical components of supply chains

are the common targets of incentive programs around the globe.

The combination of their broad operational applicability and geographic prevalence makes pursuing incentives essential for effective and efficient cost reduction within supply chains. Taking advantage of

the savings available as a result of these programs is an opportunity available to almost all players. Incentive diversity and availability mean that a wide variety of companies can use an incentives-based

cost reduction strategy. Such a strategy will conserve resources so the responsiveness and flexibility of global supply chains can be improved. The case study to follow bears out the broad applicability of an

incentives-based cost reduction scheme by showing its effectiveness for a global clinical research organization.

What companies can do to leverage incentives in their supply chains

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

1 Select a core incentives team

Because of the diversity of incentive programs discussed above, collaboration among the various stakeholders in a supply chain is imperative. Not only will members of different groups within

a company have insight into different potential incentive applications, they will identify any potential hurdles early in the process. For example, the real estate team, after conferring with the tax department, may learn that a cash grant for a new investment may be more valuable than a tax holiday.

Or government relations may have a valid concern about a particular incentive. Finally, the R&D team may want to consult with HR and IT to make sure that researchers’ time can be tracked on a project basis in order to comply with the reporting requirements necessary for cost reimbursements.

2 Match supply chain spend with available incentives

Once an internal incentives management team has been created, it will be important for the team to apply incentive value across the supply chain and the organization as a whole. Incentives are usually tied to investment or expenditure. Consequently, an important first step in the incentives management process is

a review of all supply chain-related spend by activity, jurisdiction and time horizon. This review will allow the different categories of spend to be paired with the incentive programs available for those

activities in the jurisdictions where they are occurring. Because each jurisdiction will have its own incentives, it is important for the review to consider jurisdictional as well as activity-based criteria. A leading practice is to consider the full suite of incentives in the site selection process, which in some cases may mean simply adjusting the cost model already in place. For discretionary incentives, this is also the ideal time to negotiate the package.

3 Review of alternative supply chain jurisdictions for potential further cost reductions

After the process of managing incentives is in place, it will be valuable to periodically review both the programs currently being used and the potential for increased savings under newly enacted programs. This review also could result in reduced costs if activities were to be moved to another jurisdiction with

more lucrative incentives. Of course, not all locations will be suitable alternatives for some supply chain activities, but those jurisdictions that could provide an effective substitute for a given activity may offer opportunities for additional savings and reduced risk via incentives.

Overall, an effective internal incentives management process will be led by stakeholders from all invested business functions. The core team will regularly review all the components of supply chain spend by activity, jurisdiction and time horizon in order to match incentives to eligible activities and it will monitor new incentive programs in countries representing potential alternative destinations for supply chain activity in order to stay abreast of the most valuable savings opportunities.

Meeting indirect tax challenges in the supply chain

Effective management of indirect taxes is essential to support growth and reduce costs and risk. If these taxes are left out of the picture, the expected benefits of a supply chain transformation may not be fully maximized or, in extreme cases, may not be realized at all. For example, making full use of available customs regimes can reduce production costs and speed delivery times. On the other hand, moving products cross border without the correct documents and export licenses may result in costly delays and even seizure of the goods.

There are seven common supply chain challenges that global companies face as they move into new

markets and operate more effectively and sustainably. There is a need to outline leading practices to reduce risks and boost performance in VAT/GST, customs and international trade, excise duties and

environmental taxes, export controls and incentives. Although each of these areas presents different issues and opportunities, some common themes emerge for adopting an effective management framework for indirect taxes and incentives including:

Identify and quantify the indirect taxes and incentives your company currently pays and receives

Identify and quantify areas of current and future risk and opportunity, including the costs of related compliance obligations

Assign clear responsibilities for managing your organization’s indirect tax performance and incentives "assets"

Centralize management of indirect taxes and incentives to mirror your business structure and capitalize on knowledge and experience

Standardize processes to spread leading practices throughout the organization

Outsource and co-source compliance and reporting functions that rely heavily on specialist or local knowledge

Involve all the parts of the organization that have a stake in managing and improving your business performance, such as tax, finance, operations, logistics, HR, real estate and so on

Measure the management of indirect taxes and incentives by adopting key performance indicators related to your supply chain goals