Supply and Demand Chain Executive recently ran a pair of articles on The Tax Efficient Supply Chian (I and II) by Giles Sutton of Grant Thornton LLP that pointed out that most companies overlook function-based tax planning where the supply chain is involved. Considering that tax reductions, or even tax payment delays in Free Trade Zones can save a company millions and millions of dollars, and free up millions more in working capital, tax considerations should play a major role in your supply chain, and in your supply chain finance, efforts.
When you consider that tax-planning affects both supply chain steps (including supply, distribution, retail channels, and customer delivery) and supply chain management processes (including procurement, EDI, merchandising, financing, branding, and asset management) and that it applies both above-the-line (taxes that impact operating income) and below-the-line (taxes that impact the income base), it has far reaching implications. Furthermore, as the author points out, tax issues permeate every aspect of identifying, acquiring, importing, transporting, distributing and selling goods and tax planning can impact almost every aspect of the supply chain. This means that tax savings can be almost anywhere. Some of the possibilities that the author points out are the following:
Ownership of the transaction is key as it allows the taxpayer to determine the subject matter, value of each component, and the appropriate jurisdiction, because the right balance can minimize tax.
- in many states, intangible assets are not subject to property tax — thus, including a warranty cost in a capitalized asset unnecessarily increases a company’s property tax base
- in many states, electronically downloaded software is not subject to sales tax
- disconnecting volume or contract inducement payments from the purchase of the underlying property can cause sales or property taxes to be overstated
- appropriate planning can often reduce customs and duties
- Brand Management
Brand management also has tax implications.
- the determination of where branding occurs in the supply chain, and thus where value is added, determines the situs of taxability and the value of goods for import, export, and tax purposes
- the ability to license and protect IP associated with the brand often impacts the jurisdiction of income taxation
- the situs of where IP is held impacts the tax costs of dispositions
- Merchandising and Marketing
Critical in retail operations, they carry their own tax implications
- site selection determines property tax
- capitalization of store design costs have tax implications
Finance structuring can have significant tax implications.
- the capital structure of a legal entity can impact its franchise tax profile
- internal leverage can reduce state income taxes in some jurisdictions
- Customer Relationship Management
There are tax implications in building an infrastructure to compile and store customer information
- there are state income tax implications wherever such data is stored and maintained
- an ability to license and protect IP impacts the jurisdiction of income taxation
- capitalization of CRM software has property tax implications
- Distribution of Asset Management
Distribution management is more than just minimizing logistics costs.
- an incorrect valuation of inventory can lead to higher taxes
- some jurisdictions have sales tax exemptions for transportation equipment in inter-state commerce
- distribution activities that are not separated into separate legal entities can expose a company’s major profit centers to unnecessary multi-state income taxation
- the employee-intensive nature can lead to process-based payroll tax incompliance and / or unnecessary over-payments
- state income tax savings can often be found on international distribution assets
- inefficiently designed gift-card programs can cause unnecessary escheatment of funds
Furthermore, this might just be the tip of the iceberg in tax savings opportunities available to your supply-chain based business. (I highly recommend you read both of the articles. They are highly informative on the issue.) Especially when you consider the numerous benefits of tax-efficient procurement, which include:
- prevention of incorrect or duplicative taxation
- matching subsequent rebates or discounts with original purchases to reduce the overall taxable purchase price
- structuring the transaction to fit within a statutory or regulatory exemption
- unbundling taxable items from non-taxable items
In addition, tax-efficient procurement will:
- improve the sales tax audit trail and reduce the time required to respond to audits
- allow for more efficient refund claims when errors have been made
- provide greater certainty regarding tax requirements
So what can you do to create a competitive advantage? The author recommends that you start with inter-departmental coordination in a holistic approach. Tax planning is most effective when your tax planners know in advance what each of the operating functions are planning to do, and what options they are considering.