One of the areas that doesn’t get enough attention in supply chain is taxation. Whether its because we think that taxes are unavoidable or we don’t know how to get rebates or avoid them in the first place, they are too often seen as a cost of business. While its true that taxes are more certain than death (as you don’t know when you’ll die but you know you’ll get taxed until you do, and then when you do), it’s also true that they can be minimized.
Last year, Supply & Demand Chain ran a great pair of articles on the tax efficient supply chain, that I covered in this post on the tax efficient supply chain. Since then, I haven’t seen much, until this article on how to benefit when the supply chain meets tax which presented ten characteristics of a tax efficient supply chain structure and ten leading practices of companies with tax efficient supply chains.
The practices, in particular, are worth pointing out:
- Implement limited risk structures following a business change.
Having to make big transfers to cover losses can incur “transfer” taxes related to incoming revenue. Furthermore, if the unit or division the money is coming from is separate or in another country and profitable, you might still have to pay taxes on the “profits” in that business, division, or country and get taxed twice.
- Align the tax and transfer pricing structure with the locus of strategic decision making.
If your operations aren’t in synch, the corrections you have to make after the fact could have tax implications.
- Focus resources on primary risks and view Advance Pricing Agreements (APAs) as key tools for minimizing the impact of tax audits.
Good documentation is the key to a successful audit (as long as you have been truthful on your taxes).
- Document the business case for restructuring when the decision is being made.
Be sure to detail compensation or indemnification payments to restructured entities, or risk being taxed and fined after the fact.
- Consider applying for an APA in one or more countries.
This will protect you from double taxation in two or more tax jurisdictions.
- Be sure your documentation includes the responsibility profiles of limited risk entities.
You don’t want your efforts to look like a tax evasion scheme. While it’s perfectly legal to take steps to minimize your tax burden, attempting to alleviate your fiscal responsibilities completely is a different story.
- Perform an annual review.
Insure that you are documenting revenue and paying taxes consistent with all agreements and laws that are in place. Document the findings. If you ever need to show “reasonable care”, this is how you’ll do it.
- Establish procedures for tax authority audits.
Be prepared and responsible. It will help.
- Keep informed of tax developments in each operating country.
Being proactive will save you a lot more than if you are reactive.
- Talk to Peers and Experts.
Talk with companies that have implemented Tax Efficient Supply Chains and expert consultancies (and global tax firms) that have helped.