Tax Efficient Supply Chain Management: TESCM Strategies

There are financial tools like Economic Value Added (EVA) which shows us tax management as one of the key business levers. Tax Efficient Supply Chain Management (TESCM) shows us the potential of using tax and supply chain management in an integrated way. The result of that approach is getting important effective tax saving (effective tax is the tax after tax exemptions, tax refunds and so on) AND improving supply chain efficiencies at the same time. So let’s go to review some of the main TESCM strategies that can bring massive savings to our companies and support turnaround processes:

Centralized assets and operations in low-tax countries/states by putting in place a regional/global Tax Efficient Supply Chain Management (TESCM) strategy

In Europe for instance, Ireland and Switzerland used to be the preferred locations. Those countries to attract global or Pan-European headquarters are offering important corporate tax savings at the same time that offer access to the huge European Union market (EU has free movement of capitals, people and products). Thus, we have well-known companies like Unilever, Kraft Foods or Johnson Wax that have moved their regional headquarters to Switzerland. Those are small countries which tax strategy is attracting large global or regional headquarters. There are other benefits like English language for Anglo-Saxon firms in Ireland, or high life quality standard in Switzerland which could be an incentive to attract and retain the best staff. Moreover, Switzerland is in the center of Europe and connected by plane in less than three hours with any European country what can reduce traveling expenses and improve productivity.

Additional to tax saving the huge potential of TESCM is materializing supply chain efficiencies. Therefore, in these specific TESCM strategy firms are finally creating a “real” global or regional SCM strategy; for instance creating a European procurement team that rather than optimize purchases at country level, they are leveraging the regional/global purchasing power of the corporation.

However, the most important question likely is how do we get important tax effective savings with this strategy? The answer is moving activities (planning, procurement, call-centers, etc.), assets (stock, facilities) and risks (risk of: receivables, stock, purchase and manufacturing) from other countries to headquarter country which “allow us” to move transfer price to headquarter. So we are transferring benefits from other countries to headquarter country where the effective tax is much lower.

We have to mention that this very attractive TESCM strategy has some risks that need probably be mitigated with support of experienced tax consultancy firms. In the last years many large corporations have moved headquarters to countries like Switzerland, and any “political and economic” movement is expected from EU to avoid this transfer of countries’ income and qualified staff to countries with much less taxes. Thus in the future tax corporation homogenization should be expected in the EU. In the short-term the governments that have lost important incomes from those multinational are checking taxes paid in the last years to disincentive that practice and trying to recover part of the income likely with fines from tax inspections.

Tax authorities are going to find out if this price transfer is legal or not. Thus, they used to request e-mails, purchase order, sales orders and so on in order to demonstrate that the activity was not transferred to other country and profits cannot transfer too. There are firms that implement the tax saving but they “forget” to properly implement that transfer of activities, assets and risks. Be aware that implementing this strategy in large multinational is expensive and take “some” time.

When we have to work in a subsidiary turnaround, first thing that we have to investigate is any transfer price issue. That can be the main cause of subsidiary failing.

Outsourcing services

One of the advantages of outsourcing is that the company that performs the service used to have lower salaries according to that specific industry (logistics service providers, re-packers, and so on). In that case the social charges/taxes are lower because salaries are lower. Moreover, outsourcing activities (e.g. call centers) to other countries can bring even further salary reduction and even additional saving because they could pay fewer corporate taxes in those countries. So this TESCM strategy can mean that we are reducing taxes at the same time that we take advantage of outsourcing (reduce costs, avoid investments, gain flexibility, reduce complexity, and so on). I have to stress that lower salaries should be constrained by countries’ laws regarding minimum and fair salaries, and even company policy regarding fair salaries.

Realizing of TESCM potential could make us outsource tax services with specialized tax consultancy firms which could help us to accelerate the process to detect and materialize opportunities, and to avoid risks. In this case we would be outsourcing services to firms that will likely pay for salaries higher than in our industry, but the expertise and cost benefit analysis recommend we should outsource these services.

Bounded warehouses

This type of warehouses allows companies to build stocks close to the selling market, and delay the payment of taxes (import taxes, and VAT mainly) to the moment of the sales. So this specific strategy is much more focus on improving cash-flow massively, then this is affecting the profit and loss account reducing our borrowing costs. We must be aware that bounded warehouses required of processes much more robust to guarantee that we are not having additional risks related to taxes. The complexity and risk of having a bounded warehouse used to push us to have a centralized bounded warehouse which means having the benefits of a centralized warehouse. In this article we are not going to analyze the advantage and disadvantages of centralized warehouse, but some of the advantages of centralized warehouses used to be: higher control, flexibility, responsiveness, and even less cost coming from higher efficiency. We have to mention that diseconomies of scale is likely the most important constraint for a centralized warehouse that can make us create a new warehouse. The other could be networking optimization design.

Using alternative low cost ports located in low taxes states

Most companies used the biggest, busiest, and most common ports which used to be the highest port taxes and used to be located in states with highest taxes too. So there is an opportunity to use “second level ports” with fewer taxes and not necessarily worse service. That is part of the job of supply chain professionals, synchronizing ocean freight with other supply chain areas to get the economic benefits of those “second level ports” without affecting in the service level (ocean freight frequency). Moreover, it must mention that those smaller ports used to have a good local service level because they are less busy and more customer focused.

Tax and Supply Chain Management areas can bring important benefits to our firms, if those are managed properly. We can be losing TESCM opportunities, if we do not nurture of internal/external resources those areas and support collaboration initiatives to look for new saving. Furthermore, if those areas look proactively for new saving, it will probably bring other saving just tax related (there is not any SCM efficiency) like reduce import cost because there is a new product classification according to customs, new tax reductions for specific industrial product in some underdeveloped countries, and so on.