Incorporating taxes and duties in supply chain design

The supply chain is core to how your business is run and its costs, profit, and growth. With the increasing globalisation of business, variable taxes and duties across trading borders have a huge impact on overall cost, supplier sourcing, manufacturing strategies and distribution network structure.

However, the inherently complex nature of tax laws, particularly in countries such as Brazil, has obstructed many businesses from including taxes and duties in supply chain design practices. With a global average tax rate of around over 20 per cent, the ramifications of this could be staggering — millions of pounds a year may be wasted as a result, but there is also potential to leverage tax and duty optimisation for lowest total cost and to elevate competitive advantage.

Why consider taxes and duties in supply chain design?

Balance: Successful businesses must find the right balance between supply chain costs and tax/duty obligations.

Lost Savings: Risk of missing out on potential savings by not considering regional customs regime or trade concessions.

Competitiveness: Reduced price/cost competitiveness by not including the use of free trade agreements.

Planning: Not reacting fast enough to complicated and often dynamic rules and regulations can have dramatic financial/operational consequences.

Long-term Analysis: Identifying the impact of taxes and duties in future strategic moves, such as mergers and acquisitions and supply chain capacity planning, can be a vital component in building competitive advantage and global positioning.

Financial Uniformity: Clearly communicating tax and duty-related challenges and opportunities internally is imperative in order to most effectively design and implement supply chain changes. While locally-focused tax calculations may currently be taking place, global optimisation with both tax and logistics considerations, aligned with P&L standards, can be a more compelling proposal to stakeholders.

How to use modelling technology for tax optimisation

By including tax costs and tax credits as well as operational/logistics costs in supply chain design, global businesses can minimise total costs. Modelling technology can be used to:

  • Optimise supply chain with holistic view of duties and taxes and perform what-if scenario testing on regulation changes, transfer prices, etc
  • Re-design optimal supply chain strategy based on regulation changes
  • Quantify benefits from free trade zones and regional trade concessions
  • Measure impact from various taxes such as:
  • COFIN/PIS/IPI/ISS/IRPJ/IPTU/ICMS (Brazil)
  • Value-added tax (VAT)
  • State-to-state tax
  • Corporate tax
  • Inventory tax

Dealing with complex tax structures

Both India and Brazil have complex tax structures that leverage taxes on movements of goods between states while also providing credits back to companies for movements into a given facility. These systems of Credits and Debits create significant incentives that should be considered in Supply Chain design. Design without tax and duty considerations can lead to inefficiencies and lost cost savings opportunities. Companies often form multiple corporate entities in countries with complex tax structures to minimise their tax burden.

India’s planned shift from VAT and CST (Central Sales Tax) to a more consistent Good and Services Tax (GST) regime means that supply chains need to be designed to best manage the transition. The new system should be easier for companies to track and manage but may leads to higher costs. Given the existing tax structure incentives distributed corporate entities for tax avoidance, the new system should allow for more centralisation of facilities. Effective transition plans will be needed to determine where consolidation should occur and how aggressive the timing of such changes should be.

Getting started with taxes and duties optimisation

In order to be successful and establish quick wins, start small and build your way up to more complex modelling to answer wider-scope supply chain questions. As you go, evaluate the resulting benefits and how to refine your approach with different technologies and approaches to best fit your business strategy.

Alignment across functional areas key to successful tax modelling in supply chain design

Complex tax and duties optimisation within the supply chain design practice requires tight alignment across several areas of the business. While the fiscal team may not typically be involved in supply chain modelling, when incorporating complex tax and duties calculations with annual regulatory changes, it is imperative to involve the financial team at the outset of the project. This team may also review and approve site selection, open/close and capital expenditure proposals recommended by your models.

When evaluating supply chain changes on a longer planning time horizon, your trade-off analysis should also be aligned with corporate planning and strategy. This enables you to capture all the pieces of information required for supply chain designs which are accurate and feasible to implement in the business. A task team that includes fiscal, finance, supply chain, and design capabilities can be a recipe for success when moving to supply chain design including tax modelling for more robust response and competitiveness.

Austin Chrzanowski, senior supply chain consultant at Llamasoft