Rethink - Transfer Pricing | Adapting supply chains - More than moving functions

Over the past 16 months, we have heard much about supply chain upheaval due to COVID-19 and other disruptions. Adapting and optimising global supply chains in light of these challenges is integral to global business’s ability to recover from COVID-19 and return to pre-pandemic output levels. But what are the tax and other implications of adapting and optimising supply chains?

COVID-19 brought on varying and significant supply chain shocks which included:

  • Demand volatility across multiple industries;
  • Supply disruptions for products ranging from raw materials such as lumber through to high-tech components such as semiconductors and microchips;
  • Workforce dispersion as workers continue to work remotely and companies reevaluate the importance of location for their personnel; and,
  • Government led closures and restrictions which impacted companies’ ability to operate at capacity but also to plan and make investments.

Each of these system shocks require one or more supply chain responses for businesses to continue to operate successfully. As companies consider the appropriate responses each of the respective changes to the supply chains will have significant international tax, transfer pricing, indirect tax, business process, personnel and real estate strategy implications. In order to illustrate this complexity we have chosen two examples of actions that companies have taken to adapt to various supply chain shocks as well as some of the considerations that should be taken into account when making these supply chain changes:

  • Example 1: Expansion or contraction of manufacturing locations. These changes may require companies to revisit: 1) their international tax structures as legal entities may be altered and their tax treatment changed; 2) their transfer pricing policies to address the relationships between costs and revenue, new entity characterisations as well as whether there are any exit tax costs that need to be considered as companies consider moving functions, risk and assets; 3) indirect tax assessments as both Customs and VAT may be impacted depending on the location and types of goods being manufactured in the company’s revised structure; 4) the status of their real estate incentives and whether there are opportunities to take advantage of local and regional incentives to lower the cost of moving or operating; and, 5) their business processes as their logistics and warehousing may be focused around a certain number of products or locations that serve as hubs, which may have now changed as a result of an adjusted operating footprint.
  • Example 2: Changes to procurement departments/functions. As businesses seek new means by which to source components for their products in order to meet growing demand they also need to consider: 1) whether their existing procurement structure contains an appropriate level of substance in order to meet certain domestic tax and international tax requirements; 2) if their transfer pricing policies align with the value driven by the new procurement organisation e.g. procurement savings vs. procurement service fees; 3) indirect tax exposure if the company is now sourcing from different locations which may drive new VAT and Customs costs; 4) whether or not the new procurement locations have the right talent to procure materials from new countries/regions; and, 5) if there is duplication in the types of goods that are being sourced and if business process efficiencies can be gained by streamlining the types of products sourced.

As business seeks to respond to these supply chain shocks they may miss some of the additional tax, real estate and business process issues that may arise as they adapt their supply chains to the changing times. These omissions could lead to a fundamental disconnect between business planning and tax planning which can result in distortions, risk, and missed opportunities.

BDO’s Global Value Chain practice is uniquely positioned to help companies address these issues by offering integrated solutions across the areas of tax, management consulting and real estate advisory. Our experts help businesses reimagine their global supply chain footprint to be more efficient, reduce costs and lower risks throughout the network.

Ivo Tankov
United States