Advantages of tax-aligning the supply chain: powerful results can be achieved when international tax planning efforts are aligned with initiatives to improve supply chain operations.

• Author: Emmer, Maurice
• Position: INTERNATIONAL TAX

The supply chain is the coordinated system of people, processes and technology that an organization uses to plan for and carry out the manufacturing and/or distribution of goods. Because the supply chain can easily account for 75 percent of an organization's total spending, even relatively small increases in efficiency can have a huge impact on profitability.

Indeed, two-thirds of respondents to an informal poll of international tax professionals attending a recent Deloitte Tax LLP webcast said they were currently implementing or considering supply chain improvements at their organizations.

Although most enterprises strive to involve their tax departments when planning or implementing operational strategies--including two-thirds in the same Deloitte Tax poll--they all too frequently launch significant supply chain projects without considering the tax implications.

For example, one increasingly common supply chain initiative is to centralize global procurement to achieve economies of scale, eliminate redundant operating expenses and perform more strategic sourcing. Successful strategic sourcing initiatives reduce costs of inputs to productions, reducing cost of goods sold (COGS) and increasing operating profit.

If tax planning does not occur in connection with such an initiative, the resulting incremental profits will be taxed at the marginal tax rates of the various operating units that benefit from cost reduction.

It is not uncommon for income taxes to consume 30 percent to 40 percent of those incremental profits. As such, such a supply chain initiative is only 60 percent to 70 percent effective. However, if tax planning is made an integral part of the initiative, then a significant part of the incremental profits can be realized in a low-tax jurisdiction, thus increasing the proportion of the incremental profits that remain with the enterprise.

For these reasons, a strategy called tax aligning the supply chain (TASC) is advantageous. In addition to helping companies protect the increased profits and cash flows by supply chain enhancements from excessive income taxation, TASC aims to help organizations sustain a favorable effective worldwide rate. It's apparent that multinationals seeking to enhance profitability through tightening their supply chains should carefully plan any changes with tax considerations in mind.

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