Transaction tax management: a seat at the supply chain table.

• Author: Rees, Neil
• Position: Purchasing/Procurement

The evolution of transaction tax management has been rapid. In the early 1990s, transaction tax specialists were mostly the domain of the big accounting firms. Now any self-respecting multinational wouldn't be seen without at least one such international specialist.

A second evolution is occurring. Tax departments are benchmarking their headcount and services to be best-in-class. There is more focus on "value creation," and on how much time is spent on compliance versus more value-added activities, such as planning and business advising. Within transaction tax, such opportunity exists in the world of supply chain management--a world of logistics, global sourcing, customs duties, "incoterms" (standard trade definitions most commonly used in international contracts) and free trade agreements.

Rarely are "transaction tax" and "supply chain management" mentioned in the same sentence. Yet there are many dependencies where the tax department and the supply chain team need to be working together:

How Transaction Tax Impacts The Supply Chain

1. Procurement. Any procurement team performing global sourcing should be focused on "landed" cost--the true cost of the commodity including freight costs, customs duties, brokerage costs, etc. The foreign supplier may well be 20 percent cheaper than the local supplier, but is that still the case when calculating the full costs of getting it to your door? Any procurement team that is not considering transaction taxes in its landed costs could be making an expensive mistake as normally recoverable value-added tax (VAT) and goods and services tax (GST) can sometimes become an expense that should be factored into landed cost.

2. International Logistics. Drop shipments, multinational contracts and triangulation have long been the staple diet of the transaction tax specialist, but too often this is focused on the outbound supply chain to the customer, at the expense of in-bound supply chain or manufacturing models. If the logistics team is tinkering with the supply chain, trying a few new routings, looking at direct shipments, etc., the transaction tax specialist needs to know about it.

3. Incoterms. Coming in an alphabet stew of abbreviations--such as EXW, FCP, DDU and DDP--spelled out in global protocols set forth by the International Chamber of Commerce (ICC), these govern the buyer's and seller's responsibilities. These are normally well understood by the transaction tax specialist because some can impact the...