Description
In this report, Managing indirect taxes in the supply chain: supporting growth and reducing cost and risk we look at the indirect tax supply chain issues that multinationals face when operating in a complex, changing world. We also examine how they tackle these issues in practice, drawing on some of the lessons they have learned and the "leading practices" they have developed.
Managing indirect taxes
in the supply chain
Supporting growth and reducing cost and risk
Welcome
Globalization is changing
how we do business in every
industry and in every part of
the world. Global companies
are rapidly transforming
their supply chains to go
wherever necessary to reduce
costs, launch products and
enter lucrative new markets.
Operating in this complex
global environment presents a
range of challenges for indirect
taxes such as value added
tax (VAT), goods and services
tax (GST), customs and
excise duties, environmental
duties, grants and incentives.
Confronting those challenges
and fnding effective solutions
will continue to be crucial
as the business landscape
continues to change.
In this report, Managing indirect taxes in the supply chain: supporting growth and
reducing cost and risk we look at the indirect tax supply chain issues that multinationals
face when operating in a complex, changing world. We also examine how they tackle
these issues in practice, drawing on some of the lessons they have learned and the
“leading practices” they have developed.
This report is primarily aimed at the people responsible for tax and fnancial reporting
in multinational organizations. But we hope tax and fnancial executives will also use it
to start, and contribute to, wider discussions throughout the organization about how
best to manage the global supply chain. Our comments and insights are chiefy based
on the experience of our global networks of Indirect Tax and Incentives professionals
and on in-depth interviews conducted with in-house tax executives at a number of global
companies (operating in more than 30 countries worldwide).
We hope you fnd this report interesting and the insights and examples provided useful
information for your business. We would welcome the opportunity to discuss these
topics with you in more detail. If you would like to explore how we may assist you to
improve the management of indirect taxes for your multinational organization, please
contact one of the Indirect Tax leaders listed at the end of this report or your usual
Ernst & Young Indirect Tax contact.
Philip Robinson
Global Director — Indirect Tax
+ 41 58 289 3197
[email protected]
Contents
Executive summary 2
Part I
The changing supply chain 5
The shifting patterns of global trade 6
Supply chain reorganizations 8
Part II
Indirect taxes in the supply chain 13
Global supply chains increase indirect tax risk 14
Indirect taxes — a growing source of global risk 16
VAT/GST 18
Single-stage consumption taxes 22
Customs duties 24
Excise duties and environmental taxes 28
Export controls 30
Incentives 32
Part III
Meeting indirect tax challenges in the supply chain 41
Managing indirect taxes to improve margins 44
Managing indirect taxes to support sustainability 48
Managing indirect taxes to support growth in new markets 50
Contacts 54
1
Executive
summary
What we are seeing around the world
In recent years, a combination of world events, the global
economic crisis and rapid advances in technology have wrought
radical changes in international trade. Few global companies
today do business in the same way or in the same places as they
did even fve years ago. They are extending their reach into
new markets and seeking to thrive in developed economies by
operating more effectively and effciently. These developments
are having profound effects on global supply chains —
changing how and where materials and products are sourced,
manufactured, distributed and sold.
Indirect taxes — such as VAT/GST, customs and excise duties —
are typically based on trade fows and transactions, not on
profts or income. As such, they are inextricably linked to
supply chain activities. Changes in the ways companies are
doing business are having a profound impact on these taxes.
Equally, changes in these taxes may have a profound effect
on companies’ supply chains, infuencing where activities are
carried out, the cost of fnished products and delivery routes
and timing. Increasingly, companies recognize that effective
management of indirect taxes, grants and incentives is essential
to support growth and reduce the costs and risks of doing
business internationally.
The changing supply chain
World trade patterns are changing
At the start of the 1990s, global trade was dominated by the
developed nations; by 2010, the advanced economies accounted
for a little more than 60% of global merchandise exports. New
markets are opening, companies are exporting to more countries
than ever before and trade routes are changing. China is now the
biggest trading partner for Australia, Japan, South Korea, India,
Russia and South Africa and is increasing its share of trade with
Europe and the US. As the current emerging economies (such as
Brazil, Russia, India and China) grow and mature, new developing
economies are likely to emerge (such as Vietnam and Cambodia).
Supply chains are transforming
In response to these changing patterns in global trade,
companies are rapidly transforming their supply chains to go
wherever necessary to support growth and reduce costs and
risks. For many companies, supply chain activities — such as
product engineering, sourcing, manufacturing and logistics —
are now widely dispersed around the world. As activities are
outsourced, centralized and streamlined to gain effciencies and
maximize scarce resources, corporate structures and functions
are also being transformed.
Indirect taxes in the supply chain
Changing global supply chains challenge indirect taxes
Changes in world trade and in supply chain models present
challenges for indirect taxes (including taxes on consumption
such as VAT/GST and sales taxes, customs duties and
environmental taxes, as well as grants and incentives) and
excise duties. Because supply chain transformations are
intended to obtain operational and fnancial benefts, indirect
tax considerations may not be at the forefront of the decision —
despite the fact that indirect tax treatment of transactions,
the company’s compliance obligations and the customs regimes
and incentives that are available may be seriously different
as a result of any change.
Changing indirect taxes challenge global supply chains
Governments around the world are increasingly relying on
indirect taxes to bolster revenues and fund tax reforms in other
areas. Global companies need to be aware of the main trends
in indirect taxation and their impact not only on supply chain
transformations but also on their existing supply chains.
Broadly, recent changes include: increasing tax rates for
VAT/GST and excise taxes; the adoption of new taxes as
emerging markets introduce VAT/GST and developed markets
introduce new excise and “green” taxes to infuence consumer
behavior and protect the environment; a reduction in customs
duties through new Free Trade and Preferential Trade
2 Managing indirect taxes in the supply chain
agreements; and an increasing range of tax incentives and
grants aimed at stimulating job creation, particularly higher-
value, high-wage activities and non polluting industries.
Companies should also be aware of the growing emphasis by
tax authorities on full compliance with indirect tax obligations.
Increasingly, they are turning to advance technologies for
reporting obligations, to collect information and to audit
companies’ activities. Although a growing number of countries
are imposing requirements on companies to submit electronic
data, there is still little harmonization of indirect tax reporting
requirements in different jurisdictions, adding to global
companies’ compliance obligations and the risk of making errors.
Meeting indirect tax challenges in the supply
chain
Effective management of indirect taxes is essential to support
growth and reduce costs and risk. If these taxes are left
out of the picture, the expected benefts of a supply chain
transformation may not be fully maximized or, in extreme
cases, may not be realized at all. For example, making full use
of available customs regimes can reduce production costs and
speed delivery times. On the other hand, moving products cross-
border without the correct documents and export licenses may
result in costly delays and even seizure of the goods.
In Part III of this report, we look at seven common supply chain
challenges that global companies face as they move into new
markets and operate more effectively and sustainably. We
outline leading practices to reduce risks and boost performance
in VAT/GST, customs and international trade, excise duties and
environmental taxes, export controls and incentives. Although each
of these areas present different issues and opportunities, some
common themes emerge for adopting an effective management
framework for indirect taxes and incentives including:
• Identify and quantify the indirect taxes and incentives your
company currently pays and receives
• Identify and quantify areas of current and future risk
and opportunity, including the costs of related compliance
obligations
• Assign clear responsibilities for managing your organization’s
indirect tax performance and incentives “assets”
• Centralize management of indirect taxes and incentives to
mirror your business structure and capitalize on knowledge
and experience
• Standardize processes to spread leading practices throughout
the organization
• Outsource and co-source compliance and reporting functions
that rely heavily on specialist or local knowledge
• Involve all the parts of the organization that have a stake in
managing and improving your business performance, such as
tax, fnance, operations, logistics, HR, real estate and so on
• Measure your management of indirect taxes and incentives
by adopting key performance indicators related to your
supply chain goals
3 Supporting growth and reducing cost and risk
4
Supply chains are coming under intense
scrutiny as global companies look to thrive
and grow in a rapidly changing and highly
competitive world. Advances in technology
are allowing new goods and services to be
designed, manufactured and delivered in
new ways. New markets are opening up
and old certainties are being challenged.
Change is rapid and inevitable.
Part I
The changing
supply chain
5 Managing indirect taxes in the supply chain
A
s new economic powerhouses
have emerged in recent years,
they have changed the patterns
of trade. At the start of the 1990s, global
trade was dominated by the developed
nations, which accounted for around 80%
of merchandise exports. But that share
has declined markedly during the past
two decades and the recent fnancial
crisis and global recession accelerated the
downward trend. By 2010, the advanced
economies accounted for a little more
than 60% of global merchandise exports
and we estimate that the continuing shift
toward global outsourcing of production
and regional supply chains will further
reduce the developed markets’ share
of global merchandise exports to
approximately 55% by 2020.
1
Companies expect to export to more
markets during the next few years.
In a recent Ernst & Young survey,
30% of corporate executives responded
that they anticipate exporting fnished
products to more than 20 markets
in fve years.
The continuing economic
growth of the East
A decade ago, China wasn’t the top trading
partner for even one of the Group of 20
(G20) economies. Today, it’s the biggest
trading partner for six (Australia, Japan,
South Korea, India, Russia and South
Africa) and it has replaced the US as the
top export market for a seventh (Brazil)
and risen in importance for the rest.
Asia will continue to be the most dynamic
region for trade and the fastest growth
of merchandise exports will occur within
the region itself. China and India will lead
this expansion and the commerce between
these two economies is anticipated to
grow faster than any other trade route.
Higher prices for primary commodities
such as oil and the growth of trade in
Asia have helped to boost the combined
share of the emerging economies in world
exports to 45% in 2010, its highest ever.
Already having moved toward production
of sophisticated electronics and industrial
supplies and away from their former
reliance on textiles and other light
manufacturing, China, India and other
emerging economies will further diversify
their manufacturing bases.
Gains in the West
The proliferation of regional supply chains
is a trend that reinforces the importance
of both China and India within the overall
pattern of global trade. However, it would
be deceptive to focus merely on growth
rates. The sheer magnitude of existing
trade in advanced economies means
that even a modest growth rate during
the coming decade will translate into
huge volumes of new trade. While the US
share of world exports fell signifcantly
over the past decade, this trend will
likely be reversed during the next 10
years because the economic dynamism
of Asia is a huge market opportunity for
exporters in developed nations.
The shifting patterns
of global trade
1 Trading Places: the emergence of new patterns of international trade, Ernst & Young, 2011
6 Managing indirect taxes in the supply chain
Part I The changing supply chain
“ In the past, we’ve been looking at planning very much on a country-by-
country basis. But now we’re also knitting that together.
“ For example, we know we have agreed to certain processes with the
government in country A, we have export credits in country B and an
incentive for a factory in country C. Instead of looking at those things
individually you can also look at that holistically and say ‘If you add A, B,
C together and if we change the fow like this or if we lobby government
B for a free trade agreement with country C, that would reduce our cost
signifcantly.’ You see a transformation from local-to-local supply chains
to global supply chains.
“ It’s no longer the case that a factory only serves the surrounding countries
or just the local country. A factory may well be going to supply its goods to
the entire world and that changes the dynamic and that also then changes
how to look at things.”
— Head of transfer pricing at a global consumer products company
7 Supporting growth and reducing cost and risk
Part I The changing supply chain
I
n response to these changing patterns
in global trade, global companies are
rapidly transforming their supply chains
to go wherever necessary to reduce
costs, launch products and enter lucrative
new markets. For many companies,
supply chain activities such as product
engineering, sourcing, manufacturing and
logistics are now widely dispersed around
the world.
Indirect taxes and supply chain
reorganization
Any supply chain restructuring will have
an important impact on the company’s
indirect tax position. For example, what
are the new obligations? What is the
impact on duty costs? Which company
must now account for tax — where is it
due and when?
Businesses often launch supply chain
restructuring projects without considering
the indirect tax implications. But this can
mean that risks and costs are increased
and valuable opportunities are missed.
Indirect tax is relevant for all aspects
of the supply chain, including:
• Development and strategy
• Research and development
(R&D) and design
• Procurement and sourcing
• Manufacturing
• Distribution and logistic
• Services, both customer-facing
and internal
Indirect tax issues for
centralized operating models
Supply chain models with a central
business entity are particularly
challenging from an indirect tax point
of view. Centralized operating models
often result in an increased number of
transactions and companies having to
fulfll indirect tax obligations across many
geographies. Because these models
are intended to obtain operational
and fnancial benefts, indirect tax
considerations are typically not at the
forefront of the design process.
Even if physical distribution channels are
not changed as a result of the centralized
model, the indirect tax treatment and
application of indirect tax arrangements
may be seriously different. It is quite
common for centralized operating models
to result in a disconnect between physical
product fows and the legal and fnancial
ownership of the products. The main
indirect tax challenges arise from the
central company:
• Buying in many countries
• Selling from or to many countries
• Owning goods in many countries
• Buying or selling goods on consignment
• Being involved in chain transactions
• Moving goods across borders for storage,
process and repair
• Purchasing services from many countries
• Supplying services in many countries
• Becoming the owner of all products from
raw material through fnished product
throughout the whole supply chain
• Keeping title to the fnished product until
late in the supply chain
Supply chain reorganizations
During the design of the operating model,
attention should be given to the indirect
tax implications of the more centralized
structure. Unexpected problems may arise
if the indirect tax landscape has not been
mapped out completely and if all new
indirect tax requirements have not been
considered.
The change toward a centralized model
may result in the central company
having to obtain import and export
licenses, which may require appointing
an indirect tax representative in multiple
jurisdictions. Existing incentives could
be lost without proper adjustment of
the facts associated with them. Customs
rules, such as “frst sale for export,” may
no longer be available when companies
are removed from the supply chain to
allow one central company to own the
goods throughout the supply chain. In
addition, many jurisdictions will disallow
for non-established companies to have the
required import, export and regulatory
licenses. Often the central company will be
required to register for VAT/GST, creating
a permanent establishment for direct
taxes. The list of potential issues can be
endless, effectively creating too many
practical problems for the centralized
model to be implemented without the
necessary indirect tax adaptations.
The indirect tax issues should be
addressed up front. Given ample time to
implement, most issues can be resolved
either by adapting the operating model to
better cater for indirect tax or by receiving
up-front approval from tax authorities and
regulatory bodies.
8 Managing indirect taxes in the supply chain
Part I The changing supply chain
Streamlining centers of production
Global Group A manufactures and distributes a wide range of consumer products.
In recent years the group has undertaken a number of transformation projects to
streamline centers of production and distribution. The frst project, carried out in
Europe, the Americas and Asia. The global head of transfer pricing discusses how the
company’s attitude to indirect taxes has evolved from dealing with VAT and customs
compliance resulting from these transformations to basing decisions about where
to carry out production based on indirect tax considerations. He offered:
“I think there is a difference in the importance of indirect taxes on these projects on
a regional basis. If you look at it in Europe, the biggest challenge in general has been
making sure that the ERP systems process the indirect tax aspects in such a way
that there is less manual activity, that the invoices are all done correctly and that the
electronic invoicing systems operate well. In that sense, the harmonization of VAT and
customs processes — in the EU at least — has helped signifcantly.
“In the Americas, indirect taxes were very relevant when we were designing the model,
so when we were even defning which transactions would take place, indirect tax and
customs were both very relevant. In Europe, we were much more concerned with the
compliance process, [but] in the Americas indirect taxes were a prerequisite — although
clearly once you get into implementation, the key aspect becomes compliance again.
“We have also gone through a learning process. Whereas in Europe VAT was the big
issue, customs wa the additional challenge in Asia and the Americas.
“Our supply chain is getting more global every day. So when you make a decision where
to build a factory or invest for more capacity, you can then say, ‘Well, what’s the best
place?’ and then you need to start thinking about what the customs costs are, who has
the best free trade agreements and so on.
“If you look at the transformation in Latin America, indirect tax was actually one
of the key focus areas, both on the legal entities setup and for the transaction fows.
And another example: recently, we were looking at decisions where to build a factory
in Asia and customs and free trade agreements and other indirect taxes and indirect
tax incentives are becoming key decision drivers.”
Insight
9 Supporting growth and reducing cost and risk
Part I The changing supply chain
Centralized procurement model
Global Group B manufactures and distributes goods globally. Since 2008, the group has centralized
its procurement for a range of goods used in marketing and production, including packaging
materials and raw ingredients. The global head of indirect taxes explains how the centralized
procurement project has evolved — and how the range of indirect tax issues the group has
encountered has expanded to include VAT/GST registration for the procurement company, customs
duties on imported goods, excise taxes and environmental taxes. She offered:
“Purchasing is being centralized in a company in Switzerland. The Swiss company takes care of all the
agreements with the supplier. It asks the different daughter companies how many X products, will they
need in 2012, they feedback that amount, then the procurement company goes out to the suppliers
saying we need this amount of X products what kind of deal can you give us? And then it buys all
products and sells them on to the production companies.
“We’ve faced a whole range of indirect tax issues in the various phases, as you can imagine.
“First of all, the Swiss procurement entity is now in the supply chain for VAT. This requires it to be
registered for VAT in all the countries where it buys and sells locally. It also means that fows now look
different. Having the Swiss company involved in the supply chain defnitely makes the VAT part more
complex because we now have chain transactions where before we only had two parties involved in
a transaction.
“The compliance piece is really important because the procurement company is a Swiss entity, in some
EU countries it is required that a physical representative take care of all the reporting in the country.
We have seen in some countries that, for various reasons, the Swiss company couldn’t get a VAT
registration. In these countries we had to apply another model than the standard model, so in that
respect indirect taxes have infuenced how we do things.
“We have also considered custom duties when goods are supplied across the customs border. Do we
need to have the Swiss company registered for importation and exportation, or could we do the fow in
a way so it would still be the supplier taking care of the exportation and the local production companies
taking care of the importation?
“And now excise and environmental taxes are a big issue. We are really experiencing that now that we
are moving more into sourcing fnished goods. When it comes to looking into which entity in the chain
needs a certain license to be able to deal with excise duties, it’s not the same in every country. Even
though the supply chain model looks the same and the transaction is the same, we see that we have
to follow very different sets of rules in different countries to accommodate the legal requirements.
Just looking at VAT, as long as we were not dealing with excisable product, that was much more
straightforward. Now we see that we potentially have to have much more variation in the model we use
to be able to also deal with excise obligations.
“As we’ve done the project, our approach has evolved in how we approach it and the role of indirect tax.
In the beginning there was a model designed and Indirect Tax had to follow the lead of the other work
streams and just make it work. Now, with this latest phase due to the excise duties issues, in Indirect Tax
we are pretty much at the forefront so we have been the frst to visit the counties and to really go out
and get a very detailed understanding to then be an integral part to design the new model. I think we
are much more involved now in the detailed design of this procurement model for the future state than
we used to be four years ago.”
Insight
10 Managing indirect taxes in the supply chain
Part I The changing supply chain
11
12
What do we mean by indirect taxes? In this
report, we use the term “indirect tax” to refer
to a wide range of taxes levied on the production,
sale and international trade in goods and
services, including VAT and GST, single-stage
sales taxes, environmental taxes and excise
and customs duties, which may be levied at
the national, state and local level. We also touch
on the impact of “green taxes” and look at tax
incentives offered by a number of countries
and regions to encourage business activity.
Part II
Indirect taxes in
the supply chain
13 Managing indirect taxes in the supply chain
Global supply chains
increasing indirect tax risk
O
ne reason for the increased volume
in international trade in recent
years is the globalization of supply
chains, which cause goods to cross
national boundaries several times during
the production process. Each time goods
cross a border, they are potentially subject
to a host of indirect taxes and indirect tax
compliance obligations, including:
• Export licensing
• VAT/GST reporting and documentation
(to support an export exemption)
• Customs and excise duty reporting
and compliance documentation (duty
suspension regimes, etc.)
• Customs reporting and documentation
• Customs duties on importation
• Excise duties on importation
• VAT/GST and other sales taxes on
importation
• VAT/GST reporting and documentation
(to support input tax recovery)
• Export compliance obligations
The impact of indirect taxes
The effective management of indirect
taxes is crucial to operating successfully
in today’s global market place. As supply
chains grow longer and become more
international, understanding the impact
of VAT/GST, excise duties, customs
duties and export controls is not just an
issue for the tax function. Indirect taxes
must be actively managed throughout
the business if they are to work with,
not against, your strategic agenda.
Considerations include:
• Cost base — avoiding irrecoverable
VAT, excise duties and customs duties
• Cash fow — delayed VAT refunds and
prefnanced duty payments
• Compliance burden — managing
customs and excise warehouses,
applications for incentives, VAT returns
and VAT registrations, VAT invoicing,
excise returns, customs documentation
requirements, managing export
compliance obligations
• Tax accounting — real-time VAT
reporting, tax provisions
• Corporate risk — reputational risk,
penalties, fnes and criminal liability for
errors and omissions
• Growth opportunities — incentives
for setting up new productive activity,
intelligent sourcing from or producing
in markets where import preferential
customs duty rates apply
• Effciency — customs and excise
simplifcations, goods held up at
customs, business disrupted by tax
audits and new activities delayed for
incentive grants
14 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Six global indirect tax trends
In our recent report, Indirect Tax in 2012, we
identifed six common global trends for indirect taxes
that are likely to be signifcant in 2012 and beyond:
1 Increasing VAT/GST rates
2 Broadening of the VAT/GST tax base
3 Refnement of consumption tax systems
4 Increased focus by tax administrations
on compliance and tax avoidance, using
advanced technology
5 A continuing rise in excise duties
6 Decreasing customs duties from increasing
free trade
Each time goods cross a border, they are potentially
subject to a host of indirect taxes and indirect tax
compliance obligations.
15
Part II Indirect taxes in the supply chain
A
ccording to a new survey from
Ernst & Young,
2
tax risk and tax
controversy are both rising rapidly.
Tax risk is what companies face when
they are unsure of having planned their
taxes with foresight, accounted for their
taxes correctly and complied with all
relevant tax laws. And tax controversy is
a polite term for the disputes that arise —
alas, with greater frequency — between
corporate taxpayers and tax authorities.
Ernst & Young asked more than 500
senior tax and fnance executives and
audit committee members in 18 countries
a wide range of questions about their
recent experiences and predictions for
the future. To gain a fuller picture, several
dozen tax administrators and policy-
makers were also interviewed.
The consensus is that in both tax
enforcement and tax legislation, the
landscape is now more challenging than
it has ever been.
When asked what specifc tax types were
most concerning, companies around
the world told Ernst & Young that their
indirect taxes, including VAT, GST and
customs, were a major source of risk and
uncertainty.
The complexity of transfer pricing has
long been a bone of contention between
taxpayer and tax authority and that is
still the number-one contributor to tax
risk and uncertainty. But indirect taxes
were the clear number two and they are
the fastest-rising concern, mentioned by
far more tax executives than in our last
survey in 2009–10 or any of our earlier
tax risk surveys.
Why is there so much more
tension around indirect
taxes now?
Tax executives say the dramatic shift
in the global economy has changed
tax policy and enforcement, forcing
companies and governments into more
disputes. Supply chains cross far more
national boundaries now and extend into
many new markets, including emerging
markets, multiplying the customs and VAT
considerations.
Also, legislators have been lowering
their corporate tax rates to attract
business, but they still want to increase
spending year over year, so they are all
the more likely to raise their indirect
taxes. However, even if legislators are
convinced that indirect taxes are the best
way to raise substantial new revenue,
individual taxpayers often disagree. If
their protests prevent the rate increases,
tax administrators fnd themselves in
a tough situation: they are expected to
collect much more without a substantially
higher rate.
But tax administrators do have new
technological and institutional tools
that allow them to collect more, such
as formalized cooperation with other
tax authorities. Generally speaking,
tax authorities have more data and
information about taxpayers and their
economic activities than at any time
in history.
Indirect tax policy as a source
of risk
Over just the past few years, between
60% and 70% of European Union member
states have increased their VAT rates at
least once and the assumption that no
state would go over 25% has ended with
Hungary’s new 27% rate.
These rate increases will continue because
when governments urgently demand
more revenue, they often turn to indirect
taxes, especially the VAT or GST because
this broad-based tax produces so much
revenue with each rate increase. And
even if governments slow their spending
growth, they will have to confront their
accumulated debt and to do so they will
need more revenue.
Since the beginning of 2010,
governments have not only been
demanding more revenue, they have
been demanding it quickly. Italy even
announced a one percentage point
increase in VAT effective from the
following day.
VAT compliance mistakes are more costly
when the rate is higher and mistakes are
more likely when companies have so little
notice. Even governments not in such
dire fnancial straits as Italy are expecting
taxpayers to react with uncommon alacrity
to tax changes. At the end of 2011,
China introduced a complex VAT pilot in
Shanghai with only eight weeks’ notice.
Indirect taxes: a growing
source of global risk
2 Tax risk and controversy survey: a new era of global risk and uncertainty, Ernst & Young, 2011–2012
16 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Indirect tax enforcement
as a source of risk
Tax controversy related to indirect taxes is
growing at a quick pace as tax legislators
constantly adjust the base and raise the
rate. This leads to more frequent errors
such as:
• VAT paid to suppliers (input VAT)
is not reported and recovered on the
VAT return
• VAT paid to suppliers is reported but not
recovered because tax authorities fnd
the supplier’s VAT invoice to be invalid
• VAT paid to suppliers is recovered
when it does not qualify for recovery
Tax policy-makers said they expect
indirect taxes to be their leading source
of new revenue over the next decade,
while tax administrators and taxpayers
view indirect taxes as a key source of risk
over the next three years.
An increasingly global
approach needed to managing
indirect taxes
Although companies in our survey
reported that indirect taxes are their
second leading area of tax risk, they also
reported that these taxes were managed
by the fnance or accounts department
more of the time (48%) than they were
managed by the tax department (44%).
They also reported that a global indirect
tax offcer was resident in the tax
department of only 21% of companies.
Interestingly, this percentage fell to just
12% in the largest companies (those
with US$5b in annual revenues or
more), indicating that the larger the
company, the less likely it was to have
a dedicated indirect tax offcer. Looking
forward, increasing the number of
resources focused on indirect tax in the
next two years was foreseen by only
30% of companies. These disconnects
merit close attention, particularly as tax
administrators and tax policy-makers alike
tell us that indirect taxes will be more
important to them in the future.
This insight into the current management
of indirect taxes shows that amid
uncertainty, there is an opportunity for
global businesses.
Some companies will seize that
opportunity. They will do a good job
of planning around the rapidly changing
rates and rules and foreseeing where
future changes are likely, including what
supply chain decisions are wise. Some
companies will quickly and effciently
account for new or forthcoming VAT and
GST laws, customs and excises. Some
companies will comply with all applicable
laws, paying all taxes that are due where
and when they are due; similarly, they
will reclaim all refunds that are due when
and where those refunds can be collected.
And by following these leading practices,
they will avoid indirect tax controversy
wherever possible and deal with it quickly
and effciently when it’s unavoidable.
These are the companies that will gain a
competitive advantage in the years ahead.
“ In this industry, there is a lot of pressure from people within the supply chain
for us (in the tax function) to be embedded and really understand what
their strategies are and to build indirect tax planning by way of free trade
agreements and other things into that. It’s almost assumed that we will be
able to optimize indirect taxes under their structures.”
— Head of indirect taxes at a global automotive company
Centralized VAT/GST
accounting and reporting
Using a shared service center approach
wfor global or regional indirect tax
compliance and reporting can increase
effectiveness while potentially reducing
overhead costs. By improving VAT/GST
compliance, shared service centers may
help to reduce risks and penalty costs.
For example, a centralized compliance
function may allow groups to maximize
the use of standardized automated
processes. However, some global
companies that have a decentralized
VAT/GST compliance model may be
concerned that a shared service center
compliance team may not have the
detailed local knowledge necessary to
ensure that all returns are completed
accurately and to identify underlying
VAT/GST issues. Although this is a
genuine concern, increasingly, global
companies are addressing it by combining
a centralized VAT/GST reporting model
with local review of processes, perhaps
using a third-party provider.
17 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
“ Clearly, indirect tax is growing in
importance in a current economic
environment where governments
choose to increase indirect taxes
while keeping the corporate rate
relatively fat or neutral. So the
importance of managing your
indirect taxes well is gaining
importance as well.”
— Head of transfer pricing at a global
consumer products company
V
AT/GST is a multi stage tax on
consumption that applies to the
supply of goods and services at
each stage of production, distribution
and sale. This broad-based tax is levied
on most goods and services, with notable
exceptions (such as fnancial services,
insurance, health and education).
VAT/GST is charged on the importation
of goods and services based on their
value, including any customs duties.
In contrast, exports of goods and services
do not generally attract VAT/GST.
Since it was frst introduced, VAT has
been an unstoppable tax success story.
Some form of VAT/GST now applies in
more than 150 countries worldwide,
with the US being the only developed
economy that does not currently levy
a VAT-type tax. And an increasing number
of emerging markets are adopting
VAT/GST in preference to single-stage
sales taxes or a range of local sales taxes.
In January 2012, China launched a VAT
pilot scheme in Shanghai with a view
of eventually replacing its Business Tax
(BT) and VAT with a broad-based VAT
throughout the whole country. India
is also undergoing reform in this area,
recently fnalizing its “negative list”
for excluded supplies and bringing the
introduction of a new, centralized GST
one step closer.
VAT/GST
The VAT/GST compliance
burden on business
As a tax on “consumption,” VAT/GST is
generally borne by the fnal consumer, but
it is collected and remitted by business
entities that supply taxable goods
and services. VAT/GST is charged on
transactions at each stage of the supply
chain and it also generally applies to
imports of goods (without the need for
a transaction). Businesses are treated
as VAT taxpayers who collect and remit
the tax. VAT taxpayers charge VAT/GST
on their sales (output VAT) and recover
VAT paid on their business purchases
and overheads (input VAT). Therefore,
businesses effectively account for VAT
on the value they have added at that
stage in the supply chain.
This method of charging and collecting
tax from non-taxable persons using VAT-
registered businesses makes VAT/GST
a highly cost-effective form of taxation
from a government perspective, but it
places a heavy burden on businesses.
They must report and remit VAT/GST
payable to the tax authorities on a
regular basis (generally monthly for large
companies) with 100% accuracy. However,
this task is complicated by the fact that
each country has its own system with its
own rules about how, when and where tax
is charged. Documentation and reporting
requirements also vary greatly between
tax jurisdictions.
18 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
The impact of VAT/GST
on business cash fow
VAT/GST is a “neutral” tax for most
businesses, but the cost of funding
VAT/GST is still a factor. Negative cash
fow may arise from the sales or purchase
functions:
• Sales — The supplier typically has
to fund VAT/GST charged to customers
that has not been paid by the time the
tax return is due (generally monthly)
or that is never paid, especially in
countries where no relief is given
for bad debts.
• Purchase — Waiting for VAT/GST
refunds can greatly add to the effective
VAT/GST burden for businesses with
large VAT/GST credits. Although the
VAT/GST is creditable or repayable,
many governments do not repay
tax quickly. For example, one-off
VAT/GST credits may accrue from
start-up or merger costs or as a result
of increased capital investments.
Persistent VAT/GST credits may result
from undertaking business activities
that are not subject to VAT/GST,
such as exports, or to the full rate
of VAT/GST, such as books, foodstuffs
and pharmaceuticals.
The increase of VAT/GST rates worldwide
has a number of important implications.
For businesses, higher tax rates increase
tax risk, as the amount of VAT/GST that
must be managed is greater and the
consequences are more severe in the case
of non compliance and mistakes. Non-
recoverable indirect taxes raise the costs
of doing business, making production
more expensive and requiring increased
effciency to make up for the increased
costs. For governments, as VAT/GST
income becomes more important, so
does effective enforcement. The fght
against fraud and the monitoring of
taxpayers becomes more pressing, leading
to increased compliance obligations,
more aggressive tax audits and harsher
penalty regimes.
19 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
The complexity of the
VAT/GST supply chain —
looking below the surface
In considering how to manage VAT/GST
transaction fows, it is important to
recognize that most VAT/GST supply
chains are highly complex, involving
multiple suppliers and customers and
cross-border transactions.
The complexity of the VAT/GST supply
chain increases the level of tax risk.
For example, risks may arise from the
incorrect application of the tax, problems
in communication between suppliers
and purchasers or a lack of supporting
documentation. The whole transaction
chain must be mapped and understood
if it is to be adequately controlled.
Measuring VAT/GST risk
To understand the importance of
managing indirect taxes, you need to
measure the full impact on the business
by looking at costs, negative cash fow
and the amount of VAT/GST throughput
or VAT/GST “under management” that
represents the level of tax that the
company has a statutory obligation
to manage effectively. Our experience
working with global companies around the
world indicates that the VAT/GST under
management, regardless of the size of
the company, is generally more than 30%
of non-US sales income.
3
3 VAT and GST: managing the multinational burden, Ernst & Young, 2011
VAT/GST under
management
VAT/GST throughput is all the
VAT/GST that a company has to
manage. It includes all VAT/GST on
purchases and sales plus the full rate
of VAT/GST potentially chargeable
on lower-rated, zero-rated and
exempt activities.
20 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Figure 1: Company Z’s VAT/GST ed-to-end process
Type of goal Action Functional
ownership
Strategic • Identify the VATable transactions Business units/tax
• Determine the correct VAT treatment Tax
• Assess the risks/opportunities — what is the VAT
burden in terms of absolute cost and cash fow?
How can it be adjusted to mitigate adverse effects?
Tax
• Finalize the VAT treatment/model — make business
case for alterations to current or planned model
Business units/tax
• Communicate to IT/Finance/BUs Business units/tax/
fnance/IT
Operational • Processing and accounting for VAT — record to report Finance/IT
Compliance • Completing and fling the VAT returns Finance
• Audits Finance/tax
End-to-end VAT/GST:
who owns the process?
In considering the management of
VAT/GST issues, it is necessary to identify
the relevant transactions and the parts
of the organization that have ownership
of the information and the process.
Figure 1 outlines how an examination
of fctional Company Z’s VAT/GST end-
to-end process might identify goals,
areas for investigation and improvement
and the functions within the company
that would be responsible for each part
of the process.
“ Historically, we haven’t been organized very well for managing
indirect taxes. For example, customs cost was not recorded
separately, but it was part of a cost line where we aggregated
multiple costs like broker fees, freight forwarding costs — and
included customs. We had no real idea of what we paid in
customs per year, on a global level.
“ We are now making sure that we are designing our systems for
tax management information. Now that information is actually
available, we can monitor it, work with it and potentially identify
situations where we need to improve.”
— Tax executive at a Fortune 1000 multinational
21 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
V
AT/GST is the tax on consumption
that applies most widely around
the world. However, a number
of countries do still apply single-stage
consumption taxes at the national, federal
and municipal level, such as the sales and
use taxes levied in the US and China’s
Business Tax (BT). These single-stage
taxes may apply at any stage of the supply
chain, including production, importation,
distribution and retail sales. Multiple
single-stage taxes may apply in some
jurisdictions.
The main business drawback of single-
stage taxes is that they generally are not
creditable or available for offset, which
means that they may add to the cost
base. For goods that undergo multiple
processes, single-stage taxes may apply
at multiple stages, creating a cascading
effect (as taxes paid at an earlier stage
form part of the taxable base) that leads
to very high effective tax rates.
The compliance burden may also be
an issue in countries that levy a large
number of single-rate taxes. In the US,
for example, there are more than 7,500
potential taxing jurisdictions for sales
and use tax purposes.
Single-stage consumption
taxes
22 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
VAT-led operating conditions for a reengineered logistics network
Global Global Group D purchases materials and manufactures and ships manufactured products
all over the world. The group recently reengineered its logistics network in Europe. The global head
of indirect taxes describes how the conditions needed to protect VAT zero-rating for intra-EU sales
has imposed operating conditions on the group’s new logistics network in Europe. He stated:
“In Europe, we have, approximately 40 fnished product manufacturing plants in the region in countries
stretching from Russia to Morocco. We are responsible for moving product from our suppliers’ locations
to our Group D locations. Previously, our model was basically plant-centric with each supplier supplying
to each plant directly. We had about hundreds of suppliers shipping to multiple locations so you tended
to have a lot of suppliers shipping to multiple Group D locations, with lots of carriers executing all these
different routes and billing the entities and the related plants for freight. We looked at centralizing
our logistics and running it all through one network by going to a series of hubs where the material is
accumulated at the supplier locations as effciently as it can be in full loads and sent to various hubs
where it’s then redistributed using routes going direct to our destination plants.
“From a VAT perspective it has basically changed the route for materials to get from the supplier
to the destinations. And so it has created a whole series of questions about the VAT status of the sale
of the materials and what happens to the freight.
“Before implementation, we analyzed how we would run the network and then looked at the VAT
legislation in the different countries to understand the rules and whether we would ever have a risk
that those types of sales would potentially have a change in the VAT status. We came to the conclusion
that yes, in theory, we did have some risk and it was a little bit of a gray area, particularly in certain
countries. So we concentrated on those countries and got a ruling from the VAT authorities to protect
our zero-rating. Because it’s only considered (an intra-EU) dispatch from the originating country if you
can show it was actually shipped from the country, it ended up depending on a series of conditions we
would have to meet operationally to maintain the zero-rated sales. These requirements have become
incorporated in the standard operating procedures for the network.
“One of the new rules is that if carriers want to get paid, they’re going to have to provide the
documentation up-front we need for VAT purposes. It was also a transformation for our account
logistics people and the accounts payable people.
“We also had some customs compliance issues. We had different points of entry and different countries
where we had to make the import. So different companies needed to register for VAT and recover VAT
at import and so on. We had to work through all of that as well to make the network work. So, we,
the VAT and customs people, ended up advising on determining how that was all going to happen.“
Insight
23 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
C
ustoms duties are taxes levied upon
importation of certain goods into
the customs territory of a country
to raise state revenue or protect domestic
industries from competitors from abroad.
In most cases, customs duties are raised
as a percentage of the customs value of
the goods, but they may be levied on the
basis of other parameters, such as weight
or volume.
In addition to standard customs duties,
other duties as part of anti-dumping
measures and countervailing measures
may be levied on the importation
of certain goods. These are intended
to protect the home market against
imported products being dumped on
the market or benefting unlawful or
dramatically different subsidies abroad.
In principle, when importing goods into
a country, customs declarations need to
be fled on a transactional basis for each
incoming shipment and these declarations
need to be validated by the respective
customs authorities. However, there is
a tend toward simplifying the declaration
process (e.g., consolidated reporting on
a monthly basis) even to the point of self-
reporting customs duties. And as more
customs authorities require the electronic
fling of customs declarations, special
automated systems have been developed
that can deal with multi country customs
reporting.
In principle, the level of customs duties
depends on the customs value, tariff
code and the origin of the goods being
imported. In order to identify the various
types of goods, specifc tariff (HS) codes
have been agreed upon internationally
to determine import duties (often
expressed as a percentage). But the
origin of the goods is also a factor. Many
countries have agreed bilateral and
even multilateral free trade agreements
(FTAs) that call for reduced or zero-rate
tariff duties for goods originating from
a preferred trade partner.
Furthermore, specifc valuation methods
have been agreed within the World Trade
Organization to properly determine the
value of the goods being imported. In most
cases, the transaction value (price actually
paid or payable) can be used as the basis
for the customs value. As a result, any
price adjustments after the moment
of importation (e.g., due to transfer pricing
changes) need to be properly reported to
the customs authorities.
Customs duties represent
a bottom-line cost
Customs duties — unlike VAT/GST —
represent a cost for the importer of the
goods. A reduction of customs duties
immediately improves the cash fow
and costs of importing companies.
Consequently, various customs procedures
have been designed to reduce or avoid the
customs duty burden. For instance, goods
placed under a bonded warehouse regime
can be stored under duty suspension and
re-exported to third countries without
customs duties being due in the initial
country. Economic customs regimes such
as processing under customs control and
inward and outward processing relief allow
companies to reduce the duty burden
of imported goods, provided certain
conditions are met.
Customs duties
24 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Customs supply chain
optimization
An appropriate (re)design of a company’s
supply chain may reduce the company’s
customs duty burden, landed costs and
lead times. Supply chain optimization
projects typically involve trade route
rationalization with a maximized use of
FTAs and appropriate strategies to reduce
customs compliance costs. Combined with
the available customs procedures, these
strategies can signifcantly drive down the
costs of customs duties and compliance.
For example, goods with preferential
origin status could be routed to
destinations where preferential origin
reliefs can be claimed and goods to
be re-expedited could be stored under
a customs duty suspension regime
to avoid import duties in the country
where the storage facility is located
(and potentially to safeguard the
preferential origin to be claimed in other
countries). In this type of arrangement,
potential issues to be considered include
reverse logistics and online sales, which
may represent additional challenges.
Further effciencies also may be obtained
by combining a project of this type
with the introduction of automated
customs systems.
Specifc tax-effective supply chain models
for procurement and manufacturing also
may provide for signifcant benefts. For
example, buying commissions may be
excluded from the customs value, thereby
reducing the amount of import duties to
be paid. In addition, alternative valuation
methods (cost plus or resale minus) can
be used by toll manufacturers and provide
for additional effciencies in an optimized
supply chain.
25 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Reduction of customs duty
burden
Various customs planning methods can
be combined to reduce the duty spend
by price unbundling, where non-taxable
elements (e.g., buying commission,
sole distribution rights, advertising and
promotion costs) can be excluded from
the customs value. Similarly, proper
branding and intangible property (IP)
management may provide room to further
reduce the customs value. In addition,
the “frst sale for export” principle
(available in both the EU and the US)
allows the customs value of goods to
be based on an earlier (lower) sales price
under certain conditions. Provided that
certain contractual arrangements are
made in advance, volume rebates also
may be used to decrease the amount
of customs duties paid.
“ More and more it is not just VAT that we have to focus on, it’s also custom duties. …
Recently, it has also become more excise duties and packaging taxes and other types
of environmental fees.
“ For businesses like ours, managing indirect tax goes way beyond the traditional view of just
looking at VAT and whether it has to be added to a certain transaction or not. I think that
is refected in how we run our Indirect Tax Department and our involvement in the business.
“I am involved when the business decides to structure something differently. Then
they say: what would this change mean in respect of your area? do you see any show
stoppers? what would be the better way to do it? and so on.”
— Head of indirect tax at a global manufacturing company
Reduce the trapped duty
burden and value leakage
Sound analysis and consideration
of earlier importations may reveal that
signifcant import duties have already
been paid earlier in the supply chain
(trapped duty), which may drive up
cost of goods sold (COGS) and reduce
a company’s margins. Optimization
of customs procedures and adaptation
of contracts with suppliers may provide
for signifcant customs duty savings
earlier in the supply chain, thereby
reducing purchase prices.
Customs and trade facilitation
programs
On an international level, customs
authorities have expressed their intention
to facilitate global trade through a
secure, smooth physical trade process
within the World Customs Organization’s
SAFE Framework. A key concept is the
recognition of Authorized Economic
Operators (AEOs) who have demonstrated
their “trustworthiness” from a customs
and trade perspective. AEO status
provides for additional customs benefts
and trade facilitations. Customs
authorities around the world have
developed trade facilitation programs
such as the Customs Trade Partnership
Against Terrorism (C-TPAT) in the US,
AEO (in the EU) and the Secure Trade
Partnership (STP) in Singapore. As a
result of the mutual recognition of trade
facilitation programs, goods that are
shipped between territories that mutually
recognize each other’s programs are
subject to little or no inspection.
26 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Customs regimes are “standard operating procedure”
for “just-in-time” delivery
Global Group D purchases materials and manufactures and ships products all over the
world. The head of indirect taxes describes how obtaining — and maintaining — favorable
customs regimes are vital for Group D’s just-in-time supply chain delivery model. He said:
“In most countries, we participate in some sort of signifcant preferential customs
program, whether that’s a free-zone, such as IMMEX in Mexico, or similar program,
that gives us major benefts.
“In North America, so much of what we do for logistics purposes really hinges on our
C-TPAT status. We maintain a centralized logistics network to move supplier materials
to our manufacturing plants in North America, including hubs on the Mexican and
Canadian borders. We are moving a huge amount of product back and forth, so we had
to integrate all our customs requirements into how the network operates in a just-in-time
environment to meet our delivery targets.
“We have Tier III status in Mexico which allows us to use customs fast lanes. Now we’ve
integrated the expedited time benefts we get from using the fast lanes into our whole
network. We have incorporated the expedited border crossing times into our standard
logistics network. So maintaining the C-TPAT status has become critical for operational
reasons. If we were to lose that status we would have to rework the network and we
would have potentially signifcant short-term cost and operational disruption.
“Everywhere there is a preferential program, we’re in it or getting into it. So right now
we’re doing it for AEO. We looked at our profle in each country and said where do
we need it most and where do we need it the fastest? Then we prioritize country by
country because you have to apply entity by entity. We recognized that to maintain
our numerous benefts in many countries we had to join AEO. So, for us the decision
was automatic. When a company is in an industry where it’s important to move goods
quickly, making sure you qualify for this type of customs and security status becomes
a business requirement.”
Insight
27 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
T
he other main class of consumption
taxes in the supply chain are excise
duties on specifc classes of goods.
With the broad appearance of modern
VAT/GST systems in the 1970s and
1980s, many product-related taxes were
abolished. But in recent years they have
once again gained importance, mainly
because they are seen as a good tool for
steering consumption and infuencing
consumers’ behavior while signifcantly
contributing to overall government
income.
Excise duties also add to the cost base
of production, as they represent a bottom-
line cost and are not creditable. In recent
years, the rates for alcoholic beverages,
cigarettes and hydrocarbon oils have
increased in many parts of the world.
In addition, as excise duties are normally
part of the VAT/GST tax base, any
increase in excise duty rates also implies
an increase in VAT/GST. Especially in the
case of hydrocarbon oils and tobacco
products, the revenues raised from taxes
are high and the total tax burden on fuel
(mainly excise duty plus VAT/GST) often
exceeds 100% of pre-tax prices.
A wide range of products are subject
to excise duties in individual countries
around the world (such as chocolate,
coffee and orange juice). However, the
three principal product groups that
are globally liable to excise duties are
alcoholic beverages, hydrocarbon oils
and tobacco products. In addition, new
taxes are being introduced that seek
to infuence societal behavior, such
as snack taxes on “unhealthy” food
(recently introduced in France, Hungary
and Denmark) or carbon taxes aimed at
reducing climate change and air pollution,
as in Australia.
In most cases, excise duties are raised
based on the volume or value of the
excisable products consumed in a specifc
country. Excise duties can be raised on
the importation or production of excisable
goods or when they are made available
to consumers.
Reducing the excise duty cost
Excise duty rates are often very high and
may represent a signifcant part of the
price of an excisable product. Therefore,
it is important to strategically use excise
duty reduction, exemption and suspension
regimes. As excise duties are typically
due at the moment of consumption,
companies should make sure that the
excise duty is paid only once in the
country of actual consumption by using
excise suspension regimes (such as a tax
warehouses). In addition, various reduced
rates and even exemptions may be
available under certain circumstances.
Excise compliance burden
Non compliance with excise laws may
lead to signifcant fnes (up to 1,000%)
and potential criminal prosecution.
The excise duty compliance burden
and the associated risks may be alleviated
by making full use of suspension regimes
(to avoid excise duty becoming due) and
procedures to delay excise payment
as provided for in local legislation.
In addition, simplifed procedures may
be established for excise duty reporting.
Finally, companies should pay particular
attention to the excise guarantees
that need to be deposited, which may
represent signifcant amounts, as some
jurisdictions have procedures to reduce
these guarantees.
Excise duties and
environmental taxes
28 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Local excise duties pose challenges to centralization
The head of indirect tax at a global manufacturing company discusses
how it is diffcult to centralize management of indirect taxes in a single
supply chain model. She offered:
“With excise duties and similar taxes it is hard to get an overview of the
applicable fees and regulations and things that may apply in the various
countries, because the taxes are dealt with in so many different ways.
We see so many different scenarios and set-ups.
“That requires very local knowledge, so that’s quite diffcult to centralize
and we see that we need to operate with different models in the different
countries. I think when you are not an indirect tax person it is the
general understanding that the EU is one set of rules, it is more or less
same, it cannot be that diffcult. But when you work with a supply chain
or procurement program you really realize how diffcult it can be with
these taxes being dealt with differently in the different countries.”
Insight
29 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
E
xport controls are laws and
regulations designed to support
national concerns and security
policies. They aim to enhance global
security by preventing the proliferation
of weapons of mass destruction and
related terrorist activities. Although these
laws and regulations are not new to the
international trade community, the need
to manage business risk in this area is
growing as supply chains become more
complicated and far-reaching.
The differing export control laws and
regulations that businesses encounter
when trading internationally can
cause delays in meeting deadlines and
contractual commitments. They also can
expose businesses to a range of risks that
include monetary and criminal penalties,
reputational risk, reduced share-price and
other punitive measures used by national
governments.
Companies that proactively manage
their compliance obligations in this
area throughout their global supply
chain operations may gain competitive
advantage.
The US export control regime is often
perceived as being the most restrictive
and complex. US companies are leaders
in high-tech manufacturing and many
global businesses are headquartered or
operate in the US. Therefore, the US rules
are likely to touch the global operations
of many companies, either directly or
indirectly through their extraterritorial
element. Of course, the European export
controls regime and its implementation in
individual member states have signifcant
positive and negative impacts on
operations.
The European export controls and their
differing administration through national
governments create additional regulations
for global companies to understand and
comply with. Compliance failures are
often seen within businesses that create
processes and procedures accounting for
only one set of rules (often, in practice,
based on the US rules). Companies should
analyze their operations and create
a compliance framework of expertise,
knowledge, processes and procedures
to enable compliant trade from all relevant
countries.
Partnering export controls and export
compliance management with a
company’s associated customs and
trade compliance functions, across
multiple jurisdictions, not only provides
a logical means of effectively managing
compliance obligations, but it also offers
greater visibility throughout the end-to-
end supply chain. A more effcient and
effective compliance function safeguards
against the future cost of non compliance
while producing faster, more effcient
transactions and delivering cost savings.
Export controls
30 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Indirect taxes infuence the choice of location
for low-cost manufacturing
Global Group D purchases materials and manufactures and ships product
all over the world. The head of indirect taxes discusses how the decision
to locate a manufacturing facility in Europe was infuenced by indirect tax
decisions. He said:
“I am involved with my income tax colleagues as part of a corporate-wide
team looking at sourcing decisions and where to locate new manufacturing
facilities. About two-and-a-half years ago, we were looking for a low-cost
manufacturing location to support our EU operations and our profle
was that we were looking at sourcing materials from both within the EU
and potentially from Asia. We were looking for a location that would also
deliver us the best answer from an indirect tax perspective. Indirect taxes
were a big part of the reason why we located a plant where we did, where
we could bring in material into a free-zone type of environment, without
any import requirements and export it to the EU relatively easily. And we
could source any material we wanted from any location. As long as we
transformed it into fnished products, shipments were duty free, both into
the low-cost country we chose and into the EU.
“So it was an example from an EU perspective where indirect tax
considerations were a big driver in where we actually located a plant.”
Insight
31 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Various incentives exist
Business incentives are measures taken
by authorities around the globe to
infuence desired economic behavior
and activity in specifc regions and areas
of industry. These measures are often
targeted at specifc activities, including:
• New investments
• Job creation, retention, training
• R&D investments and activity
• Sustainable development and
green operations
Business incentives can be either
statutory or discretionary and can
include tax and non-tax benefts.
Program offerings differ
A wide range of activities can be impacted
by incentives. Programs targeting these
activities are available around the globe.
Figure 2 indicates the types of incentives
that could be applicable to different
activities in the supply chain. The types
of programs available in each of these
incentive categories can be referenced
in Figure 3.
Incentives
32 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Figure 3: Examples of business incentives
Tax incentives Hiring incentives R&D incentives Property tax relief
• Sales/use tax exemptions/
refunds
• Federal/state EZ credits
• Federal/state R&D credits
• Capital investment tax credits
• Statutory look back reviews
• §48C alternative energy ITC
• §45D New Markets Tax Credits
(NMTC)
• Wage rebates, job creation
grants and credits, employment
related tax incentives
• HIRE Act/ WOTC/WtW
• State point-of-hire credits
• Hiring and employee screening
assistance
• Federal/state R&D credits
• FP7 (EU)
• R&D cash grants
• R&D super-deduction
• Real and personal property tax
exemptions
• Real and personal property tax
abatement
• Industrial Revenue Bond (IRB)
structuring for favorable
property tax treatment
• Tax increment fnancing (TIF)
Green incentives Training benefts Other incentives
• Energy effciency/GHG
reduction incentives, credits
and grants
• Incentives for LEED-certifed
buildings
• §179D deductions
• R&D/manufacturing incentives
for green products
• Training grants for prospective
expenditures
• Development/implementation
of training programs through
state agencies
• Training tax credits (retroactive
or prospective)
• Infrastructure grants/assistance
• Community Development Block
Grants (CDBG)
• Low-cost fnancing for capital
expenditures
• Utility discounts
• Waiver of permit fees
• Expedited permits
• Free or discounted land/
buildings
• Recovery Zone Facility Bonds
Note: black text represents opportunities for cash or cash equivalent benefts (e.g., refundable tax credits, cost reductions) not limited by federal or state tax liability).
Figure 2: Supply chain activities and applicable incentive types
• R&D incentives
• Hiring incentives
• Training benefts
• Property tax relief
• Tax incentives
• Other incentives
(especially customs
and trade related)
• Tax incentives
• Hiring incentives
• Property tax relief
• Green incentives
• Training benefts
• Other incentives
• Tax incentives
• Hiring incentives
• Property tax relief
• Green incentives
• Training benefts
• Other incentives
• Tax incentives
• Hiring incentives
• Property tax relief
• Training benefts
• Other incentives
1 2 3 4 5
Research and
development
Sourcing and
supply
Production and
manufacture
Distribution Delivery
33 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
How incentives ft into the
supply chain framework
Although indirect taxes can increase supply
chain-related costs and the risk associated
with globalizing these activities, incentives
provide an opportunity to offset these costs
and decrease supply chain risk. Incentives
parallel supply chains in two important ways
that can allow companies to leverage these
programs to decrease cost and risk and
to increase fexibility and responsiveness
across global supply chains.
First, incentives are broadly applicable,
with programs that target many aspects
of business operations. Given that
incentives reach across a variety of
business activities, they overlap well with
supply chain planning and touch many
functions within a business. As a result of
this overlap, incentives can provide beneft
across the layers within a supply chain.
By taking advantage of the opportunities
on multiple levels, savings will build
throughout the process and companies
can effectively reduce costs.
Second, in addition to being applicable
across a broad range of supply chain
activities, incentives are vital to a
government’s development strategy.
Therefore, it is likely that incentives
that apply to a company’s operations
will be available, regardless of the
geographic footprint of its supply chain.
This availability is the result of recent
trends in incentive development and the
prevalence of incentives around the world.
Despite the diversity of government
agendas and policy, many activities —
hiring and training, R&D, customs and
trade, sustainability — that represent
critical components of supply chains
are the common targets of incentive
programs around the globe.
The combination of their broad operational
applicability and geographic prevalence
makes pursuing incentives essential for
effective and effcient cost reduction
within supply chains. Taking advantage of
the savings available as a result of these
programs is an opportunity available to
almost all players. Incentive diversity and
availability mean that a wide variety of
companies can use an incentives-based
cost reduction strategy. Such a strategy will
conserve resources so the responsiveness
and fexibility of global supply chains can
be improved. The case study to follow
bears out the broad applicability of an
incentives-based cost reduction scheme
by showing its effectiveness for a global
clinical research organization.
“ You have to look at a range of
risks, including reputation. One
time a company I was with walked
away from signifcant property
tax incentives because they had
the potential to harm the local
community. We thought it was
the right thing to do.”
— Director of global incentives and grant
management at a multinational company
34 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
What companies can do
to leverage incentives in their
supply chains
Every company is different, but these
three leading practices apply to any
company seeking to effectively apply
incentives throughout the supply chain.
1 Select a core incentives team
Because of the diversity of incentive
programs discussed above, collaboration
among the various stakeholders in a
supply chain is imperative. Not only
will members of different groups within
a company have insight into different
potential incentive applications, they
will identify any potential hurdles early
in the process. For example, the real
estate team, after conferring with
the tax department, may learn that
a cash grant for a new investment may
be more valuable than a tax holiday.
Or government relations may have a
valid concern about a particular incentive.
Finally, the R&D team may want to
consult with HR and IT to make sure that
researchers’ time can be tracked on a
project basis in order to comply with the
reporting requirements necessary for cost
reimbursements.
2 Match supply chain spend with
available incentives
Once an internal incentives management
team has been created, it will be
important for the team to apply incentive
value across the supply chain and the
organization as a whole. Incentives are
usually tied to investment or expenditure.
Consequently, an important frst step in
the incentives management process is
a review of all supply chain-related spend
by activity, jurisdiction and time horizon.
This review will allow the different
categories of spend to be paired with the
incentive programs available for those
activities in the jurisdictions where they
are occurring. Because each jurisdiction
will have its own incentives, it is important
for the review to consider jurisdictional
as well as activity-based criteria. A leading
practice is to consider the full suite of
incentives in the site selection process,
which in some cases may mean simply
adjusting the cost model already in place.
For discretionary incentives, this is also
the ideal time to negotiate the package.
3 Review of alternative supply chain
jurisdictions for potential further
cost reductions
After the process of managing incentives
is in place, it will be valuable to
periodically review both the programs
currently being used and the potential
for increased savings under newly
enacted programs. This review also could
result in reduced costs if activities were
to be moved to another jurisdiction with
more lucrative incentives. Of course, not
all locations will be suitable alternatives
for some supply chain activities, but
those jurisdictions that could provide
an effective substitute for a given activity
may offer opportunities for additional
savings and reduced risk via incentives.
Overall, an effective internal incentives
management process will be led by
stakeholders from all invested business
functions. The core team will regularly
review all the components of supply
chain spend by activity, jurisdiction and
time horizon in order to match incentives
to eligible activities and it will monitor
new incentive programs in countries
representing potential alternative
destinations for supply chain activity
in order to stay abreast of the most
valuable savings opportunities.
In a recent internal survey of Ernst & Young’s Incentives
professionals across the globe’s top 25 foreign direct investment
recipient countries, almost all countries are trending toward
creating incentives for higher value-added activities such as high-
tech, innovative applications and higher paying jobs. To this end,
we are seeing more complex eligibility requirements that are not
always highly transparent, especially in developing countries.
35 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Managing the incentives asset
Global Company E is a large life sciences company headquartered in the US. The
director of global incentives and grant management talks about why her role was
created, the types of incentives on offer and the framework that the company has
evolved to manage its “incentives asset” effectively. She offered:
“This role was created about two-and-a-half years ago. Company E is in a growth industry
and expanding globally and had received economic development packages all over the
world, but we were handling them in a decentralized way. We realized that we had a big
asset that needed to be managed and protected and that we could also seek out additional
incentives and opportunities to support our expansion. That’s really what my role is. Also,
because I have an expertise in tax, I help manage the tax credits side of things as well.
“Typically, governments have a range of economic development tools that are available
and although they vary throughout the world, they are also very similar. Generally,
a government will calculate the increased tax base a new project is going bring to the
jurisdiction — property tax, sales tax, VAT, corporate and personal income tax, business
tax or whatever taxes there are in the jurisdiction — and they try to fgure how they can
share part of those taxes back with you to attract and support the project. Sometimes
they do it through tax credits like a job creation, investment tax credit or an R&D credit
tax. Sometimes they give it back to you in a tax holiday, giving a discounted income
tax rate for many years. Another way is through grants based on your investment,
job creation and maybe on the amount of training you are going to do. Grants could
be free land or a break on the rent. They could put in infrastructure for you. They can
put energy in or broadband if you need more capacity or bandwidth. They can buy the
building and lease it back to you. They can facilitate special arrangements with the local
universities in order to gain access to academic researchers that you need or get special
training for your people and workforce development. Things like that.
“Depending on what part of the world you are in, there is a philosophy of whether
it’s better to give companies tax credits or whether it’s better to give them cash grants,
but most places give a combination. What is available is based on an economic impact
decision that usually has to do with job creation and how much tax revenue you are
going to generate in the locale.
“Depending on the size of your company, you have to look at your incentives portfolio:
how many incentives do you have? How they are managed? It is an asset. What is the
asset worth right now and what do you think the future asset will be worth? If that is a big
number, then somebody should be paying attention to it and that means probably that there
should be resources dedicated to it — maybe even a department or a small group of people.
At a minimum, you need someone in the company who is responsible, who is accountable.
“When you get started it’s important to surround yourself with external practitioners
with a lot of experience to help you develop the infrastructure because a lot of times you
don’t even really know what you have. You have an idea what you have, but it’s dispersed
throughout the company and perhaps the world, so you need to do an inventory. And
then, you need to see how it’s currently been managed and to see what the risks are and
make decisions about whether or not that is an appropriate way to continue or whether
the activity should be more centralized.
Insight
36 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
“I fnd having a centralized function is important because there is so much commonality
between how these things are reported and how they are negotiated. If you can have
the same people involved in multiple projects, you really leverage your knowledge on
one project after another. If you have one set of business people who are on project A.
They negotiate this once-in-a-lifetime deal and then you have project B, with totally
different people, you don’t get any leverage. There is no transfer of knowledge, no
lessons learned.
“We have a matrix organization. I have globally responsibility so I need to leverage my
regional fnance team (that don’t report to me) to support my projects in the regions.
I have fnance and real estate people that support the effort. HR even lends a hand
to support the training grants and the data needed for compliance. These people don’t
report to me, but the company has made incentives a priority so if I need help, I get it.
It’s a very supportive group and they understand the importance of these incentives
to the company’s bottom line.
“Since I’m a department of one, I do very little of the compliance myself. I have trusted
business partners inside the company and I have trusted business partners outside the
company and those external business partners help me with the compliance. They also
help me scope out, develop, negotiate and secure new opportunities.
“Before seeking new incentives, we always do a cost/beneft analysis. Sometimes we
forgo incentives because they are too much work. We set a threshold, so we don’t spend
time on incentives unless there is a strong return on investment. And then we look at
the compliance burden and we look at the risk. I mean when I started in this career,
my philosophy was ‘I am going out to get everything’ but now I think ‘Let’s turn over
all the big rocks frst and then if there are any little rocks, we will go back and get them,
if it makes sense to.’
“The business people will say the incentives are not going to drive this decision. But,
incentives defnitely can infuence the business decision. For example, we have a site
we picked recently because it was in an economic development zone and we had other
sites that we were looking at that were equal otherwise, so that difference tipped the
balance. That is especially true in regions that have special economic zones. In China
for example, they have designated business parks with lots of incentives attached. But
if you are literally across the street, the same incentives are unavailable. I think helping
the real estate people and the business decision-makers know that is not intrusive. The
information helps the business people make the best decision for the company overall.
The incentives add to the project’s bottom line.
“Many things that we do can be done anywhere in the world. One of the things that
I have done is prepared an incentives matrix for all the countries where we do business
where we have 100 or more employees. When I get a call from one of our businesses
that needs to hire say 100 people in Asia, I can pull my matrix out and I can say this
is where we should start looking.
“So the business decides to expand, but it’s where and when the expansion takes place,
that can be infuenced.”
37 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Interview
Ernst & Young interviewed
Paul Wookey of Locate
in Kent, the investment
promotion agency for the
county of Kent in England.
We asked Paul about the
role of the incentives in
attracting investment,
incentive trends in Europe
and how companies should
evaluate incentive offerings.
Paul Wookey
Our job is to attract business to the county
of Kent. Ultimately, our objective and our
key performance indicator is the creation
of jobs. We provide a free and confdential
service as most investment promotion
agencies across the world would do. We
are a not-for-proft organization and we
have a mix of funding from both public
and private sector sources to fund our
operations.
We don’t sell Kent on the back of whatever
incentives are available. What we always
say is that obtaining a grant should makes
a good decision better rather than making
a bad decision better. Really it is the thing
that would possibly just tip the balance
in favour of the location.
But in our experience, when overseas
investors are looking at the UK or Europe,
one of the frst questions they will ask
is ‘What incentives are available in that
particular location?’ If you haven’t got any
incentives to offer you usually won’t even
get to the short list for that company’s
decision-making criteria. They will very
quickly move to consider areas where
there will be some fnancial support.
One of the differntiators that we currently
have in the UK is the ability to offer
some tax benefts, particularly things
like research and development tax credit
or the proposals for the patent box regime
that comes in next year. And obviously
the reduction in corporation tax was
aimed at making the UK a much more
attractive environment for investment.
These are very important and they come
into the mix when we are talking to
companies because if they are looking at
a Northern European location they will be
doing a comparison of tax rates and things
like the social cost, national insurance
and the personal income tax regime. And
then there are specifc measures that we
offer locally to supplement the national
incentives that are on offer.
Ernst & Young
Are there major differences between Kent
and other counties in England and Wales?
Paul Wookey
Yes. Kent made a bid for the Regional
Growth Funds last year. The area of East
Kent, which is the areas of Thanet, Dover,
Canterbury and Folkestone, has been
awarded £40m worth of Regional
Growth Funds and that was in direct
response to the announcement that
a multinational was going to exit its
Sandwich facility, which left a large hole
in the number of jobs in the area.
That site, which is now being transferred
by the government into another private
ownership, has been designated an
enterprise zone. And with £40m that
has been awarded to the surrounding
area there is a package of soft loans and/
or grants that will be made available to
companies seeking to invest in that area.
Anyone may apply for up to £2.5m of
the soft loans or direct grants to support
job creation. Then if you match or if you
add on top of that the enterprise beneft,
which will equate to about £55,000 a year
and £275,000 in total over fve years,
plus the corporate tax regime you begin
to create a cocktail of fnancial incentives
38 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
that overlay the natural attractiveness
of that area, making it more attractive
and more competitive than many of the
other locations that a company might
be looking at.
But I have to say that my own belief
is that most companies are not primarily
going to be driven in where they make
their investments purely on the basis of
the fnancial incentives. I think there are
many other attributes of an area that will
determine whether it’s the best location
for an individual business.
Ernst & Young
Is that one of the ways in which Kent
competes with other locations around
the world?
Paul Wookey
Yes, I think this makes us more attractive
and more competitive where we are
dealing with some of the bigger mobile
projects and where, say, a US company
is looking for a European operation but
can’t decide whether to go into Northern
Europe or into the UK.
I don’t think we have ever worked
on a project where it has been Kent,
somewhere in the US or somewhere,
in say, the Far East that are competing,
it doesn’t work like that for us. What
we usually are doing is competing with
Northern European locations where,
generally speaking, the incentives are
quite competitive. So unless we are able
to compete at that level we don’t get
to see some of those projects.
I would stress that companies should not
be making their decisions purely on the
incentives that are offered. There have
to be other good reasons to locate a
project and an investment in an area.
And they have to be looked at in a much
broader sense. Companies really need to
take good sound advice. And it’s only at
the end of the analysis around a whole
range of factors that you will see whether
the incentives really make a difference.
Ernst & Young
What trends are you seeing for fscal
incentives in the UK and in the EU?
Paul Wookey
The theory goes that the whole of Europe
is determined by the EU state aid rules
so that there is a level playing feld
across European countries. But it’s quite
interesting seeing what is happening with
the Eurozone debate and discussions
around trying to regularize and maybe
control interest rates. Our experience
is that every country is going to try to
be as competitive as it can be to win
investments and ultimately to secure
economic growth.
Many will fnd ways to offer some
additional incentives. It’s a bit like what
we are doing with the Regional Growth
Fund. Through the fact that we have been
able to secure this £40m we can offer
zero interest rate loans plus grants to
companies looking to invest in this area.
We are doing that within the state aid
rules because the areas where this money
is going to be used meet the state aid
requirements.
Some of the newer EU countries tend to
have a lower cost base with lower salary
cost and generally lower operating costs.
So, if the investment project is really
being driven by low-cost I don’t think
the UK very often gets on to the short list,
let alone Kent, because the UK is likely
to be deemed to be an expensive location.
But cost is not the only factor. What we
are seeing is that we are winning projects
largely because we’ve got the skill base.
39 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
40
Our report shows that companies are
responding to this challenge in three key ways.
Firstly, they are adapting their supply chains
to support rapid expansion and capitalize on
the growing number of middle-class buyers
in emerging markets, while managing risk.
Secondly, they are further developing their
existing supply chains to drive cost effciencies
and boost margins in their mature market
operations. And thirdly, they are developing
policies around sustainability and adapting
how they source materials and manufacture
and distribute fnished products to reduce
their impact on the environment and the
communities where they operate.
Part III
Meeting indirect
tax challenges in
the supply chain
41 Managing indirect taxes in the supply chain
W
ithin these three main areas,
we have identifed seven
interconnected items on the
Supply chain framework (Figure 4).
These interconnected items are key areas
of focus for supply chain transformation
to promote growth, improve margins
and address environmental issues. Indirect
taxes can be a barrier to success in these
sectors, for example, by increasing the
landed cost of goods, or they can enhance
opportunities, through incentives and
“soft” loans. In this part of the report,
we look at how opportunities and risks
may arise in the supply chain framework
for the following: VAT/GST; customs
and international trade; excise and
environmental taxes; export controls and;
grants and incentives. We also touch on
some of the leading practices used by
global companies to effectively manage
within their complex supply chains.
With slow revenue growth in mature markets, the supply chain must create
sustainable cost savings to support margins and to help pay for growth elsewhere.
The supply chain must enhance its core competency to
become a strategic business enablement vehicle to drive top-line growth.
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
Figure 4: Supply chain framework
42 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
43
D
uring the economic downturn,
global companies have struggled
to maintain and increase margins,
especially in developed markets where
they face a combination of increasing
costs and pricing pressures. In response,
businesses in developed markets are
looking critically at their costs, stripping
out unnecessary taxes and duties,
reducing borrowing requirements and
maximizing grants and incentives.
These can all be effective strategies in
reducing the cost of producing, selling and
distributing goods. For example, economic
customs regimes may avoid duty for
contract manufacturing, grants and soft
loans may be available for creating new
employment opportunities and VAT/GST
charged to domestic customers may be
avoided by selling goods cross-border.
Some multinationals are reconfguring
their supply chains to become more
“customer-centric,” to reduce overheads,
operate more effciently and beneft from
economies of scale. They are changing
Managing indirect taxes
to improve margins
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
how they purchase goods and services,
carry out key functions and deliver their
goods by centralizing and rationalizing
logistics, procurement, production and
distribution. These changes all have
a profound impact on indirect taxes,
particularly on compliance obligations.
If these taxes are not managed effectively
they can increase costs, have a negative
impact on cash fow and delay product
deliveries. For example, a change in the
company that buys and sells products
has a knock-on effect for VAT/GST, excise
duties, export licenses and customs
regimes. Failure to recognize and manage
the new obligations can result in major
business disruption and large fnancial
penalties.
Risks can be avoided by involving
indirect taxes as part of any supply chain
transformation project from the start.
In fact, looking critically at indirect taxes
and grants and incentives may highlight
new opportunities to strip out costs,
reduce fnancing and improve operational
effciencies.
44 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
VAT/GST
The main objectives for VAT/GST in this
area of the supply chain framework are:
• Reducing the burden of VAT/GST, both
in terms of absolute costs and in terms
of negative cash fow
• Maximizing positive VAT/GST cash fow
on sales and purchases
• Reducing the costs of compliance and
the risk of incurring penalties
The main issues for VAT/GST include:
• Absolute VAT/GST costs e.g., input
VAT/GST that is not recoverable or
that is missed due to poor VAT/GST
management, foreign VAT/GST that
is not available for recovery and double
taxation arising from mismatched
systems
• Negative cash fow e.g., VAT/GST
accounted for on sales but not yet paid
(or never paid) by purchasers, VAT/GST
paid on imports and purchases that
has not been reimbursed or offset,
foreign VAT/GST that is not picked
up for recovery
• Financial penalties from failing to
comply with VAT/GST obligations
e.g., penalties incurred for incorrect
invoicing or for late VAT/GST
registration in a foreign jurisdiction
• Administrative costs associated with
multinational VAT/GST compliance
obligations
Leading practices for reducing the cost
burden of VAT/GST include:
• Adopting an effective VAT/GST
management framework to identify,
quantify and manage transactions and
cross-border movements of goods,
throughout the end-to-end supply chain
• Mapping out VAT/GST transaction fows
against costs to identify opportunities
to strip out VAT/GST costs and improve
cash fow
• Standardizing and automating end-to-
end processes (especially AR and AP
processes)
• Centralizing VAT/GST compliance
in global or regional shared services
centers
• Routing cross-border movements
of goods to make best use of import
VAT/GST deferments, free trade
zones, reverse charge accounting,
etc. to improve cash fow and avoid
irrecoverable VAT/GST
Customs and international trade
The main objectives for customs duties
in this area of the supply chain framework
are:
• Reducing customs duty spend to
reduce the landed cost of products
• Smoothing customs clearance
processes
The main issues for customs duties
include:
• Absolute costs from “trapped duty”
paid at an earlier stage of the supply
chain that increase the landed cost
of products
• Penalties, delays and seizure of goods
arising from non compliance with
customs compliance procedures, such
as origin management, economic
customs procedures and accounting
and anti-bribery laws
• Absolute costs related to product
delays (e.g., use of air freight to meet
just-in-time delivery conditions)
• Costs and risks related to using
non compliant customs agents for
importations
• Duties and penalties imposed as a
result of countries applying different
legal interpretations to basic customs
principles (such as the country of
origin, the commodity code and the
product value of the goods)
45 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
Excise and environmental duties
The main objectives for excise duties in this
area of the supply chain framework are:
• Reducing excise duty spend to reduce
the landed cost of products
• Ensuring excise duties are paid solely
in the country of consumption
The main issues for excise duties include:
• Absolute duty costs arising from paying
irrecoverable duties in more than one
country
• Penalties, delays and seizure of goods
arising from non compliance with legal
requirements
• Administrative costs associated
with local excise duty compliance
obligations in multiple countries
Leading practices for reducing the cost
burden of excise duties include:
• Adopting an effective management
framework to identify, quantify and
manage excise duties and licenses
throughout the end-to-end supply
chain
• Optimizing the use of excise duty
planning including suspension and
exemption regimes
• Aligning excise duty planning with
customs and VAT/GST suspension
regimes, free trade zones and
warehousing to maximize benefts
and reduce the overall duty burden
Export controls
The main objectives for export controls
in this area of the supply chain framework
are:
• Reducing the cost of export compliance
• Reducing export lead times
The main issues for export controls are:
• Administrative costs arising from
complying with complex regulations
in multiple jurisdictions
• Penalties, delays and seizure of goods
arising from non compliance with
export license procedures
Leading practices for reducing the cost
burden of export controls include:
• Adopting an effective management
framework to identify, quantify and
manage export licenses throughout the
end-to-end supply chain
• Embedding export compliance
obligations into business processes
• Centralizing compliance in global
or regional shared services centers
• Using customs accreditation (such
as AEO) to transit goods more quickly
through international borders
Leading practices for reducing the cost
burden of customs duties include:
• Adopting an effective customs duty
management framework to identify,
quantify and manage transactions
and cross-border movements of goods,
throughout the end-to-end supply
chain
• In-sourcing customs activities
to improve processes and data
management
• Applying economic customs procedures
(such as OPR, IPR) and customs
planning tools (such as classifcation
and origin) where available
• Routing cross-border movements
of goods to make best use of free trade
agreements and free trade zones
• Optimizing sourcing of goods
to maximize the use of customs
procedures (e.g., origin)
• Using accreditation (such as AEO)
to transit goods more quickly through
international borders
• Linking the use of special customs
regimes in the end-to-end supply chain
46 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
Leading practices for reducing the cost
burden of incentives include:
• Adopting an effective management
framework to identify, quantify and
manage the incentives “assets”
• Centralizing management of grants
and incentives to improve controls,
improve decision-making and maximize
in-house experience
• Evaluating the benefts available
compared with the compliance
conditions and costs
• Identifying potential investment
destinations and negotiating
investment packages that are tailored
to the company’s needs to maximize
benefts and cost reductions
• Combining grants or credits for new
investment, employment and R&D, etc.
to minimize input costs throughout the
supply chain
Incentives
The main objectives for grants and
incentives in this area of the supply chain
framework are:
• Reducing the cost of raw materials
and overhead costs (including the costs
of employees, real estate, energy and
fnance)
• Increasing capital investment
The main issues for incentives are:
• Administrative costs arising from
complying with complex qualifying
conditions in multiple jurisdictions
• Absolute costs of clawed back
incentives that were granted previously
• Missed incentive opportunities because
of poor compliance or tracking of
programs or because the available
incentives are not appropriate (e.g.,
a tax holiday for a company with no
taxable profts)
47 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
G
overnments around the world are
struggling to fnd the right balance
between promoting economic
growth and protecting the environment.
Issues of sustainability have also climbed
the corporate agenda in recent years and
will continue to have a profound effect on
supply chains in the future.
Many countries have turned to indirect
taxes and incentives to support a “green”
agenda. For example, the excise duties
related to mineral oils have increased
in many countries; several jurisdictions
have also adopted one-off levies, such as
carbon taxes and packaging duties, aimed
at discouraging waste, pollution and the
use of fossil fuels. These environmental
taxes can increase the cost of overheads,
and the production and distribution cost
of raw materials. And failure to comply
with multiple local requirements can lead
to business disruption, fnes and delays.
But companies that adopt greener policies
may beneft from a range grants and
incentives aimed at attracting the use
of cleaner industries and technologies and
non polluting activities (such as R&D and
high-tech).
Environmental duties
The main objectives for environmental
duties in this area of the supply chain
framework are:
• Ensuring full compliance with local
taxes
• Reducing environmental duty spend
to reduce the landed cost of products
• Avoiding product delivery delays
The main issues for environmental duties
include:
• Absolute duty costs arising from paying
irrecoverable duties
• Penalties, delays and seizure of goods
arising from non compliance with legal
requirements
• Administrative costs associated with
local environmental duty compliance
obligations in multiple countries
Leading practices for reducing the cost
burden of environmental duties include:
• Adopting an effective management
framework to identify, quantify and
manage environmental duties and
licenses throughout the end-to-end
supply chain
• Centralizing management of
environmental duties (e.g., in a global
or regional shared service center)
to improve quality of compliance and
reduce costs
• Embedding environmental concerns
into the supply chain and modifying
products or processes to reduce or
avoid one-off duties (e.g., packaging
and carbon taxes)
Managing indirect taxes
to support sustainability
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
48 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
Incentives
The main objectives for grants and
incentives in this area of the supply chain
framework are:
• Covering or reducing the cost of
setting up businesses that will carry
on sustainable activities
• Covering or reducing the cost
of adapting current infrastructure
and business practices to be more
sustainable
The main issues for incentives are:
• Compliance costs associated with
complex qualifying conditions in
multiple jurisdictions
• Absolute costs of clawed back
incentives that were granted but for
which the conditions have not been met
• Missed incentive opportunities because
of poor compliance or tracking of
programs or because the available
incentives are not appropriate (e.g.,
a tax holiday for a company with no
taxable profts)
Leading practices for reducing the cost
burden of incentives include:
• Adopting an effective management
framework to identify, quantify and
manage the incentives “asset”
• Centralizing management of grants
and incentives to improve controls,
improve decision-making and maximize
in-house experience
• Evaluating the benefts available
compared with the compliance
conditions and costs
• Identifying potential investment
destinations and negotiating
investment packages that are tailored
to the company’s needs to maximize
benefts and cost reductions
• Combining grants or credits for
sustainability programs for multiple
concerns, such as renewable energy,
waste management and production
effciencies
“ I am seeing a trend right now in
China and in other places too where
they are starting to talk about
attracting ‘no carbon footprint’
businesses. They want to attract
businesses like outsourcing and life
sciences that aren’t going to pollute.”
— Director of global incentives and grant
management at a multinational company
49 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
T
o deal with diffcult economic
conditions in developed economies,
in recent years, global companies
have developed new products and
expanded into new markets. Developing
an effective supply chain operating model
is critical to achieving and maintaining
high levels of growth within emerging
markets. A wide range of grants and
incentives — from tax holidays to soft
loans and R&D support — are offered to
attract global companies to new locations.
But operating in unfamiliar territories
can challenge corporate functions to the
limit and expose an organization to a wide
range of risks. The mix of indirect taxes
in emerging economies, for example, may
be unfamiliar to companies headquartered
in Europe and the US. For example,
excise taxes may apply to a wider range
of products and customs duty rates may
be higher, or the country may not yet
have a well-developed network of free
trade agreements.
Managing indirect taxes to
support growth in new markets
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
Operating in new markets can also
increase the diffculty of managing
indirect taxes and the complexity of
obligations, thus increasing the risk of
incurring penalties for non compliance.
Failing to comply fully with indirect
tax requirements can have severe
consequences in countries which impose
high penalties for errors and omissions
(including severe fnancial penalties,
business closure and criminal sanctions
for business offcials). For example, as
companies enter new markets they must
ensure that they are aware of and ready
to comply with all their obligations before
they commence operations. Companies
that are comfortable with European-style
VATs may struggle with the single-stage
consumption taxes, such as business
tax in China, or the multiple local taxes
charged in India and Brazil.
Changes in indirect tax systems can also
add to the complexity. In many emerging
economies, new and reformed taxes may
be introduced and taxpayers’ systems
and processes must adapt, often at short
notice, to keep the business operating.
For example, the recent VAT pilot in
Shanghai was introduced with just eight
weeks notice.
Risks can be avoided and the benefts
of entering new markets preserved by
involving indirect taxes as part of any
business expansion project from the
outset. In fact, looking critically at indirect
taxes and incentives may help to decide
where and how new activities should be
undertaken.
50 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
VAT/GST
• Reducing the burden of VAT/GST, both
in terms of absolute costs and in terms
of negative cash fow
• Reducing the costs of compliance in
multiple jurisdictions
• Reducing the risk of incurring penalties
in unfamiliar jurisdictions and new tax
systems
The main issues for VAT/GST include:
• Administrative costs associated with
adapting to VAT/GST compliance
obligations arising from doing business
in new markets
• Absolute VAT/GST costs e.g., input
VAT/GST that is not recoverable or
that is missed due to poor VAT/GST
management, foreign VAT/GST that is
not available for recovery and double
taxation arising from mismatched
systems
• Negative cash fow e.g., VAT/GST
accounted for on sales but not yet paid
(or never paid) by purchasers, VAT/GST
paid on imports and purchases that
has not been reimbursed or offset,
foreign VAT/GST that is not picked up
for recovery
• Financial penalties from failing to
comply with VAT/GST obligation
e.g., penalties incurred for incorrect
invoicing or for late VAT/GST
registration in a foreign jurisdiction
• The effect of a new VAT/GST being
introduced or of consumption tax
reform on business processes and
accounting and reporting requirements
Leading practices for reducing the cost
burden of VAT/GST include:
• Adopting an effective VAT/GST
management framework to identify,
quantify and manage transactions and
cross-border movements of goods,
throughout the end-to-end supply chain
• Mapping out VAT/GST transaction fows
against costs to identify opportunities
to strip out VAT/GST costs and improve
cash fow
• Standardizing and automating end-to-
end processes (especially AR and AP
processes)
• Centralizing VAT/GST compliance
in global or regional shared services
centers
• Proactively planning for new
compliance requirements and changes
to tax systems
• Routing cross-border movements
of goods to make best use of import
VAT/GST deferments, free trade
zones, reverse charge accounting,
etc. to improve cash fow and avoid
irrecoverable VAT/GST
• Adopting a centralized or regional
supply chain model and implementing
a VAT/GST-free procurement,
manufacturing and sales model to
meet business needs and just-in-time
delivery targets
Customs and international trade
The main objectives for customs duties
in this area of the supply chain framework
are:
• Reducing penalties and delays related
to customs compliance
• Smoothing customs clearance
processes
• Identifying increased customs spend
• Reducing customs duty costs
for landed goods and within the
manufacturing chain
The main issues for customs duties
include:
• New customs duties, obligations
and opportunities arising from doing
business in new markets or trading
in new products
• Absolute costs of “trapped duty” paid
at an earlier stage of the supply chain
increasing the landed cost of products
• Penalties, delays and seizure of goods
arising from non compliance with
customs compliance procedures, such
as origin management, economic
customs procedures and accounting
and anti-bribery laws
• Absolute costs related to product
delays (e.g., use of air freight to meet
just-in-time delivery conditions)
• Costs and risks related to using
non compliant customs agents for
importations
• Duties and penalties imposed as a
result of countries applying different
legal interpretations to basic customs
principles such as the country of origin,
the commodity code and the product
value of the goods
51 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
Excise and environmental duties
The main objectives for excise duties in this
area of the supply chain framework are:
• Reducing excise duty spend to reduce
the landed cost of products
• Ensuring excise duties are paid solely
in the country of consumption
• Smoothing logistics for excisable
products processes
The main issues for excise duties include:
• New excise duties and obligations
arising from introducing new goods
onto the market or existing goods into
new markets
• Absolute costs arising from “excise
leakage” (paying irrecoverable duties
in more than one country)
• Penalties, delays and seizure of goods
arising from non compliance with legal
requirements
• Administrative costs associated
with local excise duty compliance
obligations in multiple countries
Leading practices for reducing the cost
burden of excise duties include:
• Discussing new activities and new
product with local tax authorities
to explore available excise duty
programs and applicable conditions
• Adopting an effective management
framework to identify, quantify and
manage excise duties and licenses
throughout the end-to-end supply
chain
• Defning excise duty management
obligations and agreeing them
in specifc service agreements
• Identifying local excise duty planning
including suspension and exemption
regimes
• Using centralized excise licenses
and direct transportation to optimize
payment facilities and deposit
guarantees
• Aligning excise duty planning with
customs and VAT/GST suspension
regimes, free trade zones and
warehousing to maximize benefts
and reduce the overall duty burden
Leading practices for reducing the cost
burden of customs duties include:
• Adopting an effective customs duty
management framework to identify,
quantify and manage transactions
and cross-border movements of goods,
throughout the end-to-end supply
chain
• In-sourcing customs activities
to improve processes and data
management
• Applying economic customs procedures
(such as OPR, IPR) and customs
planning tools (such as classifcation
and origin) where available
• Routing cross-border movements
of goods to make best use of free trade
agreements and free trade zones
• Optimizing sourcing of goods
to maximize the use of customs
procedures (e.g., origin)
• Using accreditation and facilitation
programs (such as AEO, CT-PAT)
to transit goods more quickly through
international borders
• Linking the use of special customs
regimes in the end-to-end supply chain
• Negotiating with tax authorities
to make full use of cost reduction
programs
52 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
Incentives
The main objectives for grants and
incentives in this area of the supply chain
framework are:
• Adding value to business decisions
related to new markets and new
activities
• Reducing costs of setting up and
doing business in new locations
or undertaking new activities
• Supporting capital investment
The main issues for incentives are:
• Administrative costs arising from
complying with complex qualifying
conditions in multiple jurisdictions
• Missed incentive opportunities because
of poor compliance or tracking of
programs or because the available
incentives are not appropriate (e.g.,
a tax holiday for a company with no
taxable profts)
Leading practices for reducing the cost
burden of incentives include:
• Adopting an effective management
framework to identify, quantify and
manage the incentives “asset”
• Proactive consideration of available
incentives during the investment
planning process to build savings into
the business decision-making process
• Centralizing management of grants
and incentives to improve controls,
improve decision-making and maximize
in-house experience
• Evaluating the benefts available
compared with the compliance
conditions and costs
• Identifying potential investment
destinations and negotiating
investment packages that are tailored
to the company’s needs to maximize
benefts and cost reductions
• Combining grants or credits for new
investment, employment, R&D to
minimize input costs throughout the
supply chain
• Incentives related to product or service
development may increase employees’
skill levels and extend the benefts of
R&D within the organization
Export controls
The main objectives for export controls
in this area of the supply chain framework
are:
• Reducing the cost of export compliance
• Reducing export lead times
The main issues for export controls are:
• Administrative costs arising from
complying with complex regulations
in multiple jurisdictions
• Penalties, delays and seizure of goods
arising from non compliance with
export license procedures
• Operating in emerging markets may
increase compliance risk
Leading practices for reducing the cost
burden of export controls include:
• Adopting an effective management
framework to identify, quantify and
manage export licenses throughout
the end-to-end supply chain
• Embedding export compliance
obligations into business processes and
across multiple corporate functions
• Centralizing compliance in global
or regional shared services centers
• Using customs accreditation (such
as AEO) to transit goods more quickly
through international borders
53 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
Indirect tax
Global Director — Indirect Tax
Philip Robinson
+ 41 58 289 3197
[email protected]
Americas Asia-Pacifc Europe, Middle East, India
and Africa (EMEIA)
Jeffrey Saviano
+ 1 212 773 0780 (New York)
+ 1 617 375 3702 (Boston)
[email protected]
Karen Christie
+ 1 212 773 5552
[email protected]
Frank de Meijer
+ 55 11 2573 3413
[email protected]
Kristine Price
+ 1 212 773 2662
[email protected]
Robert Smith
+ 86 21 2228 2328
[email protected]
Gijsbert Bulk
+ 31 88 407 11 75
[email protected]
Charles Brayne
+ 44 20 7951 6337
[email protected]
Franky De Pril
+ 32 2 774 9484
[email protected]
Marc Schlaeger
+ 41 58 286 3103
[email protected]
John Sloot
+ 31 88 40 70426
[email protected]
Contacts
54 Managing indirect taxes in the supply chain
Incentives
Americas Asia-Pacifc Europe, Middle East, India
and Africa (EMEIA)
Karen Hensley-Chelstowska
+ 1 972 835 4559
[email protected]
Robin Parsons
+ 61 8 9429 2251
[email protected]
Christine Oates
+ 44 121 535 2466
[email protected]
55 Supporting growth and reducing cost and risk
56
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Ernst & Young
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ED 0113
doc_399354060.pdf
In this report, Managing indirect taxes in the supply chain: supporting growth and reducing cost and risk we look at the indirect tax supply chain issues that multinationals face when operating in a complex, changing world. We also examine how they tackle these issues in practice, drawing on some of the lessons they have learned and the "leading practices" they have developed.
Managing indirect taxes
in the supply chain
Supporting growth and reducing cost and risk
Welcome
Globalization is changing
how we do business in every
industry and in every part of
the world. Global companies
are rapidly transforming
their supply chains to go
wherever necessary to reduce
costs, launch products and
enter lucrative new markets.
Operating in this complex
global environment presents a
range of challenges for indirect
taxes such as value added
tax (VAT), goods and services
tax (GST), customs and
excise duties, environmental
duties, grants and incentives.
Confronting those challenges
and fnding effective solutions
will continue to be crucial
as the business landscape
continues to change.
In this report, Managing indirect taxes in the supply chain: supporting growth and
reducing cost and risk we look at the indirect tax supply chain issues that multinationals
face when operating in a complex, changing world. We also examine how they tackle
these issues in practice, drawing on some of the lessons they have learned and the
“leading practices” they have developed.
This report is primarily aimed at the people responsible for tax and fnancial reporting
in multinational organizations. But we hope tax and fnancial executives will also use it
to start, and contribute to, wider discussions throughout the organization about how
best to manage the global supply chain. Our comments and insights are chiefy based
on the experience of our global networks of Indirect Tax and Incentives professionals
and on in-depth interviews conducted with in-house tax executives at a number of global
companies (operating in more than 30 countries worldwide).
We hope you fnd this report interesting and the insights and examples provided useful
information for your business. We would welcome the opportunity to discuss these
topics with you in more detail. If you would like to explore how we may assist you to
improve the management of indirect taxes for your multinational organization, please
contact one of the Indirect Tax leaders listed at the end of this report or your usual
Ernst & Young Indirect Tax contact.
Philip Robinson
Global Director — Indirect Tax
+ 41 58 289 3197
[email protected]
Contents
Executive summary 2
Part I
The changing supply chain 5
The shifting patterns of global trade 6
Supply chain reorganizations 8
Part II
Indirect taxes in the supply chain 13
Global supply chains increase indirect tax risk 14
Indirect taxes — a growing source of global risk 16
VAT/GST 18
Single-stage consumption taxes 22
Customs duties 24
Excise duties and environmental taxes 28
Export controls 30
Incentives 32
Part III
Meeting indirect tax challenges in the supply chain 41
Managing indirect taxes to improve margins 44
Managing indirect taxes to support sustainability 48
Managing indirect taxes to support growth in new markets 50
Contacts 54
1
Executive
summary
What we are seeing around the world
In recent years, a combination of world events, the global
economic crisis and rapid advances in technology have wrought
radical changes in international trade. Few global companies
today do business in the same way or in the same places as they
did even fve years ago. They are extending their reach into
new markets and seeking to thrive in developed economies by
operating more effectively and effciently. These developments
are having profound effects on global supply chains —
changing how and where materials and products are sourced,
manufactured, distributed and sold.
Indirect taxes — such as VAT/GST, customs and excise duties —
are typically based on trade fows and transactions, not on
profts or income. As such, they are inextricably linked to
supply chain activities. Changes in the ways companies are
doing business are having a profound impact on these taxes.
Equally, changes in these taxes may have a profound effect
on companies’ supply chains, infuencing where activities are
carried out, the cost of fnished products and delivery routes
and timing. Increasingly, companies recognize that effective
management of indirect taxes, grants and incentives is essential
to support growth and reduce the costs and risks of doing
business internationally.
The changing supply chain
World trade patterns are changing
At the start of the 1990s, global trade was dominated by the
developed nations; by 2010, the advanced economies accounted
for a little more than 60% of global merchandise exports. New
markets are opening, companies are exporting to more countries
than ever before and trade routes are changing. China is now the
biggest trading partner for Australia, Japan, South Korea, India,
Russia and South Africa and is increasing its share of trade with
Europe and the US. As the current emerging economies (such as
Brazil, Russia, India and China) grow and mature, new developing
economies are likely to emerge (such as Vietnam and Cambodia).
Supply chains are transforming
In response to these changing patterns in global trade,
companies are rapidly transforming their supply chains to go
wherever necessary to support growth and reduce costs and
risks. For many companies, supply chain activities — such as
product engineering, sourcing, manufacturing and logistics —
are now widely dispersed around the world. As activities are
outsourced, centralized and streamlined to gain effciencies and
maximize scarce resources, corporate structures and functions
are also being transformed.
Indirect taxes in the supply chain
Changing global supply chains challenge indirect taxes
Changes in world trade and in supply chain models present
challenges for indirect taxes (including taxes on consumption
such as VAT/GST and sales taxes, customs duties and
environmental taxes, as well as grants and incentives) and
excise duties. Because supply chain transformations are
intended to obtain operational and fnancial benefts, indirect
tax considerations may not be at the forefront of the decision —
despite the fact that indirect tax treatment of transactions,
the company’s compliance obligations and the customs regimes
and incentives that are available may be seriously different
as a result of any change.
Changing indirect taxes challenge global supply chains
Governments around the world are increasingly relying on
indirect taxes to bolster revenues and fund tax reforms in other
areas. Global companies need to be aware of the main trends
in indirect taxation and their impact not only on supply chain
transformations but also on their existing supply chains.
Broadly, recent changes include: increasing tax rates for
VAT/GST and excise taxes; the adoption of new taxes as
emerging markets introduce VAT/GST and developed markets
introduce new excise and “green” taxes to infuence consumer
behavior and protect the environment; a reduction in customs
duties through new Free Trade and Preferential Trade
2 Managing indirect taxes in the supply chain
agreements; and an increasing range of tax incentives and
grants aimed at stimulating job creation, particularly higher-
value, high-wage activities and non polluting industries.
Companies should also be aware of the growing emphasis by
tax authorities on full compliance with indirect tax obligations.
Increasingly, they are turning to advance technologies for
reporting obligations, to collect information and to audit
companies’ activities. Although a growing number of countries
are imposing requirements on companies to submit electronic
data, there is still little harmonization of indirect tax reporting
requirements in different jurisdictions, adding to global
companies’ compliance obligations and the risk of making errors.
Meeting indirect tax challenges in the supply
chain
Effective management of indirect taxes is essential to support
growth and reduce costs and risk. If these taxes are left
out of the picture, the expected benefts of a supply chain
transformation may not be fully maximized or, in extreme
cases, may not be realized at all. For example, making full use
of available customs regimes can reduce production costs and
speed delivery times. On the other hand, moving products cross-
border without the correct documents and export licenses may
result in costly delays and even seizure of the goods.
In Part III of this report, we look at seven common supply chain
challenges that global companies face as they move into new
markets and operate more effectively and sustainably. We
outline leading practices to reduce risks and boost performance
in VAT/GST, customs and international trade, excise duties and
environmental taxes, export controls and incentives. Although each
of these areas present different issues and opportunities, some
common themes emerge for adopting an effective management
framework for indirect taxes and incentives including:
• Identify and quantify the indirect taxes and incentives your
company currently pays and receives
• Identify and quantify areas of current and future risk
and opportunity, including the costs of related compliance
obligations
• Assign clear responsibilities for managing your organization’s
indirect tax performance and incentives “assets”
• Centralize management of indirect taxes and incentives to
mirror your business structure and capitalize on knowledge
and experience
• Standardize processes to spread leading practices throughout
the organization
• Outsource and co-source compliance and reporting functions
that rely heavily on specialist or local knowledge
• Involve all the parts of the organization that have a stake in
managing and improving your business performance, such as
tax, fnance, operations, logistics, HR, real estate and so on
• Measure your management of indirect taxes and incentives
by adopting key performance indicators related to your
supply chain goals
3 Supporting growth and reducing cost and risk
4
Supply chains are coming under intense
scrutiny as global companies look to thrive
and grow in a rapidly changing and highly
competitive world. Advances in technology
are allowing new goods and services to be
designed, manufactured and delivered in
new ways. New markets are opening up
and old certainties are being challenged.
Change is rapid and inevitable.
Part I
The changing
supply chain
5 Managing indirect taxes in the supply chain
A
s new economic powerhouses
have emerged in recent years,
they have changed the patterns
of trade. At the start of the 1990s, global
trade was dominated by the developed
nations, which accounted for around 80%
of merchandise exports. But that share
has declined markedly during the past
two decades and the recent fnancial
crisis and global recession accelerated the
downward trend. By 2010, the advanced
economies accounted for a little more
than 60% of global merchandise exports
and we estimate that the continuing shift
toward global outsourcing of production
and regional supply chains will further
reduce the developed markets’ share
of global merchandise exports to
approximately 55% by 2020.
1
Companies expect to export to more
markets during the next few years.
In a recent Ernst & Young survey,
30% of corporate executives responded
that they anticipate exporting fnished
products to more than 20 markets
in fve years.
The continuing economic
growth of the East
A decade ago, China wasn’t the top trading
partner for even one of the Group of 20
(G20) economies. Today, it’s the biggest
trading partner for six (Australia, Japan,
South Korea, India, Russia and South
Africa) and it has replaced the US as the
top export market for a seventh (Brazil)
and risen in importance for the rest.
Asia will continue to be the most dynamic
region for trade and the fastest growth
of merchandise exports will occur within
the region itself. China and India will lead
this expansion and the commerce between
these two economies is anticipated to
grow faster than any other trade route.
Higher prices for primary commodities
such as oil and the growth of trade in
Asia have helped to boost the combined
share of the emerging economies in world
exports to 45% in 2010, its highest ever.
Already having moved toward production
of sophisticated electronics and industrial
supplies and away from their former
reliance on textiles and other light
manufacturing, China, India and other
emerging economies will further diversify
their manufacturing bases.
Gains in the West
The proliferation of regional supply chains
is a trend that reinforces the importance
of both China and India within the overall
pattern of global trade. However, it would
be deceptive to focus merely on growth
rates. The sheer magnitude of existing
trade in advanced economies means
that even a modest growth rate during
the coming decade will translate into
huge volumes of new trade. While the US
share of world exports fell signifcantly
over the past decade, this trend will
likely be reversed during the next 10
years because the economic dynamism
of Asia is a huge market opportunity for
exporters in developed nations.
The shifting patterns
of global trade
1 Trading Places: the emergence of new patterns of international trade, Ernst & Young, 2011
6 Managing indirect taxes in the supply chain
Part I The changing supply chain
“ In the past, we’ve been looking at planning very much on a country-by-
country basis. But now we’re also knitting that together.
“ For example, we know we have agreed to certain processes with the
government in country A, we have export credits in country B and an
incentive for a factory in country C. Instead of looking at those things
individually you can also look at that holistically and say ‘If you add A, B,
C together and if we change the fow like this or if we lobby government
B for a free trade agreement with country C, that would reduce our cost
signifcantly.’ You see a transformation from local-to-local supply chains
to global supply chains.
“ It’s no longer the case that a factory only serves the surrounding countries
or just the local country. A factory may well be going to supply its goods to
the entire world and that changes the dynamic and that also then changes
how to look at things.”
— Head of transfer pricing at a global consumer products company
7 Supporting growth and reducing cost and risk
Part I The changing supply chain
I
n response to these changing patterns
in global trade, global companies are
rapidly transforming their supply chains
to go wherever necessary to reduce
costs, launch products and enter lucrative
new markets. For many companies,
supply chain activities such as product
engineering, sourcing, manufacturing and
logistics are now widely dispersed around
the world.
Indirect taxes and supply chain
reorganization
Any supply chain restructuring will have
an important impact on the company’s
indirect tax position. For example, what
are the new obligations? What is the
impact on duty costs? Which company
must now account for tax — where is it
due and when?
Businesses often launch supply chain
restructuring projects without considering
the indirect tax implications. But this can
mean that risks and costs are increased
and valuable opportunities are missed.
Indirect tax is relevant for all aspects
of the supply chain, including:
• Development and strategy
• Research and development
(R&D) and design
• Procurement and sourcing
• Manufacturing
• Distribution and logistic
• Services, both customer-facing
and internal
Indirect tax issues for
centralized operating models
Supply chain models with a central
business entity are particularly
challenging from an indirect tax point
of view. Centralized operating models
often result in an increased number of
transactions and companies having to
fulfll indirect tax obligations across many
geographies. Because these models
are intended to obtain operational
and fnancial benefts, indirect tax
considerations are typically not at the
forefront of the design process.
Even if physical distribution channels are
not changed as a result of the centralized
model, the indirect tax treatment and
application of indirect tax arrangements
may be seriously different. It is quite
common for centralized operating models
to result in a disconnect between physical
product fows and the legal and fnancial
ownership of the products. The main
indirect tax challenges arise from the
central company:
• Buying in many countries
• Selling from or to many countries
• Owning goods in many countries
• Buying or selling goods on consignment
• Being involved in chain transactions
• Moving goods across borders for storage,
process and repair
• Purchasing services from many countries
• Supplying services in many countries
• Becoming the owner of all products from
raw material through fnished product
throughout the whole supply chain
• Keeping title to the fnished product until
late in the supply chain
Supply chain reorganizations
During the design of the operating model,
attention should be given to the indirect
tax implications of the more centralized
structure. Unexpected problems may arise
if the indirect tax landscape has not been
mapped out completely and if all new
indirect tax requirements have not been
considered.
The change toward a centralized model
may result in the central company
having to obtain import and export
licenses, which may require appointing
an indirect tax representative in multiple
jurisdictions. Existing incentives could
be lost without proper adjustment of
the facts associated with them. Customs
rules, such as “frst sale for export,” may
no longer be available when companies
are removed from the supply chain to
allow one central company to own the
goods throughout the supply chain. In
addition, many jurisdictions will disallow
for non-established companies to have the
required import, export and regulatory
licenses. Often the central company will be
required to register for VAT/GST, creating
a permanent establishment for direct
taxes. The list of potential issues can be
endless, effectively creating too many
practical problems for the centralized
model to be implemented without the
necessary indirect tax adaptations.
The indirect tax issues should be
addressed up front. Given ample time to
implement, most issues can be resolved
either by adapting the operating model to
better cater for indirect tax or by receiving
up-front approval from tax authorities and
regulatory bodies.
8 Managing indirect taxes in the supply chain
Part I The changing supply chain
Streamlining centers of production
Global Group A manufactures and distributes a wide range of consumer products.
In recent years the group has undertaken a number of transformation projects to
streamline centers of production and distribution. The frst project, carried out in
Europe, the Americas and Asia. The global head of transfer pricing discusses how the
company’s attitude to indirect taxes has evolved from dealing with VAT and customs
compliance resulting from these transformations to basing decisions about where
to carry out production based on indirect tax considerations. He offered:
“I think there is a difference in the importance of indirect taxes on these projects on
a regional basis. If you look at it in Europe, the biggest challenge in general has been
making sure that the ERP systems process the indirect tax aspects in such a way
that there is less manual activity, that the invoices are all done correctly and that the
electronic invoicing systems operate well. In that sense, the harmonization of VAT and
customs processes — in the EU at least — has helped signifcantly.
“In the Americas, indirect taxes were very relevant when we were designing the model,
so when we were even defning which transactions would take place, indirect tax and
customs were both very relevant. In Europe, we were much more concerned with the
compliance process, [but] in the Americas indirect taxes were a prerequisite — although
clearly once you get into implementation, the key aspect becomes compliance again.
“We have also gone through a learning process. Whereas in Europe VAT was the big
issue, customs wa the additional challenge in Asia and the Americas.
“Our supply chain is getting more global every day. So when you make a decision where
to build a factory or invest for more capacity, you can then say, ‘Well, what’s the best
place?’ and then you need to start thinking about what the customs costs are, who has
the best free trade agreements and so on.
“If you look at the transformation in Latin America, indirect tax was actually one
of the key focus areas, both on the legal entities setup and for the transaction fows.
And another example: recently, we were looking at decisions where to build a factory
in Asia and customs and free trade agreements and other indirect taxes and indirect
tax incentives are becoming key decision drivers.”
Insight
9 Supporting growth and reducing cost and risk
Part I The changing supply chain
Centralized procurement model
Global Group B manufactures and distributes goods globally. Since 2008, the group has centralized
its procurement for a range of goods used in marketing and production, including packaging
materials and raw ingredients. The global head of indirect taxes explains how the centralized
procurement project has evolved — and how the range of indirect tax issues the group has
encountered has expanded to include VAT/GST registration for the procurement company, customs
duties on imported goods, excise taxes and environmental taxes. She offered:
“Purchasing is being centralized in a company in Switzerland. The Swiss company takes care of all the
agreements with the supplier. It asks the different daughter companies how many X products, will they
need in 2012, they feedback that amount, then the procurement company goes out to the suppliers
saying we need this amount of X products what kind of deal can you give us? And then it buys all
products and sells them on to the production companies.
“We’ve faced a whole range of indirect tax issues in the various phases, as you can imagine.
“First of all, the Swiss procurement entity is now in the supply chain for VAT. This requires it to be
registered for VAT in all the countries where it buys and sells locally. It also means that fows now look
different. Having the Swiss company involved in the supply chain defnitely makes the VAT part more
complex because we now have chain transactions where before we only had two parties involved in
a transaction.
“The compliance piece is really important because the procurement company is a Swiss entity, in some
EU countries it is required that a physical representative take care of all the reporting in the country.
We have seen in some countries that, for various reasons, the Swiss company couldn’t get a VAT
registration. In these countries we had to apply another model than the standard model, so in that
respect indirect taxes have infuenced how we do things.
“We have also considered custom duties when goods are supplied across the customs border. Do we
need to have the Swiss company registered for importation and exportation, or could we do the fow in
a way so it would still be the supplier taking care of the exportation and the local production companies
taking care of the importation?
“And now excise and environmental taxes are a big issue. We are really experiencing that now that we
are moving more into sourcing fnished goods. When it comes to looking into which entity in the chain
needs a certain license to be able to deal with excise duties, it’s not the same in every country. Even
though the supply chain model looks the same and the transaction is the same, we see that we have
to follow very different sets of rules in different countries to accommodate the legal requirements.
Just looking at VAT, as long as we were not dealing with excisable product, that was much more
straightforward. Now we see that we potentially have to have much more variation in the model we use
to be able to also deal with excise obligations.
“As we’ve done the project, our approach has evolved in how we approach it and the role of indirect tax.
In the beginning there was a model designed and Indirect Tax had to follow the lead of the other work
streams and just make it work. Now, with this latest phase due to the excise duties issues, in Indirect Tax
we are pretty much at the forefront so we have been the frst to visit the counties and to really go out
and get a very detailed understanding to then be an integral part to design the new model. I think we
are much more involved now in the detailed design of this procurement model for the future state than
we used to be four years ago.”
Insight
10 Managing indirect taxes in the supply chain
Part I The changing supply chain
11
12
What do we mean by indirect taxes? In this
report, we use the term “indirect tax” to refer
to a wide range of taxes levied on the production,
sale and international trade in goods and
services, including VAT and GST, single-stage
sales taxes, environmental taxes and excise
and customs duties, which may be levied at
the national, state and local level. We also touch
on the impact of “green taxes” and look at tax
incentives offered by a number of countries
and regions to encourage business activity.
Part II
Indirect taxes in
the supply chain
13 Managing indirect taxes in the supply chain
Global supply chains
increasing indirect tax risk
O
ne reason for the increased volume
in international trade in recent
years is the globalization of supply
chains, which cause goods to cross
national boundaries several times during
the production process. Each time goods
cross a border, they are potentially subject
to a host of indirect taxes and indirect tax
compliance obligations, including:
• Export licensing
• VAT/GST reporting and documentation
(to support an export exemption)
• Customs and excise duty reporting
and compliance documentation (duty
suspension regimes, etc.)
• Customs reporting and documentation
• Customs duties on importation
• Excise duties on importation
• VAT/GST and other sales taxes on
importation
• VAT/GST reporting and documentation
(to support input tax recovery)
• Export compliance obligations
The impact of indirect taxes
The effective management of indirect
taxes is crucial to operating successfully
in today’s global market place. As supply
chains grow longer and become more
international, understanding the impact
of VAT/GST, excise duties, customs
duties and export controls is not just an
issue for the tax function. Indirect taxes
must be actively managed throughout
the business if they are to work with,
not against, your strategic agenda.
Considerations include:
• Cost base — avoiding irrecoverable
VAT, excise duties and customs duties
• Cash fow — delayed VAT refunds and
prefnanced duty payments
• Compliance burden — managing
customs and excise warehouses,
applications for incentives, VAT returns
and VAT registrations, VAT invoicing,
excise returns, customs documentation
requirements, managing export
compliance obligations
• Tax accounting — real-time VAT
reporting, tax provisions
• Corporate risk — reputational risk,
penalties, fnes and criminal liability for
errors and omissions
• Growth opportunities — incentives
for setting up new productive activity,
intelligent sourcing from or producing
in markets where import preferential
customs duty rates apply
• Effciency — customs and excise
simplifcations, goods held up at
customs, business disrupted by tax
audits and new activities delayed for
incentive grants
14 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Six global indirect tax trends
In our recent report, Indirect Tax in 2012, we
identifed six common global trends for indirect taxes
that are likely to be signifcant in 2012 and beyond:
1 Increasing VAT/GST rates
2 Broadening of the VAT/GST tax base
3 Refnement of consumption tax systems
4 Increased focus by tax administrations
on compliance and tax avoidance, using
advanced technology
5 A continuing rise in excise duties
6 Decreasing customs duties from increasing
free trade
Each time goods cross a border, they are potentially
subject to a host of indirect taxes and indirect tax
compliance obligations.
15
Part II Indirect taxes in the supply chain
A
ccording to a new survey from
Ernst & Young,
2
tax risk and tax
controversy are both rising rapidly.
Tax risk is what companies face when
they are unsure of having planned their
taxes with foresight, accounted for their
taxes correctly and complied with all
relevant tax laws. And tax controversy is
a polite term for the disputes that arise —
alas, with greater frequency — between
corporate taxpayers and tax authorities.
Ernst & Young asked more than 500
senior tax and fnance executives and
audit committee members in 18 countries
a wide range of questions about their
recent experiences and predictions for
the future. To gain a fuller picture, several
dozen tax administrators and policy-
makers were also interviewed.
The consensus is that in both tax
enforcement and tax legislation, the
landscape is now more challenging than
it has ever been.
When asked what specifc tax types were
most concerning, companies around
the world told Ernst & Young that their
indirect taxes, including VAT, GST and
customs, were a major source of risk and
uncertainty.
The complexity of transfer pricing has
long been a bone of contention between
taxpayer and tax authority and that is
still the number-one contributor to tax
risk and uncertainty. But indirect taxes
were the clear number two and they are
the fastest-rising concern, mentioned by
far more tax executives than in our last
survey in 2009–10 or any of our earlier
tax risk surveys.
Why is there so much more
tension around indirect
taxes now?
Tax executives say the dramatic shift
in the global economy has changed
tax policy and enforcement, forcing
companies and governments into more
disputes. Supply chains cross far more
national boundaries now and extend into
many new markets, including emerging
markets, multiplying the customs and VAT
considerations.
Also, legislators have been lowering
their corporate tax rates to attract
business, but they still want to increase
spending year over year, so they are all
the more likely to raise their indirect
taxes. However, even if legislators are
convinced that indirect taxes are the best
way to raise substantial new revenue,
individual taxpayers often disagree. If
their protests prevent the rate increases,
tax administrators fnd themselves in
a tough situation: they are expected to
collect much more without a substantially
higher rate.
But tax administrators do have new
technological and institutional tools
that allow them to collect more, such
as formalized cooperation with other
tax authorities. Generally speaking,
tax authorities have more data and
information about taxpayers and their
economic activities than at any time
in history.
Indirect tax policy as a source
of risk
Over just the past few years, between
60% and 70% of European Union member
states have increased their VAT rates at
least once and the assumption that no
state would go over 25% has ended with
Hungary’s new 27% rate.
These rate increases will continue because
when governments urgently demand
more revenue, they often turn to indirect
taxes, especially the VAT or GST because
this broad-based tax produces so much
revenue with each rate increase. And
even if governments slow their spending
growth, they will have to confront their
accumulated debt and to do so they will
need more revenue.
Since the beginning of 2010,
governments have not only been
demanding more revenue, they have
been demanding it quickly. Italy even
announced a one percentage point
increase in VAT effective from the
following day.
VAT compliance mistakes are more costly
when the rate is higher and mistakes are
more likely when companies have so little
notice. Even governments not in such
dire fnancial straits as Italy are expecting
taxpayers to react with uncommon alacrity
to tax changes. At the end of 2011,
China introduced a complex VAT pilot in
Shanghai with only eight weeks’ notice.
Indirect taxes: a growing
source of global risk
2 Tax risk and controversy survey: a new era of global risk and uncertainty, Ernst & Young, 2011–2012
16 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Indirect tax enforcement
as a source of risk
Tax controversy related to indirect taxes is
growing at a quick pace as tax legislators
constantly adjust the base and raise the
rate. This leads to more frequent errors
such as:
• VAT paid to suppliers (input VAT)
is not reported and recovered on the
VAT return
• VAT paid to suppliers is reported but not
recovered because tax authorities fnd
the supplier’s VAT invoice to be invalid
• VAT paid to suppliers is recovered
when it does not qualify for recovery
Tax policy-makers said they expect
indirect taxes to be their leading source
of new revenue over the next decade,
while tax administrators and taxpayers
view indirect taxes as a key source of risk
over the next three years.
An increasingly global
approach needed to managing
indirect taxes
Although companies in our survey
reported that indirect taxes are their
second leading area of tax risk, they also
reported that these taxes were managed
by the fnance or accounts department
more of the time (48%) than they were
managed by the tax department (44%).
They also reported that a global indirect
tax offcer was resident in the tax
department of only 21% of companies.
Interestingly, this percentage fell to just
12% in the largest companies (those
with US$5b in annual revenues or
more), indicating that the larger the
company, the less likely it was to have
a dedicated indirect tax offcer. Looking
forward, increasing the number of
resources focused on indirect tax in the
next two years was foreseen by only
30% of companies. These disconnects
merit close attention, particularly as tax
administrators and tax policy-makers alike
tell us that indirect taxes will be more
important to them in the future.
This insight into the current management
of indirect taxes shows that amid
uncertainty, there is an opportunity for
global businesses.
Some companies will seize that
opportunity. They will do a good job
of planning around the rapidly changing
rates and rules and foreseeing where
future changes are likely, including what
supply chain decisions are wise. Some
companies will quickly and effciently
account for new or forthcoming VAT and
GST laws, customs and excises. Some
companies will comply with all applicable
laws, paying all taxes that are due where
and when they are due; similarly, they
will reclaim all refunds that are due when
and where those refunds can be collected.
And by following these leading practices,
they will avoid indirect tax controversy
wherever possible and deal with it quickly
and effciently when it’s unavoidable.
These are the companies that will gain a
competitive advantage in the years ahead.
“ In this industry, there is a lot of pressure from people within the supply chain
for us (in the tax function) to be embedded and really understand what
their strategies are and to build indirect tax planning by way of free trade
agreements and other things into that. It’s almost assumed that we will be
able to optimize indirect taxes under their structures.”
— Head of indirect taxes at a global automotive company
Centralized VAT/GST
accounting and reporting
Using a shared service center approach
wfor global or regional indirect tax
compliance and reporting can increase
effectiveness while potentially reducing
overhead costs. By improving VAT/GST
compliance, shared service centers may
help to reduce risks and penalty costs.
For example, a centralized compliance
function may allow groups to maximize
the use of standardized automated
processes. However, some global
companies that have a decentralized
VAT/GST compliance model may be
concerned that a shared service center
compliance team may not have the
detailed local knowledge necessary to
ensure that all returns are completed
accurately and to identify underlying
VAT/GST issues. Although this is a
genuine concern, increasingly, global
companies are addressing it by combining
a centralized VAT/GST reporting model
with local review of processes, perhaps
using a third-party provider.
17 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
“ Clearly, indirect tax is growing in
importance in a current economic
environment where governments
choose to increase indirect taxes
while keeping the corporate rate
relatively fat or neutral. So the
importance of managing your
indirect taxes well is gaining
importance as well.”
— Head of transfer pricing at a global
consumer products company
V
AT/GST is a multi stage tax on
consumption that applies to the
supply of goods and services at
each stage of production, distribution
and sale. This broad-based tax is levied
on most goods and services, with notable
exceptions (such as fnancial services,
insurance, health and education).
VAT/GST is charged on the importation
of goods and services based on their
value, including any customs duties.
In contrast, exports of goods and services
do not generally attract VAT/GST.
Since it was frst introduced, VAT has
been an unstoppable tax success story.
Some form of VAT/GST now applies in
more than 150 countries worldwide,
with the US being the only developed
economy that does not currently levy
a VAT-type tax. And an increasing number
of emerging markets are adopting
VAT/GST in preference to single-stage
sales taxes or a range of local sales taxes.
In January 2012, China launched a VAT
pilot scheme in Shanghai with a view
of eventually replacing its Business Tax
(BT) and VAT with a broad-based VAT
throughout the whole country. India
is also undergoing reform in this area,
recently fnalizing its “negative list”
for excluded supplies and bringing the
introduction of a new, centralized GST
one step closer.
VAT/GST
The VAT/GST compliance
burden on business
As a tax on “consumption,” VAT/GST is
generally borne by the fnal consumer, but
it is collected and remitted by business
entities that supply taxable goods
and services. VAT/GST is charged on
transactions at each stage of the supply
chain and it also generally applies to
imports of goods (without the need for
a transaction). Businesses are treated
as VAT taxpayers who collect and remit
the tax. VAT taxpayers charge VAT/GST
on their sales (output VAT) and recover
VAT paid on their business purchases
and overheads (input VAT). Therefore,
businesses effectively account for VAT
on the value they have added at that
stage in the supply chain.
This method of charging and collecting
tax from non-taxable persons using VAT-
registered businesses makes VAT/GST
a highly cost-effective form of taxation
from a government perspective, but it
places a heavy burden on businesses.
They must report and remit VAT/GST
payable to the tax authorities on a
regular basis (generally monthly for large
companies) with 100% accuracy. However,
this task is complicated by the fact that
each country has its own system with its
own rules about how, when and where tax
is charged. Documentation and reporting
requirements also vary greatly between
tax jurisdictions.
18 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
The impact of VAT/GST
on business cash fow
VAT/GST is a “neutral” tax for most
businesses, but the cost of funding
VAT/GST is still a factor. Negative cash
fow may arise from the sales or purchase
functions:
• Sales — The supplier typically has
to fund VAT/GST charged to customers
that has not been paid by the time the
tax return is due (generally monthly)
or that is never paid, especially in
countries where no relief is given
for bad debts.
• Purchase — Waiting for VAT/GST
refunds can greatly add to the effective
VAT/GST burden for businesses with
large VAT/GST credits. Although the
VAT/GST is creditable or repayable,
many governments do not repay
tax quickly. For example, one-off
VAT/GST credits may accrue from
start-up or merger costs or as a result
of increased capital investments.
Persistent VAT/GST credits may result
from undertaking business activities
that are not subject to VAT/GST,
such as exports, or to the full rate
of VAT/GST, such as books, foodstuffs
and pharmaceuticals.
The increase of VAT/GST rates worldwide
has a number of important implications.
For businesses, higher tax rates increase
tax risk, as the amount of VAT/GST that
must be managed is greater and the
consequences are more severe in the case
of non compliance and mistakes. Non-
recoverable indirect taxes raise the costs
of doing business, making production
more expensive and requiring increased
effciency to make up for the increased
costs. For governments, as VAT/GST
income becomes more important, so
does effective enforcement. The fght
against fraud and the monitoring of
taxpayers becomes more pressing, leading
to increased compliance obligations,
more aggressive tax audits and harsher
penalty regimes.
19 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
The complexity of the
VAT/GST supply chain —
looking below the surface
In considering how to manage VAT/GST
transaction fows, it is important to
recognize that most VAT/GST supply
chains are highly complex, involving
multiple suppliers and customers and
cross-border transactions.
The complexity of the VAT/GST supply
chain increases the level of tax risk.
For example, risks may arise from the
incorrect application of the tax, problems
in communication between suppliers
and purchasers or a lack of supporting
documentation. The whole transaction
chain must be mapped and understood
if it is to be adequately controlled.
Measuring VAT/GST risk
To understand the importance of
managing indirect taxes, you need to
measure the full impact on the business
by looking at costs, negative cash fow
and the amount of VAT/GST throughput
or VAT/GST “under management” that
represents the level of tax that the
company has a statutory obligation
to manage effectively. Our experience
working with global companies around the
world indicates that the VAT/GST under
management, regardless of the size of
the company, is generally more than 30%
of non-US sales income.
3
3 VAT and GST: managing the multinational burden, Ernst & Young, 2011
VAT/GST under
management
VAT/GST throughput is all the
VAT/GST that a company has to
manage. It includes all VAT/GST on
purchases and sales plus the full rate
of VAT/GST potentially chargeable
on lower-rated, zero-rated and
exempt activities.
20 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Figure 1: Company Z’s VAT/GST ed-to-end process
Type of goal Action Functional
ownership
Strategic • Identify the VATable transactions Business units/tax
• Determine the correct VAT treatment Tax
• Assess the risks/opportunities — what is the VAT
burden in terms of absolute cost and cash fow?
How can it be adjusted to mitigate adverse effects?
Tax
• Finalize the VAT treatment/model — make business
case for alterations to current or planned model
Business units/tax
• Communicate to IT/Finance/BUs Business units/tax/
fnance/IT
Operational • Processing and accounting for VAT — record to report Finance/IT
Compliance • Completing and fling the VAT returns Finance
• Audits Finance/tax
End-to-end VAT/GST:
who owns the process?
In considering the management of
VAT/GST issues, it is necessary to identify
the relevant transactions and the parts
of the organization that have ownership
of the information and the process.
Figure 1 outlines how an examination
of fctional Company Z’s VAT/GST end-
to-end process might identify goals,
areas for investigation and improvement
and the functions within the company
that would be responsible for each part
of the process.
“ Historically, we haven’t been organized very well for managing
indirect taxes. For example, customs cost was not recorded
separately, but it was part of a cost line where we aggregated
multiple costs like broker fees, freight forwarding costs — and
included customs. We had no real idea of what we paid in
customs per year, on a global level.
“ We are now making sure that we are designing our systems for
tax management information. Now that information is actually
available, we can monitor it, work with it and potentially identify
situations where we need to improve.”
— Tax executive at a Fortune 1000 multinational
21 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
V
AT/GST is the tax on consumption
that applies most widely around
the world. However, a number
of countries do still apply single-stage
consumption taxes at the national, federal
and municipal level, such as the sales and
use taxes levied in the US and China’s
Business Tax (BT). These single-stage
taxes may apply at any stage of the supply
chain, including production, importation,
distribution and retail sales. Multiple
single-stage taxes may apply in some
jurisdictions.
The main business drawback of single-
stage taxes is that they generally are not
creditable or available for offset, which
means that they may add to the cost
base. For goods that undergo multiple
processes, single-stage taxes may apply
at multiple stages, creating a cascading
effect (as taxes paid at an earlier stage
form part of the taxable base) that leads
to very high effective tax rates.
The compliance burden may also be
an issue in countries that levy a large
number of single-rate taxes. In the US,
for example, there are more than 7,500
potential taxing jurisdictions for sales
and use tax purposes.
Single-stage consumption
taxes
22 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
VAT-led operating conditions for a reengineered logistics network
Global Global Group D purchases materials and manufactures and ships manufactured products
all over the world. The group recently reengineered its logistics network in Europe. The global head
of indirect taxes describes how the conditions needed to protect VAT zero-rating for intra-EU sales
has imposed operating conditions on the group’s new logistics network in Europe. He stated:
“In Europe, we have, approximately 40 fnished product manufacturing plants in the region in countries
stretching from Russia to Morocco. We are responsible for moving product from our suppliers’ locations
to our Group D locations. Previously, our model was basically plant-centric with each supplier supplying
to each plant directly. We had about hundreds of suppliers shipping to multiple locations so you tended
to have a lot of suppliers shipping to multiple Group D locations, with lots of carriers executing all these
different routes and billing the entities and the related plants for freight. We looked at centralizing
our logistics and running it all through one network by going to a series of hubs where the material is
accumulated at the supplier locations as effciently as it can be in full loads and sent to various hubs
where it’s then redistributed using routes going direct to our destination plants.
“From a VAT perspective it has basically changed the route for materials to get from the supplier
to the destinations. And so it has created a whole series of questions about the VAT status of the sale
of the materials and what happens to the freight.
“Before implementation, we analyzed how we would run the network and then looked at the VAT
legislation in the different countries to understand the rules and whether we would ever have a risk
that those types of sales would potentially have a change in the VAT status. We came to the conclusion
that yes, in theory, we did have some risk and it was a little bit of a gray area, particularly in certain
countries. So we concentrated on those countries and got a ruling from the VAT authorities to protect
our zero-rating. Because it’s only considered (an intra-EU) dispatch from the originating country if you
can show it was actually shipped from the country, it ended up depending on a series of conditions we
would have to meet operationally to maintain the zero-rated sales. These requirements have become
incorporated in the standard operating procedures for the network.
“One of the new rules is that if carriers want to get paid, they’re going to have to provide the
documentation up-front we need for VAT purposes. It was also a transformation for our account
logistics people and the accounts payable people.
“We also had some customs compliance issues. We had different points of entry and different countries
where we had to make the import. So different companies needed to register for VAT and recover VAT
at import and so on. We had to work through all of that as well to make the network work. So, we,
the VAT and customs people, ended up advising on determining how that was all going to happen.“
Insight
23 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
C
ustoms duties are taxes levied upon
importation of certain goods into
the customs territory of a country
to raise state revenue or protect domestic
industries from competitors from abroad.
In most cases, customs duties are raised
as a percentage of the customs value of
the goods, but they may be levied on the
basis of other parameters, such as weight
or volume.
In addition to standard customs duties,
other duties as part of anti-dumping
measures and countervailing measures
may be levied on the importation
of certain goods. These are intended
to protect the home market against
imported products being dumped on
the market or benefting unlawful or
dramatically different subsidies abroad.
In principle, when importing goods into
a country, customs declarations need to
be fled on a transactional basis for each
incoming shipment and these declarations
need to be validated by the respective
customs authorities. However, there is
a tend toward simplifying the declaration
process (e.g., consolidated reporting on
a monthly basis) even to the point of self-
reporting customs duties. And as more
customs authorities require the electronic
fling of customs declarations, special
automated systems have been developed
that can deal with multi country customs
reporting.
In principle, the level of customs duties
depends on the customs value, tariff
code and the origin of the goods being
imported. In order to identify the various
types of goods, specifc tariff (HS) codes
have been agreed upon internationally
to determine import duties (often
expressed as a percentage). But the
origin of the goods is also a factor. Many
countries have agreed bilateral and
even multilateral free trade agreements
(FTAs) that call for reduced or zero-rate
tariff duties for goods originating from
a preferred trade partner.
Furthermore, specifc valuation methods
have been agreed within the World Trade
Organization to properly determine the
value of the goods being imported. In most
cases, the transaction value (price actually
paid or payable) can be used as the basis
for the customs value. As a result, any
price adjustments after the moment
of importation (e.g., due to transfer pricing
changes) need to be properly reported to
the customs authorities.
Customs duties represent
a bottom-line cost
Customs duties — unlike VAT/GST —
represent a cost for the importer of the
goods. A reduction of customs duties
immediately improves the cash fow
and costs of importing companies.
Consequently, various customs procedures
have been designed to reduce or avoid the
customs duty burden. For instance, goods
placed under a bonded warehouse regime
can be stored under duty suspension and
re-exported to third countries without
customs duties being due in the initial
country. Economic customs regimes such
as processing under customs control and
inward and outward processing relief allow
companies to reduce the duty burden
of imported goods, provided certain
conditions are met.
Customs duties
24 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Customs supply chain
optimization
An appropriate (re)design of a company’s
supply chain may reduce the company’s
customs duty burden, landed costs and
lead times. Supply chain optimization
projects typically involve trade route
rationalization with a maximized use of
FTAs and appropriate strategies to reduce
customs compliance costs. Combined with
the available customs procedures, these
strategies can signifcantly drive down the
costs of customs duties and compliance.
For example, goods with preferential
origin status could be routed to
destinations where preferential origin
reliefs can be claimed and goods to
be re-expedited could be stored under
a customs duty suspension regime
to avoid import duties in the country
where the storage facility is located
(and potentially to safeguard the
preferential origin to be claimed in other
countries). In this type of arrangement,
potential issues to be considered include
reverse logistics and online sales, which
may represent additional challenges.
Further effciencies also may be obtained
by combining a project of this type
with the introduction of automated
customs systems.
Specifc tax-effective supply chain models
for procurement and manufacturing also
may provide for signifcant benefts. For
example, buying commissions may be
excluded from the customs value, thereby
reducing the amount of import duties to
be paid. In addition, alternative valuation
methods (cost plus or resale minus) can
be used by toll manufacturers and provide
for additional effciencies in an optimized
supply chain.
25 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Reduction of customs duty
burden
Various customs planning methods can
be combined to reduce the duty spend
by price unbundling, where non-taxable
elements (e.g., buying commission,
sole distribution rights, advertising and
promotion costs) can be excluded from
the customs value. Similarly, proper
branding and intangible property (IP)
management may provide room to further
reduce the customs value. In addition,
the “frst sale for export” principle
(available in both the EU and the US)
allows the customs value of goods to
be based on an earlier (lower) sales price
under certain conditions. Provided that
certain contractual arrangements are
made in advance, volume rebates also
may be used to decrease the amount
of customs duties paid.
“ More and more it is not just VAT that we have to focus on, it’s also custom duties. …
Recently, it has also become more excise duties and packaging taxes and other types
of environmental fees.
“ For businesses like ours, managing indirect tax goes way beyond the traditional view of just
looking at VAT and whether it has to be added to a certain transaction or not. I think that
is refected in how we run our Indirect Tax Department and our involvement in the business.
“I am involved when the business decides to structure something differently. Then
they say: what would this change mean in respect of your area? do you see any show
stoppers? what would be the better way to do it? and so on.”
— Head of indirect tax at a global manufacturing company
Reduce the trapped duty
burden and value leakage
Sound analysis and consideration
of earlier importations may reveal that
signifcant import duties have already
been paid earlier in the supply chain
(trapped duty), which may drive up
cost of goods sold (COGS) and reduce
a company’s margins. Optimization
of customs procedures and adaptation
of contracts with suppliers may provide
for signifcant customs duty savings
earlier in the supply chain, thereby
reducing purchase prices.
Customs and trade facilitation
programs
On an international level, customs
authorities have expressed their intention
to facilitate global trade through a
secure, smooth physical trade process
within the World Customs Organization’s
SAFE Framework. A key concept is the
recognition of Authorized Economic
Operators (AEOs) who have demonstrated
their “trustworthiness” from a customs
and trade perspective. AEO status
provides for additional customs benefts
and trade facilitations. Customs
authorities around the world have
developed trade facilitation programs
such as the Customs Trade Partnership
Against Terrorism (C-TPAT) in the US,
AEO (in the EU) and the Secure Trade
Partnership (STP) in Singapore. As a
result of the mutual recognition of trade
facilitation programs, goods that are
shipped between territories that mutually
recognize each other’s programs are
subject to little or no inspection.
26 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Customs regimes are “standard operating procedure”
for “just-in-time” delivery
Global Group D purchases materials and manufactures and ships products all over the
world. The head of indirect taxes describes how obtaining — and maintaining — favorable
customs regimes are vital for Group D’s just-in-time supply chain delivery model. He said:
“In most countries, we participate in some sort of signifcant preferential customs
program, whether that’s a free-zone, such as IMMEX in Mexico, or similar program,
that gives us major benefts.
“In North America, so much of what we do for logistics purposes really hinges on our
C-TPAT status. We maintain a centralized logistics network to move supplier materials
to our manufacturing plants in North America, including hubs on the Mexican and
Canadian borders. We are moving a huge amount of product back and forth, so we had
to integrate all our customs requirements into how the network operates in a just-in-time
environment to meet our delivery targets.
“We have Tier III status in Mexico which allows us to use customs fast lanes. Now we’ve
integrated the expedited time benefts we get from using the fast lanes into our whole
network. We have incorporated the expedited border crossing times into our standard
logistics network. So maintaining the C-TPAT status has become critical for operational
reasons. If we were to lose that status we would have to rework the network and we
would have potentially signifcant short-term cost and operational disruption.
“Everywhere there is a preferential program, we’re in it or getting into it. So right now
we’re doing it for AEO. We looked at our profle in each country and said where do
we need it most and where do we need it the fastest? Then we prioritize country by
country because you have to apply entity by entity. We recognized that to maintain
our numerous benefts in many countries we had to join AEO. So, for us the decision
was automatic. When a company is in an industry where it’s important to move goods
quickly, making sure you qualify for this type of customs and security status becomes
a business requirement.”
Insight
27 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
T
he other main class of consumption
taxes in the supply chain are excise
duties on specifc classes of goods.
With the broad appearance of modern
VAT/GST systems in the 1970s and
1980s, many product-related taxes were
abolished. But in recent years they have
once again gained importance, mainly
because they are seen as a good tool for
steering consumption and infuencing
consumers’ behavior while signifcantly
contributing to overall government
income.
Excise duties also add to the cost base
of production, as they represent a bottom-
line cost and are not creditable. In recent
years, the rates for alcoholic beverages,
cigarettes and hydrocarbon oils have
increased in many parts of the world.
In addition, as excise duties are normally
part of the VAT/GST tax base, any
increase in excise duty rates also implies
an increase in VAT/GST. Especially in the
case of hydrocarbon oils and tobacco
products, the revenues raised from taxes
are high and the total tax burden on fuel
(mainly excise duty plus VAT/GST) often
exceeds 100% of pre-tax prices.
A wide range of products are subject
to excise duties in individual countries
around the world (such as chocolate,
coffee and orange juice). However, the
three principal product groups that
are globally liable to excise duties are
alcoholic beverages, hydrocarbon oils
and tobacco products. In addition, new
taxes are being introduced that seek
to infuence societal behavior, such
as snack taxes on “unhealthy” food
(recently introduced in France, Hungary
and Denmark) or carbon taxes aimed at
reducing climate change and air pollution,
as in Australia.
In most cases, excise duties are raised
based on the volume or value of the
excisable products consumed in a specifc
country. Excise duties can be raised on
the importation or production of excisable
goods or when they are made available
to consumers.
Reducing the excise duty cost
Excise duty rates are often very high and
may represent a signifcant part of the
price of an excisable product. Therefore,
it is important to strategically use excise
duty reduction, exemption and suspension
regimes. As excise duties are typically
due at the moment of consumption,
companies should make sure that the
excise duty is paid only once in the
country of actual consumption by using
excise suspension regimes (such as a tax
warehouses). In addition, various reduced
rates and even exemptions may be
available under certain circumstances.
Excise compliance burden
Non compliance with excise laws may
lead to signifcant fnes (up to 1,000%)
and potential criminal prosecution.
The excise duty compliance burden
and the associated risks may be alleviated
by making full use of suspension regimes
(to avoid excise duty becoming due) and
procedures to delay excise payment
as provided for in local legislation.
In addition, simplifed procedures may
be established for excise duty reporting.
Finally, companies should pay particular
attention to the excise guarantees
that need to be deposited, which may
represent signifcant amounts, as some
jurisdictions have procedures to reduce
these guarantees.
Excise duties and
environmental taxes
28 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Local excise duties pose challenges to centralization
The head of indirect tax at a global manufacturing company discusses
how it is diffcult to centralize management of indirect taxes in a single
supply chain model. She offered:
“With excise duties and similar taxes it is hard to get an overview of the
applicable fees and regulations and things that may apply in the various
countries, because the taxes are dealt with in so many different ways.
We see so many different scenarios and set-ups.
“That requires very local knowledge, so that’s quite diffcult to centralize
and we see that we need to operate with different models in the different
countries. I think when you are not an indirect tax person it is the
general understanding that the EU is one set of rules, it is more or less
same, it cannot be that diffcult. But when you work with a supply chain
or procurement program you really realize how diffcult it can be with
these taxes being dealt with differently in the different countries.”
Insight
29 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
E
xport controls are laws and
regulations designed to support
national concerns and security
policies. They aim to enhance global
security by preventing the proliferation
of weapons of mass destruction and
related terrorist activities. Although these
laws and regulations are not new to the
international trade community, the need
to manage business risk in this area is
growing as supply chains become more
complicated and far-reaching.
The differing export control laws and
regulations that businesses encounter
when trading internationally can
cause delays in meeting deadlines and
contractual commitments. They also can
expose businesses to a range of risks that
include monetary and criminal penalties,
reputational risk, reduced share-price and
other punitive measures used by national
governments.
Companies that proactively manage
their compliance obligations in this
area throughout their global supply
chain operations may gain competitive
advantage.
The US export control regime is often
perceived as being the most restrictive
and complex. US companies are leaders
in high-tech manufacturing and many
global businesses are headquartered or
operate in the US. Therefore, the US rules
are likely to touch the global operations
of many companies, either directly or
indirectly through their extraterritorial
element. Of course, the European export
controls regime and its implementation in
individual member states have signifcant
positive and negative impacts on
operations.
The European export controls and their
differing administration through national
governments create additional regulations
for global companies to understand and
comply with. Compliance failures are
often seen within businesses that create
processes and procedures accounting for
only one set of rules (often, in practice,
based on the US rules). Companies should
analyze their operations and create
a compliance framework of expertise,
knowledge, processes and procedures
to enable compliant trade from all relevant
countries.
Partnering export controls and export
compliance management with a
company’s associated customs and
trade compliance functions, across
multiple jurisdictions, not only provides
a logical means of effectively managing
compliance obligations, but it also offers
greater visibility throughout the end-to-
end supply chain. A more effcient and
effective compliance function safeguards
against the future cost of non compliance
while producing faster, more effcient
transactions and delivering cost savings.
Export controls
30 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Indirect taxes infuence the choice of location
for low-cost manufacturing
Global Group D purchases materials and manufactures and ships product
all over the world. The head of indirect taxes discusses how the decision
to locate a manufacturing facility in Europe was infuenced by indirect tax
decisions. He said:
“I am involved with my income tax colleagues as part of a corporate-wide
team looking at sourcing decisions and where to locate new manufacturing
facilities. About two-and-a-half years ago, we were looking for a low-cost
manufacturing location to support our EU operations and our profle
was that we were looking at sourcing materials from both within the EU
and potentially from Asia. We were looking for a location that would also
deliver us the best answer from an indirect tax perspective. Indirect taxes
were a big part of the reason why we located a plant where we did, where
we could bring in material into a free-zone type of environment, without
any import requirements and export it to the EU relatively easily. And we
could source any material we wanted from any location. As long as we
transformed it into fnished products, shipments were duty free, both into
the low-cost country we chose and into the EU.
“So it was an example from an EU perspective where indirect tax
considerations were a big driver in where we actually located a plant.”
Insight
31 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Various incentives exist
Business incentives are measures taken
by authorities around the globe to
infuence desired economic behavior
and activity in specifc regions and areas
of industry. These measures are often
targeted at specifc activities, including:
• New investments
• Job creation, retention, training
• R&D investments and activity
• Sustainable development and
green operations
Business incentives can be either
statutory or discretionary and can
include tax and non-tax benefts.
Program offerings differ
A wide range of activities can be impacted
by incentives. Programs targeting these
activities are available around the globe.
Figure 2 indicates the types of incentives
that could be applicable to different
activities in the supply chain. The types
of programs available in each of these
incentive categories can be referenced
in Figure 3.
Incentives
32 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
Figure 3: Examples of business incentives
Tax incentives Hiring incentives R&D incentives Property tax relief
• Sales/use tax exemptions/
refunds
• Federal/state EZ credits
• Federal/state R&D credits
• Capital investment tax credits
• Statutory look back reviews
• §48C alternative energy ITC
• §45D New Markets Tax Credits
(NMTC)
• Wage rebates, job creation
grants and credits, employment
related tax incentives
• HIRE Act/ WOTC/WtW
• State point-of-hire credits
• Hiring and employee screening
assistance
• Federal/state R&D credits
• FP7 (EU)
• R&D cash grants
• R&D super-deduction
• Real and personal property tax
exemptions
• Real and personal property tax
abatement
• Industrial Revenue Bond (IRB)
structuring for favorable
property tax treatment
• Tax increment fnancing (TIF)
Green incentives Training benefts Other incentives
• Energy effciency/GHG
reduction incentives, credits
and grants
• Incentives for LEED-certifed
buildings
• §179D deductions
• R&D/manufacturing incentives
for green products
• Training grants for prospective
expenditures
• Development/implementation
of training programs through
state agencies
• Training tax credits (retroactive
or prospective)
• Infrastructure grants/assistance
• Community Development Block
Grants (CDBG)
• Low-cost fnancing for capital
expenditures
• Utility discounts
• Waiver of permit fees
• Expedited permits
• Free or discounted land/
buildings
• Recovery Zone Facility Bonds
Note: black text represents opportunities for cash or cash equivalent benefts (e.g., refundable tax credits, cost reductions) not limited by federal or state tax liability).
Figure 2: Supply chain activities and applicable incentive types
• R&D incentives
• Hiring incentives
• Training benefts
• Property tax relief
• Tax incentives
• Other incentives
(especially customs
and trade related)
• Tax incentives
• Hiring incentives
• Property tax relief
• Green incentives
• Training benefts
• Other incentives
• Tax incentives
• Hiring incentives
• Property tax relief
• Green incentives
• Training benefts
• Other incentives
• Tax incentives
• Hiring incentives
• Property tax relief
• Training benefts
• Other incentives
1 2 3 4 5
Research and
development
Sourcing and
supply
Production and
manufacture
Distribution Delivery
33 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
How incentives ft into the
supply chain framework
Although indirect taxes can increase supply
chain-related costs and the risk associated
with globalizing these activities, incentives
provide an opportunity to offset these costs
and decrease supply chain risk. Incentives
parallel supply chains in two important ways
that can allow companies to leverage these
programs to decrease cost and risk and
to increase fexibility and responsiveness
across global supply chains.
First, incentives are broadly applicable,
with programs that target many aspects
of business operations. Given that
incentives reach across a variety of
business activities, they overlap well with
supply chain planning and touch many
functions within a business. As a result of
this overlap, incentives can provide beneft
across the layers within a supply chain.
By taking advantage of the opportunities
on multiple levels, savings will build
throughout the process and companies
can effectively reduce costs.
Second, in addition to being applicable
across a broad range of supply chain
activities, incentives are vital to a
government’s development strategy.
Therefore, it is likely that incentives
that apply to a company’s operations
will be available, regardless of the
geographic footprint of its supply chain.
This availability is the result of recent
trends in incentive development and the
prevalence of incentives around the world.
Despite the diversity of government
agendas and policy, many activities —
hiring and training, R&D, customs and
trade, sustainability — that represent
critical components of supply chains
are the common targets of incentive
programs around the globe.
The combination of their broad operational
applicability and geographic prevalence
makes pursuing incentives essential for
effective and effcient cost reduction
within supply chains. Taking advantage of
the savings available as a result of these
programs is an opportunity available to
almost all players. Incentive diversity and
availability mean that a wide variety of
companies can use an incentives-based
cost reduction strategy. Such a strategy will
conserve resources so the responsiveness
and fexibility of global supply chains can
be improved. The case study to follow
bears out the broad applicability of an
incentives-based cost reduction scheme
by showing its effectiveness for a global
clinical research organization.
“ You have to look at a range of
risks, including reputation. One
time a company I was with walked
away from signifcant property
tax incentives because they had
the potential to harm the local
community. We thought it was
the right thing to do.”
— Director of global incentives and grant
management at a multinational company
34 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
What companies can do
to leverage incentives in their
supply chains
Every company is different, but these
three leading practices apply to any
company seeking to effectively apply
incentives throughout the supply chain.
1 Select a core incentives team
Because of the diversity of incentive
programs discussed above, collaboration
among the various stakeholders in a
supply chain is imperative. Not only
will members of different groups within
a company have insight into different
potential incentive applications, they
will identify any potential hurdles early
in the process. For example, the real
estate team, after conferring with
the tax department, may learn that
a cash grant for a new investment may
be more valuable than a tax holiday.
Or government relations may have a
valid concern about a particular incentive.
Finally, the R&D team may want to
consult with HR and IT to make sure that
researchers’ time can be tracked on a
project basis in order to comply with the
reporting requirements necessary for cost
reimbursements.
2 Match supply chain spend with
available incentives
Once an internal incentives management
team has been created, it will be
important for the team to apply incentive
value across the supply chain and the
organization as a whole. Incentives are
usually tied to investment or expenditure.
Consequently, an important frst step in
the incentives management process is
a review of all supply chain-related spend
by activity, jurisdiction and time horizon.
This review will allow the different
categories of spend to be paired with the
incentive programs available for those
activities in the jurisdictions where they
are occurring. Because each jurisdiction
will have its own incentives, it is important
for the review to consider jurisdictional
as well as activity-based criteria. A leading
practice is to consider the full suite of
incentives in the site selection process,
which in some cases may mean simply
adjusting the cost model already in place.
For discretionary incentives, this is also
the ideal time to negotiate the package.
3 Review of alternative supply chain
jurisdictions for potential further
cost reductions
After the process of managing incentives
is in place, it will be valuable to
periodically review both the programs
currently being used and the potential
for increased savings under newly
enacted programs. This review also could
result in reduced costs if activities were
to be moved to another jurisdiction with
more lucrative incentives. Of course, not
all locations will be suitable alternatives
for some supply chain activities, but
those jurisdictions that could provide
an effective substitute for a given activity
may offer opportunities for additional
savings and reduced risk via incentives.
Overall, an effective internal incentives
management process will be led by
stakeholders from all invested business
functions. The core team will regularly
review all the components of supply
chain spend by activity, jurisdiction and
time horizon in order to match incentives
to eligible activities and it will monitor
new incentive programs in countries
representing potential alternative
destinations for supply chain activity
in order to stay abreast of the most
valuable savings opportunities.
In a recent internal survey of Ernst & Young’s Incentives
professionals across the globe’s top 25 foreign direct investment
recipient countries, almost all countries are trending toward
creating incentives for higher value-added activities such as high-
tech, innovative applications and higher paying jobs. To this end,
we are seeing more complex eligibility requirements that are not
always highly transparent, especially in developing countries.
35 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Managing the incentives asset
Global Company E is a large life sciences company headquartered in the US. The
director of global incentives and grant management talks about why her role was
created, the types of incentives on offer and the framework that the company has
evolved to manage its “incentives asset” effectively. She offered:
“This role was created about two-and-a-half years ago. Company E is in a growth industry
and expanding globally and had received economic development packages all over the
world, but we were handling them in a decentralized way. We realized that we had a big
asset that needed to be managed and protected and that we could also seek out additional
incentives and opportunities to support our expansion. That’s really what my role is. Also,
because I have an expertise in tax, I help manage the tax credits side of things as well.
“Typically, governments have a range of economic development tools that are available
and although they vary throughout the world, they are also very similar. Generally,
a government will calculate the increased tax base a new project is going bring to the
jurisdiction — property tax, sales tax, VAT, corporate and personal income tax, business
tax or whatever taxes there are in the jurisdiction — and they try to fgure how they can
share part of those taxes back with you to attract and support the project. Sometimes
they do it through tax credits like a job creation, investment tax credit or an R&D credit
tax. Sometimes they give it back to you in a tax holiday, giving a discounted income
tax rate for many years. Another way is through grants based on your investment,
job creation and maybe on the amount of training you are going to do. Grants could
be free land or a break on the rent. They could put in infrastructure for you. They can
put energy in or broadband if you need more capacity or bandwidth. They can buy the
building and lease it back to you. They can facilitate special arrangements with the local
universities in order to gain access to academic researchers that you need or get special
training for your people and workforce development. Things like that.
“Depending on what part of the world you are in, there is a philosophy of whether
it’s better to give companies tax credits or whether it’s better to give them cash grants,
but most places give a combination. What is available is based on an economic impact
decision that usually has to do with job creation and how much tax revenue you are
going to generate in the locale.
“Depending on the size of your company, you have to look at your incentives portfolio:
how many incentives do you have? How they are managed? It is an asset. What is the
asset worth right now and what do you think the future asset will be worth? If that is a big
number, then somebody should be paying attention to it and that means probably that there
should be resources dedicated to it — maybe even a department or a small group of people.
At a minimum, you need someone in the company who is responsible, who is accountable.
“When you get started it’s important to surround yourself with external practitioners
with a lot of experience to help you develop the infrastructure because a lot of times you
don’t even really know what you have. You have an idea what you have, but it’s dispersed
throughout the company and perhaps the world, so you need to do an inventory. And
then, you need to see how it’s currently been managed and to see what the risks are and
make decisions about whether or not that is an appropriate way to continue or whether
the activity should be more centralized.
Insight
36 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
“I fnd having a centralized function is important because there is so much commonality
between how these things are reported and how they are negotiated. If you can have
the same people involved in multiple projects, you really leverage your knowledge on
one project after another. If you have one set of business people who are on project A.
They negotiate this once-in-a-lifetime deal and then you have project B, with totally
different people, you don’t get any leverage. There is no transfer of knowledge, no
lessons learned.
“We have a matrix organization. I have globally responsibility so I need to leverage my
regional fnance team (that don’t report to me) to support my projects in the regions.
I have fnance and real estate people that support the effort. HR even lends a hand
to support the training grants and the data needed for compliance. These people don’t
report to me, but the company has made incentives a priority so if I need help, I get it.
It’s a very supportive group and they understand the importance of these incentives
to the company’s bottom line.
“Since I’m a department of one, I do very little of the compliance myself. I have trusted
business partners inside the company and I have trusted business partners outside the
company and those external business partners help me with the compliance. They also
help me scope out, develop, negotiate and secure new opportunities.
“Before seeking new incentives, we always do a cost/beneft analysis. Sometimes we
forgo incentives because they are too much work. We set a threshold, so we don’t spend
time on incentives unless there is a strong return on investment. And then we look at
the compliance burden and we look at the risk. I mean when I started in this career,
my philosophy was ‘I am going out to get everything’ but now I think ‘Let’s turn over
all the big rocks frst and then if there are any little rocks, we will go back and get them,
if it makes sense to.’
“The business people will say the incentives are not going to drive this decision. But,
incentives defnitely can infuence the business decision. For example, we have a site
we picked recently because it was in an economic development zone and we had other
sites that we were looking at that were equal otherwise, so that difference tipped the
balance. That is especially true in regions that have special economic zones. In China
for example, they have designated business parks with lots of incentives attached. But
if you are literally across the street, the same incentives are unavailable. I think helping
the real estate people and the business decision-makers know that is not intrusive. The
information helps the business people make the best decision for the company overall.
The incentives add to the project’s bottom line.
“Many things that we do can be done anywhere in the world. One of the things that
I have done is prepared an incentives matrix for all the countries where we do business
where we have 100 or more employees. When I get a call from one of our businesses
that needs to hire say 100 people in Asia, I can pull my matrix out and I can say this
is where we should start looking.
“So the business decides to expand, but it’s where and when the expansion takes place,
that can be infuenced.”
37 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
Interview
Ernst & Young interviewed
Paul Wookey of Locate
in Kent, the investment
promotion agency for the
county of Kent in England.
We asked Paul about the
role of the incentives in
attracting investment,
incentive trends in Europe
and how companies should
evaluate incentive offerings.
Paul Wookey
Our job is to attract business to the county
of Kent. Ultimately, our objective and our
key performance indicator is the creation
of jobs. We provide a free and confdential
service as most investment promotion
agencies across the world would do. We
are a not-for-proft organization and we
have a mix of funding from both public
and private sector sources to fund our
operations.
We don’t sell Kent on the back of whatever
incentives are available. What we always
say is that obtaining a grant should makes
a good decision better rather than making
a bad decision better. Really it is the thing
that would possibly just tip the balance
in favour of the location.
But in our experience, when overseas
investors are looking at the UK or Europe,
one of the frst questions they will ask
is ‘What incentives are available in that
particular location?’ If you haven’t got any
incentives to offer you usually won’t even
get to the short list for that company’s
decision-making criteria. They will very
quickly move to consider areas where
there will be some fnancial support.
One of the differntiators that we currently
have in the UK is the ability to offer
some tax benefts, particularly things
like research and development tax credit
or the proposals for the patent box regime
that comes in next year. And obviously
the reduction in corporation tax was
aimed at making the UK a much more
attractive environment for investment.
These are very important and they come
into the mix when we are talking to
companies because if they are looking at
a Northern European location they will be
doing a comparison of tax rates and things
like the social cost, national insurance
and the personal income tax regime. And
then there are specifc measures that we
offer locally to supplement the national
incentives that are on offer.
Ernst & Young
Are there major differences between Kent
and other counties in England and Wales?
Paul Wookey
Yes. Kent made a bid for the Regional
Growth Funds last year. The area of East
Kent, which is the areas of Thanet, Dover,
Canterbury and Folkestone, has been
awarded £40m worth of Regional
Growth Funds and that was in direct
response to the announcement that
a multinational was going to exit its
Sandwich facility, which left a large hole
in the number of jobs in the area.
That site, which is now being transferred
by the government into another private
ownership, has been designated an
enterprise zone. And with £40m that
has been awarded to the surrounding
area there is a package of soft loans and/
or grants that will be made available to
companies seeking to invest in that area.
Anyone may apply for up to £2.5m of
the soft loans or direct grants to support
job creation. Then if you match or if you
add on top of that the enterprise beneft,
which will equate to about £55,000 a year
and £275,000 in total over fve years,
plus the corporate tax regime you begin
to create a cocktail of fnancial incentives
38 Managing indirect taxes in the supply chain
Part II Indirect taxes in the supply chain
that overlay the natural attractiveness
of that area, making it more attractive
and more competitive than many of the
other locations that a company might
be looking at.
But I have to say that my own belief
is that most companies are not primarily
going to be driven in where they make
their investments purely on the basis of
the fnancial incentives. I think there are
many other attributes of an area that will
determine whether it’s the best location
for an individual business.
Ernst & Young
Is that one of the ways in which Kent
competes with other locations around
the world?
Paul Wookey
Yes, I think this makes us more attractive
and more competitive where we are
dealing with some of the bigger mobile
projects and where, say, a US company
is looking for a European operation but
can’t decide whether to go into Northern
Europe or into the UK.
I don’t think we have ever worked
on a project where it has been Kent,
somewhere in the US or somewhere,
in say, the Far East that are competing,
it doesn’t work like that for us. What
we usually are doing is competing with
Northern European locations where,
generally speaking, the incentives are
quite competitive. So unless we are able
to compete at that level we don’t get
to see some of those projects.
I would stress that companies should not
be making their decisions purely on the
incentives that are offered. There have
to be other good reasons to locate a
project and an investment in an area.
And they have to be looked at in a much
broader sense. Companies really need to
take good sound advice. And it’s only at
the end of the analysis around a whole
range of factors that you will see whether
the incentives really make a difference.
Ernst & Young
What trends are you seeing for fscal
incentives in the UK and in the EU?
Paul Wookey
The theory goes that the whole of Europe
is determined by the EU state aid rules
so that there is a level playing feld
across European countries. But it’s quite
interesting seeing what is happening with
the Eurozone debate and discussions
around trying to regularize and maybe
control interest rates. Our experience
is that every country is going to try to
be as competitive as it can be to win
investments and ultimately to secure
economic growth.
Many will fnd ways to offer some
additional incentives. It’s a bit like what
we are doing with the Regional Growth
Fund. Through the fact that we have been
able to secure this £40m we can offer
zero interest rate loans plus grants to
companies looking to invest in this area.
We are doing that within the state aid
rules because the areas where this money
is going to be used meet the state aid
requirements.
Some of the newer EU countries tend to
have a lower cost base with lower salary
cost and generally lower operating costs.
So, if the investment project is really
being driven by low-cost I don’t think
the UK very often gets on to the short list,
let alone Kent, because the UK is likely
to be deemed to be an expensive location.
But cost is not the only factor. What we
are seeing is that we are winning projects
largely because we’ve got the skill base.
39 Supporting growth and reducing cost and risk
Part II Indirect taxes in the supply chain
40
Our report shows that companies are
responding to this challenge in three key ways.
Firstly, they are adapting their supply chains
to support rapid expansion and capitalize on
the growing number of middle-class buyers
in emerging markets, while managing risk.
Secondly, they are further developing their
existing supply chains to drive cost effciencies
and boost margins in their mature market
operations. And thirdly, they are developing
policies around sustainability and adapting
how they source materials and manufacture
and distribute fnished products to reduce
their impact on the environment and the
communities where they operate.
Part III
Meeting indirect
tax challenges in
the supply chain
41 Managing indirect taxes in the supply chain
W
ithin these three main areas,
we have identifed seven
interconnected items on the
Supply chain framework (Figure 4).
These interconnected items are key areas
of focus for supply chain transformation
to promote growth, improve margins
and address environmental issues. Indirect
taxes can be a barrier to success in these
sectors, for example, by increasing the
landed cost of goods, or they can enhance
opportunities, through incentives and
“soft” loans. In this part of the report,
we look at how opportunities and risks
may arise in the supply chain framework
for the following: VAT/GST; customs
and international trade; excise and
environmental taxes; export controls and;
grants and incentives. We also touch on
some of the leading practices used by
global companies to effectively manage
within their complex supply chains.
With slow revenue growth in mature markets, the supply chain must create
sustainable cost savings to support margins and to help pay for growth elsewhere.
The supply chain must enhance its core competency to
become a strategic business enablement vehicle to drive top-line growth.
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
Figure 4: Supply chain framework
42 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
43
D
uring the economic downturn,
global companies have struggled
to maintain and increase margins,
especially in developed markets where
they face a combination of increasing
costs and pricing pressures. In response,
businesses in developed markets are
looking critically at their costs, stripping
out unnecessary taxes and duties,
reducing borrowing requirements and
maximizing grants and incentives.
These can all be effective strategies in
reducing the cost of producing, selling and
distributing goods. For example, economic
customs regimes may avoid duty for
contract manufacturing, grants and soft
loans may be available for creating new
employment opportunities and VAT/GST
charged to domestic customers may be
avoided by selling goods cross-border.
Some multinationals are reconfguring
their supply chains to become more
“customer-centric,” to reduce overheads,
operate more effciently and beneft from
economies of scale. They are changing
Managing indirect taxes
to improve margins
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
how they purchase goods and services,
carry out key functions and deliver their
goods by centralizing and rationalizing
logistics, procurement, production and
distribution. These changes all have
a profound impact on indirect taxes,
particularly on compliance obligations.
If these taxes are not managed effectively
they can increase costs, have a negative
impact on cash fow and delay product
deliveries. For example, a change in the
company that buys and sells products
has a knock-on effect for VAT/GST, excise
duties, export licenses and customs
regimes. Failure to recognize and manage
the new obligations can result in major
business disruption and large fnancial
penalties.
Risks can be avoided by involving
indirect taxes as part of any supply chain
transformation project from the start.
In fact, looking critically at indirect taxes
and grants and incentives may highlight
new opportunities to strip out costs,
reduce fnancing and improve operational
effciencies.
44 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
VAT/GST
The main objectives for VAT/GST in this
area of the supply chain framework are:
• Reducing the burden of VAT/GST, both
in terms of absolute costs and in terms
of negative cash fow
• Maximizing positive VAT/GST cash fow
on sales and purchases
• Reducing the costs of compliance and
the risk of incurring penalties
The main issues for VAT/GST include:
• Absolute VAT/GST costs e.g., input
VAT/GST that is not recoverable or
that is missed due to poor VAT/GST
management, foreign VAT/GST that
is not available for recovery and double
taxation arising from mismatched
systems
• Negative cash fow e.g., VAT/GST
accounted for on sales but not yet paid
(or never paid) by purchasers, VAT/GST
paid on imports and purchases that
has not been reimbursed or offset,
foreign VAT/GST that is not picked
up for recovery
• Financial penalties from failing to
comply with VAT/GST obligations
e.g., penalties incurred for incorrect
invoicing or for late VAT/GST
registration in a foreign jurisdiction
• Administrative costs associated with
multinational VAT/GST compliance
obligations
Leading practices for reducing the cost
burden of VAT/GST include:
• Adopting an effective VAT/GST
management framework to identify,
quantify and manage transactions and
cross-border movements of goods,
throughout the end-to-end supply chain
• Mapping out VAT/GST transaction fows
against costs to identify opportunities
to strip out VAT/GST costs and improve
cash fow
• Standardizing and automating end-to-
end processes (especially AR and AP
processes)
• Centralizing VAT/GST compliance
in global or regional shared services
centers
• Routing cross-border movements
of goods to make best use of import
VAT/GST deferments, free trade
zones, reverse charge accounting,
etc. to improve cash fow and avoid
irrecoverable VAT/GST
Customs and international trade
The main objectives for customs duties
in this area of the supply chain framework
are:
• Reducing customs duty spend to
reduce the landed cost of products
• Smoothing customs clearance
processes
The main issues for customs duties
include:
• Absolute costs from “trapped duty”
paid at an earlier stage of the supply
chain that increase the landed cost
of products
• Penalties, delays and seizure of goods
arising from non compliance with
customs compliance procedures, such
as origin management, economic
customs procedures and accounting
and anti-bribery laws
• Absolute costs related to product
delays (e.g., use of air freight to meet
just-in-time delivery conditions)
• Costs and risks related to using
non compliant customs agents for
importations
• Duties and penalties imposed as a
result of countries applying different
legal interpretations to basic customs
principles (such as the country of
origin, the commodity code and the
product value of the goods)
45 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
Excise and environmental duties
The main objectives for excise duties in this
area of the supply chain framework are:
• Reducing excise duty spend to reduce
the landed cost of products
• Ensuring excise duties are paid solely
in the country of consumption
The main issues for excise duties include:
• Absolute duty costs arising from paying
irrecoverable duties in more than one
country
• Penalties, delays and seizure of goods
arising from non compliance with legal
requirements
• Administrative costs associated
with local excise duty compliance
obligations in multiple countries
Leading practices for reducing the cost
burden of excise duties include:
• Adopting an effective management
framework to identify, quantify and
manage excise duties and licenses
throughout the end-to-end supply
chain
• Optimizing the use of excise duty
planning including suspension and
exemption regimes
• Aligning excise duty planning with
customs and VAT/GST suspension
regimes, free trade zones and
warehousing to maximize benefts
and reduce the overall duty burden
Export controls
The main objectives for export controls
in this area of the supply chain framework
are:
• Reducing the cost of export compliance
• Reducing export lead times
The main issues for export controls are:
• Administrative costs arising from
complying with complex regulations
in multiple jurisdictions
• Penalties, delays and seizure of goods
arising from non compliance with
export license procedures
Leading practices for reducing the cost
burden of export controls include:
• Adopting an effective management
framework to identify, quantify and
manage export licenses throughout the
end-to-end supply chain
• Embedding export compliance
obligations into business processes
• Centralizing compliance in global
or regional shared services centers
• Using customs accreditation (such
as AEO) to transit goods more quickly
through international borders
Leading practices for reducing the cost
burden of customs duties include:
• Adopting an effective customs duty
management framework to identify,
quantify and manage transactions
and cross-border movements of goods,
throughout the end-to-end supply
chain
• In-sourcing customs activities
to improve processes and data
management
• Applying economic customs procedures
(such as OPR, IPR) and customs
planning tools (such as classifcation
and origin) where available
• Routing cross-border movements
of goods to make best use of free trade
agreements and free trade zones
• Optimizing sourcing of goods
to maximize the use of customs
procedures (e.g., origin)
• Using accreditation (such as AEO)
to transit goods more quickly through
international borders
• Linking the use of special customs
regimes in the end-to-end supply chain
46 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
Leading practices for reducing the cost
burden of incentives include:
• Adopting an effective management
framework to identify, quantify and
manage the incentives “assets”
• Centralizing management of grants
and incentives to improve controls,
improve decision-making and maximize
in-house experience
• Evaluating the benefts available
compared with the compliance
conditions and costs
• Identifying potential investment
destinations and negotiating
investment packages that are tailored
to the company’s needs to maximize
benefts and cost reductions
• Combining grants or credits for new
investment, employment and R&D, etc.
to minimize input costs throughout the
supply chain
Incentives
The main objectives for grants and
incentives in this area of the supply chain
framework are:
• Reducing the cost of raw materials
and overhead costs (including the costs
of employees, real estate, energy and
fnance)
• Increasing capital investment
The main issues for incentives are:
• Administrative costs arising from
complying with complex qualifying
conditions in multiple jurisdictions
• Absolute costs of clawed back
incentives that were granted previously
• Missed incentive opportunities because
of poor compliance or tracking of
programs or because the available
incentives are not appropriate (e.g.,
a tax holiday for a company with no
taxable profts)
47 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
G
overnments around the world are
struggling to fnd the right balance
between promoting economic
growth and protecting the environment.
Issues of sustainability have also climbed
the corporate agenda in recent years and
will continue to have a profound effect on
supply chains in the future.
Many countries have turned to indirect
taxes and incentives to support a “green”
agenda. For example, the excise duties
related to mineral oils have increased
in many countries; several jurisdictions
have also adopted one-off levies, such as
carbon taxes and packaging duties, aimed
at discouraging waste, pollution and the
use of fossil fuels. These environmental
taxes can increase the cost of overheads,
and the production and distribution cost
of raw materials. And failure to comply
with multiple local requirements can lead
to business disruption, fnes and delays.
But companies that adopt greener policies
may beneft from a range grants and
incentives aimed at attracting the use
of cleaner industries and technologies and
non polluting activities (such as R&D and
high-tech).
Environmental duties
The main objectives for environmental
duties in this area of the supply chain
framework are:
• Ensuring full compliance with local
taxes
• Reducing environmental duty spend
to reduce the landed cost of products
• Avoiding product delivery delays
The main issues for environmental duties
include:
• Absolute duty costs arising from paying
irrecoverable duties
• Penalties, delays and seizure of goods
arising from non compliance with legal
requirements
• Administrative costs associated with
local environmental duty compliance
obligations in multiple countries
Leading practices for reducing the cost
burden of environmental duties include:
• Adopting an effective management
framework to identify, quantify and
manage environmental duties and
licenses throughout the end-to-end
supply chain
• Centralizing management of
environmental duties (e.g., in a global
or regional shared service center)
to improve quality of compliance and
reduce costs
• Embedding environmental concerns
into the supply chain and modifying
products or processes to reduce or
avoid one-off duties (e.g., packaging
and carbon taxes)
Managing indirect taxes
to support sustainability
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
48 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
Incentives
The main objectives for grants and
incentives in this area of the supply chain
framework are:
• Covering or reducing the cost of
setting up businesses that will carry
on sustainable activities
• Covering or reducing the cost
of adapting current infrastructure
and business practices to be more
sustainable
The main issues for incentives are:
• Compliance costs associated with
complex qualifying conditions in
multiple jurisdictions
• Absolute costs of clawed back
incentives that were granted but for
which the conditions have not been met
• Missed incentive opportunities because
of poor compliance or tracking of
programs or because the available
incentives are not appropriate (e.g.,
a tax holiday for a company with no
taxable profts)
Leading practices for reducing the cost
burden of incentives include:
• Adopting an effective management
framework to identify, quantify and
manage the incentives “asset”
• Centralizing management of grants
and incentives to improve controls,
improve decision-making and maximize
in-house experience
• Evaluating the benefts available
compared with the compliance
conditions and costs
• Identifying potential investment
destinations and negotiating
investment packages that are tailored
to the company’s needs to maximize
benefts and cost reductions
• Combining grants or credits for
sustainability programs for multiple
concerns, such as renewable energy,
waste management and production
effciencies
“ I am seeing a trend right now in
China and in other places too where
they are starting to talk about
attracting ‘no carbon footprint’
businesses. They want to attract
businesses like outsourcing and life
sciences that aren’t going to pollute.”
— Director of global incentives and grant
management at a multinational company
49 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
T
o deal with diffcult economic
conditions in developed economies,
in recent years, global companies
have developed new products and
expanded into new markets. Developing
an effective supply chain operating model
is critical to achieving and maintaining
high levels of growth within emerging
markets. A wide range of grants and
incentives — from tax holidays to soft
loans and R&D support — are offered to
attract global companies to new locations.
But operating in unfamiliar territories
can challenge corporate functions to the
limit and expose an organization to a wide
range of risks. The mix of indirect taxes
in emerging economies, for example, may
be unfamiliar to companies headquartered
in Europe and the US. For example,
excise taxes may apply to a wider range
of products and customs duty rates may
be higher, or the country may not yet
have a well-developed network of free
trade agreements.
Managing indirect taxes to
support growth in new markets
Optimizing
global spend
Establishing an
effective supply
chain model
and infrastructure
Enabling
new revenue
sources
Managing
operational,
tax and
regulatory risk
Recon?guring the
supply chain to
create cost
competitiveness
Improved
results
Improving
operational agility
and responsiveness
Managing
environmental
and sustainability
expectations
Operating in new markets can also
increase the diffculty of managing
indirect taxes and the complexity of
obligations, thus increasing the risk of
incurring penalties for non compliance.
Failing to comply fully with indirect
tax requirements can have severe
consequences in countries which impose
high penalties for errors and omissions
(including severe fnancial penalties,
business closure and criminal sanctions
for business offcials). For example, as
companies enter new markets they must
ensure that they are aware of and ready
to comply with all their obligations before
they commence operations. Companies
that are comfortable with European-style
VATs may struggle with the single-stage
consumption taxes, such as business
tax in China, or the multiple local taxes
charged in India and Brazil.
Changes in indirect tax systems can also
add to the complexity. In many emerging
economies, new and reformed taxes may
be introduced and taxpayers’ systems
and processes must adapt, often at short
notice, to keep the business operating.
For example, the recent VAT pilot in
Shanghai was introduced with just eight
weeks notice.
Risks can be avoided and the benefts
of entering new markets preserved by
involving indirect taxes as part of any
business expansion project from the
outset. In fact, looking critically at indirect
taxes and incentives may help to decide
where and how new activities should be
undertaken.
50 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
VAT/GST
• Reducing the burden of VAT/GST, both
in terms of absolute costs and in terms
of negative cash fow
• Reducing the costs of compliance in
multiple jurisdictions
• Reducing the risk of incurring penalties
in unfamiliar jurisdictions and new tax
systems
The main issues for VAT/GST include:
• Administrative costs associated with
adapting to VAT/GST compliance
obligations arising from doing business
in new markets
• Absolute VAT/GST costs e.g., input
VAT/GST that is not recoverable or
that is missed due to poor VAT/GST
management, foreign VAT/GST that is
not available for recovery and double
taxation arising from mismatched
systems
• Negative cash fow e.g., VAT/GST
accounted for on sales but not yet paid
(or never paid) by purchasers, VAT/GST
paid on imports and purchases that
has not been reimbursed or offset,
foreign VAT/GST that is not picked up
for recovery
• Financial penalties from failing to
comply with VAT/GST obligation
e.g., penalties incurred for incorrect
invoicing or for late VAT/GST
registration in a foreign jurisdiction
• The effect of a new VAT/GST being
introduced or of consumption tax
reform on business processes and
accounting and reporting requirements
Leading practices for reducing the cost
burden of VAT/GST include:
• Adopting an effective VAT/GST
management framework to identify,
quantify and manage transactions and
cross-border movements of goods,
throughout the end-to-end supply chain
• Mapping out VAT/GST transaction fows
against costs to identify opportunities
to strip out VAT/GST costs and improve
cash fow
• Standardizing and automating end-to-
end processes (especially AR and AP
processes)
• Centralizing VAT/GST compliance
in global or regional shared services
centers
• Proactively planning for new
compliance requirements and changes
to tax systems
• Routing cross-border movements
of goods to make best use of import
VAT/GST deferments, free trade
zones, reverse charge accounting,
etc. to improve cash fow and avoid
irrecoverable VAT/GST
• Adopting a centralized or regional
supply chain model and implementing
a VAT/GST-free procurement,
manufacturing and sales model to
meet business needs and just-in-time
delivery targets
Customs and international trade
The main objectives for customs duties
in this area of the supply chain framework
are:
• Reducing penalties and delays related
to customs compliance
• Smoothing customs clearance
processes
• Identifying increased customs spend
• Reducing customs duty costs
for landed goods and within the
manufacturing chain
The main issues for customs duties
include:
• New customs duties, obligations
and opportunities arising from doing
business in new markets or trading
in new products
• Absolute costs of “trapped duty” paid
at an earlier stage of the supply chain
increasing the landed cost of products
• Penalties, delays and seizure of goods
arising from non compliance with
customs compliance procedures, such
as origin management, economic
customs procedures and accounting
and anti-bribery laws
• Absolute costs related to product
delays (e.g., use of air freight to meet
just-in-time delivery conditions)
• Costs and risks related to using
non compliant customs agents for
importations
• Duties and penalties imposed as a
result of countries applying different
legal interpretations to basic customs
principles such as the country of origin,
the commodity code and the product
value of the goods
51 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
Excise and environmental duties
The main objectives for excise duties in this
area of the supply chain framework are:
• Reducing excise duty spend to reduce
the landed cost of products
• Ensuring excise duties are paid solely
in the country of consumption
• Smoothing logistics for excisable
products processes
The main issues for excise duties include:
• New excise duties and obligations
arising from introducing new goods
onto the market or existing goods into
new markets
• Absolute costs arising from “excise
leakage” (paying irrecoverable duties
in more than one country)
• Penalties, delays and seizure of goods
arising from non compliance with legal
requirements
• Administrative costs associated
with local excise duty compliance
obligations in multiple countries
Leading practices for reducing the cost
burden of excise duties include:
• Discussing new activities and new
product with local tax authorities
to explore available excise duty
programs and applicable conditions
• Adopting an effective management
framework to identify, quantify and
manage excise duties and licenses
throughout the end-to-end supply
chain
• Defning excise duty management
obligations and agreeing them
in specifc service agreements
• Identifying local excise duty planning
including suspension and exemption
regimes
• Using centralized excise licenses
and direct transportation to optimize
payment facilities and deposit
guarantees
• Aligning excise duty planning with
customs and VAT/GST suspension
regimes, free trade zones and
warehousing to maximize benefts
and reduce the overall duty burden
Leading practices for reducing the cost
burden of customs duties include:
• Adopting an effective customs duty
management framework to identify,
quantify and manage transactions
and cross-border movements of goods,
throughout the end-to-end supply
chain
• In-sourcing customs activities
to improve processes and data
management
• Applying economic customs procedures
(such as OPR, IPR) and customs
planning tools (such as classifcation
and origin) where available
• Routing cross-border movements
of goods to make best use of free trade
agreements and free trade zones
• Optimizing sourcing of goods
to maximize the use of customs
procedures (e.g., origin)
• Using accreditation and facilitation
programs (such as AEO, CT-PAT)
to transit goods more quickly through
international borders
• Linking the use of special customs
regimes in the end-to-end supply chain
• Negotiating with tax authorities
to make full use of cost reduction
programs
52 Managing indirect taxes in the supply chain
Part III Meeting indirect tax challenges in the supply chain
Incentives
The main objectives for grants and
incentives in this area of the supply chain
framework are:
• Adding value to business decisions
related to new markets and new
activities
• Reducing costs of setting up and
doing business in new locations
or undertaking new activities
• Supporting capital investment
The main issues for incentives are:
• Administrative costs arising from
complying with complex qualifying
conditions in multiple jurisdictions
• Missed incentive opportunities because
of poor compliance or tracking of
programs or because the available
incentives are not appropriate (e.g.,
a tax holiday for a company with no
taxable profts)
Leading practices for reducing the cost
burden of incentives include:
• Adopting an effective management
framework to identify, quantify and
manage the incentives “asset”
• Proactive consideration of available
incentives during the investment
planning process to build savings into
the business decision-making process
• Centralizing management of grants
and incentives to improve controls,
improve decision-making and maximize
in-house experience
• Evaluating the benefts available
compared with the compliance
conditions and costs
• Identifying potential investment
destinations and negotiating
investment packages that are tailored
to the company’s needs to maximize
benefts and cost reductions
• Combining grants or credits for new
investment, employment, R&D to
minimize input costs throughout the
supply chain
• Incentives related to product or service
development may increase employees’
skill levels and extend the benefts of
R&D within the organization
Export controls
The main objectives for export controls
in this area of the supply chain framework
are:
• Reducing the cost of export compliance
• Reducing export lead times
The main issues for export controls are:
• Administrative costs arising from
complying with complex regulations
in multiple jurisdictions
• Penalties, delays and seizure of goods
arising from non compliance with
export license procedures
• Operating in emerging markets may
increase compliance risk
Leading practices for reducing the cost
burden of export controls include:
• Adopting an effective management
framework to identify, quantify and
manage export licenses throughout
the end-to-end supply chain
• Embedding export compliance
obligations into business processes and
across multiple corporate functions
• Centralizing compliance in global
or regional shared services centers
• Using customs accreditation (such
as AEO) to transit goods more quickly
through international borders
53 Supporting growth and reducing cost and risk
Part III Meeting indirect tax challenges in the supply chain
Indirect tax
Global Director — Indirect Tax
Philip Robinson
+ 41 58 289 3197
[email protected]
Americas Asia-Pacifc Europe, Middle East, India
and Africa (EMEIA)
Jeffrey Saviano
+ 1 212 773 0780 (New York)
+ 1 617 375 3702 (Boston)
[email protected]
Karen Christie
+ 1 212 773 5552
[email protected]
Frank de Meijer
+ 55 11 2573 3413
[email protected]
Kristine Price
+ 1 212 773 2662
[email protected]
Robert Smith
+ 86 21 2228 2328
[email protected]
Gijsbert Bulk
+ 31 88 407 11 75
[email protected]
Charles Brayne
+ 44 20 7951 6337
[email protected]
Franky De Pril
+ 32 2 774 9484
[email protected]
Marc Schlaeger
+ 41 58 286 3103
[email protected]
John Sloot
+ 31 88 40 70426
[email protected]
Contacts
54 Managing indirect taxes in the supply chain
Incentives
Americas Asia-Pacifc Europe, Middle East, India
and Africa (EMEIA)
Karen Hensley-Chelstowska
+ 1 972 835 4559
[email protected]
Robin Parsons
+ 61 8 9429 2251
[email protected]
Christine Oates
+ 44 121 535 2466
[email protected]
55 Supporting growth and reducing cost and risk
56
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Ernst & Young
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