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How "Substance" Can Impact Your Supply Chain Structure

25 Aug 2011

Recently, the IRS issued a Directive offering guidance to its examiners on the application of the economic substance doctrine to taxpayer transactions. The Directive lays out a multi-step examination process, which includes a list of factors that may weigh either in favour of or against the application of the economic substance doctrine. Many of the "factors" in the Directive can be viewed as just another circular definition of economic substance itself. (E.g., "Transaction has no meaningful potential for profit apart from tax benefits.")

In the context of international supply chain planning, we generally do not identify the Directive (or the underlying economic substance doctrine) as being a significant concern where the taxpayer otherwise complies with international tax law rules and principles.

Therefore next steps wil be to explore (or revisit) areas of the tax law where "substance" (as opposed to economic substance) may have a significant impact on your international supply chain planning.

Taxand US discusses, what can arguably be described as the "bread and butter" of US international tax planning: Subpart F (and more specifically, the recent rules on substantial contribution) and rules on permanent establishments.

Find out how "substance" impacts your international supply chain here

Taxand's Take

Management of substance in your international business enterprise can be critical from a tax and supply chain planning perspective. Careful and considered design of substantive business and operational activities in your supply chain structure may yield significant tax efficiencies. Whether you are in the early stages of designing your international supply chain structure or you find yourself overseeing a more mature international enterprise, you should consider with your tax department and tax planning advisors whether substance in your international structure has been optimized to reduce tax inefficiencies and systemic tax risks.

Your Taxand contact for further queries is:
Ernesto Perez
T. +1 305 704 6720

Sam Chung
T. +1 206 664 8981

Taxand's Take Author