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Tax Efficient Supply Chain Planning Trends in Asia

Tax Efficient Supply Chain Planning Trends in Asia
18 Nov 2011

Supply Chain Planning is known in the market in various guises that include: Tax Efficient Supply Chain Management (TESCM) and Value Chain Planning. No matter what it is called, it exhibits the same key features: centralisation of functions, assets and risks. As multinationals seek to become more global or regional, adopting a business model that involves centralising key functions, assets and risks drive costs out of the business, while simultaneously creating operating efficiencies (refer diagram below). The result is the realisation of significant above-the-line savings. Taxand UK and Taxand Netherlands discuss potential savings in the Asia region for multinationals if supply chain planning is done in a robust manner.

Asia - Inbound or Outbound?
There is a clear shift in the Asian region with respect to the nature of TESCM. Historically most commercial activities in the region involved US or European multinationals establishing Principal companies in Asian countries like Singapore. With the incentives offered by the Economic Development Board, Singapore was a hot bed for foreign investment. In addition to regional supply chain companies, many groups established Sourcing/Procurement companies (typically in Hong Kong and China).

As the region has transformed from a receiver of investment to a provider, there has been a seismic shift in the nature of supply chain planning. We are increasingly assisting clients from Asia (in particular China, India, Japan and South Korea) with establishing trading Principals in the European market.

The main beneficiaries of Asian investment in Europe have been Switzerland, Netherlands, the UK, Ireland and Luxembourg. When determining location, tax is only one of the criteria that will be assessed by the group. Critical criteria include the following considerations: cultural fit, investment support, quality of life, housing, schooling, health, language and political stability.

Whilst there has been an increase in outbound supply chain planning opportunities in the region, the focus has mainly been on supporting clients investing inbound to the region.

How are Governments responding?
Given the state of the global economy multinationals are under increasing pressure to maximise shareholder return, while Governments are under increasing pressure to maintain their revenue base. The inevitable result is tension among stakeholders. It is clear that Tax Authorities globally are not only focusing on exit charges on outbounds but they are aggressively challenging PE and transfer pricing arrangements with respect to inbounds, leading to prolonged and costly debate with tax authorities.

Many inbound supply chain reorganisations implemented in Asia are now under review by the tax authorities. The authorities are focusing on the transfer pricing arrangements of the groups given that the economic profile has changed significantly since implementation. Groups who have not revisited their transfer pricing for sometime should be actively reviewing their policies to ensure that they are robust and reflect the current global environment.

When is a company ripe for TESCM?
Traditionally, TESCM was viewed as big bang business restructuring that was only appropriate for large multinationals in the consumer goods sector. In practice however, TESCM has been implemented in a broad range of industries (consumer goods, pharma, heavy industrial, oil and gas, services) for groups of varying size.

Some key factors that indicate whether TESCM is appropriate for a business include: ERP implementation being considered in a group, merger and acquisition activity, decentralised business model, inefficiencies across the supply chain, R&D activity, high effective tax rate compared to competitors, significant procurement spend and new business/product lines being introduced, greenfield operations and rebranding.

Business Change
It is important to bear in mind that TESCM involves real business change. In fact business change is at the very heart of TESCM. It is therefore essential that when considering the feasibility of restructuring a group's supply chain or value chain that a business case is developed including an assessment of the cost/benefits analysis.

We are often asked "How many people need to relocate to the Principal company?". This question in itself misses the fundamental principle of robust implementation. First and foremost, the Principal must have the appropriate substance to manage and run the business - this will typically include senior personnel across the various elements of the value chain that is being reorganised. The key is to assess who and what function(s) drives value in the business and ensure that this role is housed in the Principal.

Key issues to address
Implementing change that impacts people is never straightforward and should never be underestimated. This is true also of change that will impact IT systems and reporting. People and IT issues are the two main reasons when some groups do not implement supply chain reorganisations. Rarely would tax be seen as a blocker to implementation. Having said that there are of course significant tax challenges to address when undertaking supply chain changes.

Corporate tax considerations include the following: exit charge valuations, transfer pricing, repatriation, CFC, Permanent Establishment analysis, legal entity structuring.

Successful Implementation
Based on our experience of implementing TESCM reorganisations there are numerous critical success factors common to all projects. Such factors include the following: an empowered project team with clear decision making responsibility and authority, appropriate resources; team led by commercial/operations (not tax!), an integrated team of advisors who have a track record of implementation; clear communication throughout the project and an experienced change management team.


Taxand's Take


There is significant amount of opportunity in the Asia region for both inbound and outbound supply chain planning. What multinationals need to ensure is that they have experienced specialists that will ensure that supply chain reorganisation is carried out in a robust and substantive manner. This will lead to both operational and financial efficiencies being maximised.

Your Taxand contacts for further queries are:
UK
Tom McFarlane
T. +44 207 072 3201
E. tmcfarlane@alvarezandmarsal.com

NETHERLANDS
Jimmie van der Zwaan
T. +31 20 301 66 33
E. jimmie.vanderzwaan@vmwtaxand.nl

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Taxand's Take Author