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August 2009
Tax Efficient Supply Chains
Unlock
savings through Tax efficiencies &
Supply Chain Optimisation
Introduction
Tax Rates are being reduced by respective governments in the region to encourage
more companies, especially multinationals, to situate their regional headquarters
in their country (Figure 1). A growing number of companies are responding
to the call, by relocating their regional headquarters in countries with lower corporate taxes (e.g. Singapore, Hong Kong).
Figure
1: Corporate Tax Rates across the Asia Pacific Region
Click to enlarge
The benefit
from relocating the regional centre of operations in lower corporate tax
countries is significant - reductions in corporate taxes directly impacts
the bottom line, and a reduction of 5% in corporate tax improves net profit
by the same amount. Additional benefits could also be harnessed by moving
to a regional supply chain which enables cost reduction opportunities through
consolidation in each step of the supply chain – from planning to fulfilment.
Though the benefits are significant, such a move requires significant planning
at the tactical and operational levels. At a minimum, such a move will entail
process reengineering to accommodate centralisation of several activities,
and changes in organisation reporting structure as decision making will
be centralized.
Tax Efficient
Supply Chains
The idea of a tax efficient supply chain is not new - several multinationals
have adopted a tax-efficient supply chain type of structure for the Asia
Pacific region, with one of the lower corporate tax countries as their regional
headquarters. Notable FMCG companies that have adopted this strategy include
P&G, British American Tobacco, and several more are in the planning stage
to move to a tax efficient supply chain structure.
Components
of a Tax Efficient Supply Chain Structure
The objective of
a tax efficient supply chain is to harness the lower corporate taxes offered
by selected countries in Asia Pacific by centralizing significant portion
of operations in these locations. The typical components of a tax efficient
supply chain structure are as follows:
- Central organization located in the lower corporate tax country which
acts as the Regional Supply Chain Centre. The regional centre plans demand
/ supply on a regional basis, and should be the seat of decision making
activity to qualify for tax incentives.
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The central organization is responsible for
buying ingredients/raw materials for the products, and retains ownership
of all materials (including work-in-progress goods, and finished goods)
until such materials/products are sold to the end-market/customer. The
central organization could also be the centre for all back-office functions
such as HR, IT, Finance, etc.
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Toll manufacturers will manufacture goods on
behalf of the central organization and will be paid a standard fee agreed
between the central organization & the toll manufacturer. The manufacturing
organization will own manufacturing plant/equipment/ buildings but not
the materials or products as these are centrally owned. Toll manufacturers
could be company’s own manufacturing plants or 3rd party manufacturing
plants.
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Local sales & marketing company is responsible
for sales & marketing activities at the country/local level. They are
usually focused on maintaining customer relationships, order taking, and
are usually rewarded with commissions based on sales.
The structure described above is generic, and will need to be tailored to
suit each company’s unique strategy and operating model. In addition, the
structure has to be optimised to meet the qualification criteria for tax
incentives (e.g. significant part of value adding activities should be in
the low corporate tax country, or significant part of back-office functions
should be centralised in the low corporate tax country, etc.)
ASEAN Developments & Implications
ASEAN (organization of 10 South-East Asian countries) targets
acceleration of economic growth, social progress, and cultural
development among its member countries. Inline with the economic
collaboration & development model, ASEAN instituted the ASEAN FREE TRADE
AREA (AFTA) which aims to promote the free flow of goods within ASEAN.
In addition to free trade within ASEAN, the association also has free
trade agreements with China, Korea, Japan, Australia, and New Zealand,
with more countries on the negotiating table (e.g. India). The primary
goals of AFTA seek to:
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Increase ASEAN's competitive edge as a production
base in the world market through the elimination, within ASEAN, of tariffs
and non-tariff barriers
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Attract more foreign direct investment to ASEAN
The primary mechanism for achieving the goals given above is the Common
Effective Preferential Tariff (CEPT) scheme. The CEPT scheme aims to enact
zero tariff rates on virtually all imports within ASEAN by 2010 for the
original six signatories (i.e. Brunei, Indonesia, Malaysia, Thailand, Philippines,
and Singapore).
The impact of the AFTA /CEPT on the operating footprints of major multinational
companies cannot be underestimated. The landed cost of products across the
ASEAN region will be significantly impacted with the implementation of AFTA/
CEPT as the tariffs/customs/duties will be reduced to zero. The impact of
labour costs & transportation costs will become the key drivers for cost
competitiveness within ASEAN as duties/tariffs will be eliminated.
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A tax efficient supply chain will
need to consider the impact of AFTA on the landed cost of products
within ASEAN, and consequently, drive further benefits in terms of
cost savings by selecting the right operating footprint (e.g. choice
of manufacturing location given the cost of labour, cost of raw
materials including the impact of tariffs on these raw materials,
the landed cost of finished goods in the export markets, etc.). |
Risks &
Critical Success Factors
The risks involved in moving to a tax efficient supply chain structure could
be segmented into two broad areas – business risks, and organizational/personnel
risks.
Business Risks
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Significant business continuity risk due to
the new organization structure & operating model which has to fulfil
the criteria set to qualify for corporate tax incentives, and qualify
for being taxed at lower corporate tax rates as dictated in the
regional HQ location.
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Almost all functions will need to be managed
on a regional scale from their existing local scale. Functions most impacted
will be in supply chain, especially in order fulfilment.
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The transition to the new operating model will
be complex as each country operation is unique - e.g. regulations will
be different in each country, supplier relationships/contracts will be
different in each country, etc.
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Allocation of significant business resources/management
time to the implementation of the tax efficient supply chain will potentially
impact/disrupt day-to-day operations
Organizational/ Personnel
Risks
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Change of roles and responsibilities across
the whole regional organization will necessitate different skill sets
from impacted personnel, and consequently, retraining of personnel
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In addition, such a major move will impact the
motivation & morale of employees due to fear of potential job losses from
centralization of several activities
As highlighted above, significant risks exist in the move to a tax efficient
supply chain, and needs to be managed carefully. BUT, the rewards are significant
in terms of cost benefits & competitive positioning, and such a move should
be seriously considered given the current environment.
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