By Karen Lynch
The practical impact on global supply chain management could come in the form of serial tax changes – some beneficial, some not so much – all along the supply chain. Leading finance and supply chain executives are working together on strategies to mitigate the bad and capitalize on the good.
Generally speaking, tax policy influences global supply chain management because it affects a supply chain’s cost of doing business in or between given jurisdictions. Multilateral tax policy guidelines have been rewritten in recent years for today’s global digital economy, under the leadership of the Group of 20 nations and the Organization for Economic Co-operation and Development (OECD). National governments have been taking the OECD’s guidelines and adapting them locally – though not all at the same time or in the same way.
Global policymakers have approached the challenge of digital economy taxation primarily as a defense against tax evasion, calling their tax rewrite the Base Erosion and Profit Shifting (BEPS) Action Plan.1 “Thanks to digitalization, we now see businesses across all sectors having the capacity to design and build their operating models around technological capabilities, with a view to improve flexibility and efficiency and extend their reach into global markets,” wrote Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration. “These advances have significantly expanded the ability of certain business models of the digital economy – e.g. electronic commerce, online advertising and cloud computing – to take advantage of BEPS opportunities.”2
For their part, national governments are attempting to strike a balance between attracting foreign direct investment with tax incentives and ensuring that the global digital economy doesn’t erode their tax bases.3 Even though they have worked together within the BEPS process, they remain engaged in a natural competition among nations.
Against this backdrop, the BEPS initiative has coincided with a drive for greater tax transparency and with dramatic headlines of multimillion- and even multibillion-dollar tax cases against corporations. To increase transparency, national tax authorities are beginning to automate their collection of tax information from companies doing business within their borders – and setting up automatic data exchanges with their peers worldwide. As for those headlines, the European Commission has cited some governments for allegedly courting foreign direct investment with excessive tax incentives,4 while companies have been penalized for what were seen as aggressive interpretations of pre-BEPS tax laws.5
The sweep of the BEPS tax changes is broader than simply improving tax compliance. There are operational implications for global supply chain management in the new rules for value-added taxes (VAT) and other sales taxes, as well as for corporate income taxes. Some countries began putting these changes into effect before the ink was even dry on the OECD’s tax rewrite,6 while many more countries are still drafting their BEPS tax reform measures.
Sales tax (a.k.a. VAT) has been the first focus of many countries’ tax authorities, since it is less complicated to administer than income tax. The BEPS project has included an international agreement on collecting VAT on cross-border business-to-consumer (B2C) sales in the country where the customer is located, rather than the seller’s location. In addition, some countries have abolished their previous thresholds on low-value cross-border e-commerce as well as imposing their first sales taxes on cross-border digital services.
For U.S. companies doing business abroad, such VAT developments can have implications for supply chain management operations, international pricing strategies and competitive positioning in overseas markets. In Europe, for instance, standard VAT rates are typically 20 percent or higher.7 In global supply chain management, “You must normally pay VAT on all goods and services, up to and including the sale to the final consumer. This could also include each stage of a production process, e.g. buying components, assembly, shipping etc.,” according to the rules.8 In a business-to-business (B2B) context, paperwork is a consideration, since VAT is charged by the seller to the buyer at each step in the global supply chain, and it can be recoverable at each step except the last.9
Corporate income tax issues could also emerge in global supply chain management. “The threshold for creating a taxable presence for corporate income tax purposes in a country is lowered, with inventory holding, warehousing functions and sales activities being particular targets,” according to Ronald van den Brekel and Tim Meijer, both transfer pricing specialists at the professional services firm EY.10 Creating a taxable presence brings on a significant obligation for tax filings as well as the possibility of new taxes in what could be many supply chain locations. Some countries are even looking at the ownership and management of computer servers in their countries as a possible taxable presence.
Additionally, when accounting for intra-company costs within supply chains, “there is a clear shift in focus from the legal form to the economic reality of a transaction,” the EY authors wrote. In a practical example, this could require changes in some current arrangements whereby the intellectual property (IP) for globally commercialized goods is held in one (low-tax) country, the value-creating IP development is conducted elsewhere, and the goods produced are sold in yet another (higher-tax) set of countries.
As for any new opportunities created by BEPS, some countries are evolving in the post-BEPS world to attract innovative businesses with improved incentive packages variously known as patent boxes, innovation boxes and knowledge boxes, which grant discounted tax rates on IP while taking care to be aligned with BEPS guidelines. Sometimes packaged in these “boxes” are various combinations of lower corporate tax rates, deductions for research and development, and other tax breaks.11,12
Altogether, finance executives and global supply chain management professionals find that they must keep abreast of these and other still-changing tax provisions to develop flexible strategies that mitigate tax risk in global supply chain management while capitalizing on available opportunities.
While digitization has fueled the expansion of global operations, it has also catalyzed the creation of new global digital economy taxation. Today, the cost of global supply chain management could be subject to changing taxes at any link of the chain, as the new tax policy is implemented.
Karen Lynch is a journalist who has covered global business, technology and policy in New York, Paris and Washington, DC, for more than 30 years. Karen also is a principal at Content Marketing Partners.
1. “Tax Challenges, Disruption and the Digital Economy”, OECD Observer; http://oecdobserver.org/news/fullstory.php/aid/5600/Tax_challenges,_disruption_and_the_digital_economy.html#sthash.XyFsyaZm.dpuf.
3. Taxation and Investment in United Kingdom 2015, Deloitte; https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-unitedkingdomguide-2015.pdf
4. "Minister Noonan disagrees profoundly with Commission", Irish Department of Finance; http://www.finance.gov.ie/news-centre/press-releases/minister-noonan-disagrees-profoundly-commission-apple
5. "Response to European Commission State Aid Decision on the Netherlands", Starbucks press release; https://news.starbucks.com/views/response-to-european-commission-state-aid-decision-on-the-netherlands
6. "The New Geography of Taxation", EY; http://www.ey.com/Publication/vwLUAssets/EY-at-the-intersection-of-tax-and-digital-transformation-may-2015/$FILE/EY-at-the-intersection-of-tax-and-digital-transformation-may-2015.pdf
7. "VAT Rates Applied in Member States of the European Union", European Commission; http://ec.europa.eu/taxation_customs/sites/taxation/files/resources/documents/taxation/vat/how_vat_works/rates/vat_rates_en.pdf 8. "VAT Rules and Rates", European Union; http://europa.eu/youreurope/business/vat-customs/buy-sell/index_en.htm
9. "Understanding VAT", Oracle; https://docs.oracle.com/cd/E39583_01/fscm92pbr0/eng/fscm/fsgl/concept_UnderstandingVAT-9f1ba0.html
10. "The Impact of BEPS on Tax Compliance", International Tax Review; http://www.internationaltaxreview.com/Article/3535802/The-impact-of-BEPS-on-tax-compliance.html
11. "Swiss IP Structures Attractive to U.S. Tax Directors", Bloomberg BNA; http://www.bna.com/swiss-ip-structures-n57982076519/
12. "Israel Proposes Significant Tax Breaks to Attract Multinational Corporation Investment", MNE Tax; http://mnetax.com/israel-proposes-significant-tax-breaks-attract-multinational-corporation-investment-16621