Executive Briefings

Four Trends to Accelerate Tax-Efficient Supply Chains

Analyst Insight: Supply-chain executives are under tremendous pressure to continually re-optimize their supply chains. While supply-chain economics must dictate where manufacturing and distribution assets should reside, tax changes and opportunities need to be looked at in parallel with the supply-chain economics to sustain the planned benefits. Looking forward to 2020 and beyond, we believe companies should pay particular attention to four trends that will accelerate the need for a tax-efficient supply chain. - Michael DuVall, principal, Bradley Slattery, principal and Jared Lapin, director, PwC

Four Trends to Accelerate Tax-Efficient Supply Chains

Virtual workforce. Advances in supply-chain analytics, smart devices, and collaboration technologies continue to untether employees from traditional work locations. Because income is attributed to more economically significant functions (i.e., strategic versus tactical), the location of the supply-chain management team can influence the tax implications. This can muddy the waters regarding where a multinational is taxed on the economically significant functions, but also provide for organizational design flexibility to ensure that the legal, governance and tax model is developed so as not to erode business benefits.

Continued rise of e-commerce. E-commerce is becoming a more significant channel for all sectors. In retail, for example, online sales account for only 8 percent of all revenue but are expected to nearly double by 2020. The attribution of income to related value-chain functions, including sales force, product services, website maintenance, and the corresponding tax treatment of that income is an area of growing complexity. Revenue authorities strive to equitably balance the significance of these functions in generating entrepreneurial returns of the business. For supply-chain executives, the associated tax can significantly increase the cost of doing business if not appropriately accounted for in the operating model design.

Additive manufacturing. The ownership and use of intangibles related to production can be as important as the location of the manufacturing activity for multinationals. This is likely to become more complex with the increasing adoption of additive manufacturing. While traditional production can often originate from a single high-scale manufacturing facility, 3D printing enables production closer to the point of need in multiple smaller operations (i.e., where the printers sit) across markets. Determining how to attribute taxable income within a supply chain that continues to diversify, including the contribution of intangibles to value creation, will continue to deepen the complexity of operating across multiple jurisdictions.

Emerging markets. Foreign investment in emerging markets has spurred a rise of local tax incentives to attract further long-term investment in strategic talent, intangible development and capital investments. This comes, in part, at the expense of some of the more traditional investment locations, such as Switzerland, Hong Kong and Singapore, which prove to be expensive locations to employ senior business talent and make capital investments. While the economic incentives may prove lucrative, an assessment of intellectual property protection, political stability and access to local talent will continue to be critical factors in determining the appropriate strategic location for multinationals outside the U.S.

The Outlook

As noted, supply-chain economics will continue to drive the network footprint. However, the legal, governance and tax model is a critical step in ensuring that companies can sustain the anticipated benefits from any operating model design. To create a tax-efficient supply chain, a company needs to think carefully about all its assets and where it is creating value.

Virtual workforce. Advances in supply-chain analytics, smart devices, and collaboration technologies continue to untether employees from traditional work locations. Because income is attributed to more economically significant functions (i.e., strategic versus tactical), the location of the supply-chain management team can influence the tax implications. This can muddy the waters regarding where a multinational is taxed on the economically significant functions, but also provide for organizational design flexibility to ensure that the legal, governance and tax model is developed so as not to erode business benefits.

Continued rise of e-commerce. E-commerce is becoming a more significant channel for all sectors. In retail, for example, online sales account for only 8 percent of all revenue but are expected to nearly double by 2020. The attribution of income to related value-chain functions, including sales force, product services, website maintenance, and the corresponding tax treatment of that income is an area of growing complexity. Revenue authorities strive to equitably balance the significance of these functions in generating entrepreneurial returns of the business. For supply-chain executives, the associated tax can significantly increase the cost of doing business if not appropriately accounted for in the operating model design.

Additive manufacturing. The ownership and use of intangibles related to production can be as important as the location of the manufacturing activity for multinationals. This is likely to become more complex with the increasing adoption of additive manufacturing. While traditional production can often originate from a single high-scale manufacturing facility, 3D printing enables production closer to the point of need in multiple smaller operations (i.e., where the printers sit) across markets. Determining how to attribute taxable income within a supply chain that continues to diversify, including the contribution of intangibles to value creation, will continue to deepen the complexity of operating across multiple jurisdictions.

Emerging markets. Foreign investment in emerging markets has spurred a rise of local tax incentives to attract further long-term investment in strategic talent, intangible development and capital investments. This comes, in part, at the expense of some of the more traditional investment locations, such as Switzerland, Hong Kong and Singapore, which prove to be expensive locations to employ senior business talent and make capital investments. While the economic incentives may prove lucrative, an assessment of intellectual property protection, political stability and access to local talent will continue to be critical factors in determining the appropriate strategic location for multinationals outside the U.S.

The Outlook

As noted, supply-chain economics will continue to drive the network footprint. However, the legal, governance and tax model is a critical step in ensuring that companies can sustain the anticipated benefits from any operating model design. To create a tax-efficient supply chain, a company needs to think carefully about all its assets and where it is creating value.

Four Trends to Accelerate Tax-Efficient Supply Chains