Tax savings from smart supply chain management
significant sums of money, up to 5 per cent of turnover in some
cases, by considering tax implications in their supply chain
strategy, according to a report from consultants Capgemini.
The potential saving on average for the top 13 life science companies in Europe would be more than €200 million a year if they implement what Capgemini has dubbed Tax Effective Supply Chain Management (TESCM).
TESCM is a business model that considers tax when designing a supply chain strategy. The profitability of a supply chain can be significantly enhanced by aligning the respective tax structure with the current and future supply chain structure and strategy.
This is achieved through: the creation of more centrally coordinated strategic and tactical supply chain management processes; managing the tax impact resulting from the operational changes in the supply chain (e.g., flow of goods, location of (in)tangible assets and organisational structures); and reducing the effective corporate tax rate and optimising indirect taxes, such as value-added tax (VAT) and custom duties.
The principle underlying this model is the centralisation of the higher value add functions, major risks and intangible assets into a separate legal entity, called a Principal company or a Supply Chain Management Company. This SCMC is usually conveniently located in a favourable tax jurisdiction, like Switzerland, says Capgemini.
Despite the benefits, a lot of firms are not implementing TESCM yet, as they feel a social responsibility for the region in which they are located. Often, the location is where the company has its roots and the place where the people who have contributed largely to its growth live, according to the firm. But US-based competitors have limited social responsibility in Europe and they are quickly reaping the benefits of TESCM models.
In the longer term, firms will therefore have no choice if competitors continue to lower their cost levels and increase the efficiency and effectiveness of their supply chain by implementing TESCM, says Capgemini.
The consequence will be that a lot of the tax payments will move away from existing countries, and t would imply that the pressure on countries to reduce the corporate tax rate will continue to increase.
As such, it will become important to get to an agreement within the European Union and also with Switzerland on some kind of minimal base tax rate as proposed by a France/Germany initiative in June this year.
"One might think that, although research into trends in the Effective Tax Rate within the EU does not show a decline of the ETR yet, we might be at the start of a 'race to the bottom', " said Han Kampman, the report's author, at Capgemini.
