Aspects of the Tax Efficient Supply Chain

BY
Syeda Tayba Waqar (33248)

TO
Sir Kashif Shafiq

Iqra University, Karachi

1st December, 2019
Introduction:

Purchasing executives have been trying to squeeze every conceivable dollar out of the supply
chain for several years, especially in the retail industry. They have focused on process
improvements such as total quality management, just in time (JIT), and Six Sigma. We have also
invested heavily in information systems and, more recently, in supplier partnerships. One of the
biggest single costs of running a supply chain, however, has often gone unaddressed: tax.

The reason for this disconnect is that, unlike procurement professionals and information
technology (IT) professionals who work on the operational side of the business (i.e. in profit
centers), tax professionals have typically limited their discussions to a company's financial group
(a cost center).

Corporate tax professionals are typically measured on a non-surprise basis and are seldom
pursued for innovations. Actually, they are motivated to reduce the overhead cost of taxation.
Often, from a strategic point of view, no news is tax department goods news. This has typically
contributed to disconnect between practical strategic organizational planning and the most stable
type of tax planning— functional tax planning.

Where is Tax Planning Applicable?

Tax planning is applicable for the supply-chain (supplier, retailer, retail channels, company
supply) and for processes leading to the effective management of the supply-chain (purchasing,
electronic data interchange (EDI), merchandising, financing, advertising, etc.). It also applies to
taxes above and below the line. (Above-the-line generally refers to taxes that have an impact on
operating income above the line known as Net Income before Income Taxes. Over - the-line
costs are expenses used to calculate net operating income before income tax. Operating taxes
include sales and taxation for use, property taxes, license and franchise taxes and excise taxes.
Taxes below-the-line affect taxes on income.)

Taxes cover all aspects of the classification, production, manufacture, shipment, distribution and
sale of goods. Tax planning will impact almost any part of the supply chain. One of the few ways
in which a business can determine its tax profile is to evaluate the economic effectiveness of its
supply chain.

In addition, supply chain-related tax savings often remain on the table unless a holistic approach
is taken.

 Procurement
The transaction's ownership is important as it allows taxpayers to assess the subject area,
the cost of each component and the competence, because the right balance will reduce
taxes to a minimum.
o In many countries, intangible assets are not subject to property tax — thus,
including the value of the guarantee in a capitalized asset unfairly raises the
corporation's tax base on property.in many states / jurisdictions, electronically
downloaded software is not subject to sales tax
 o customs and duties can often be reduced by appropriate planning
o Disconnecting the size or contractual reward payments from the purchase of the
underlying property could overestimate sales or property taxes
 Brand Management
Brand management also has tax implications.
o The location of the branding in the supply chain and, therefore, the value added
determines the location of the taxability and the value of the goods for
importation, export and tax purposes
o the situs of where IP is held impacts the tax costs of dispositions
o The ability to license and protect brand-related IP often affects income tax
jurisdiction
 Distribution of Asset Management
Distribution management is more than just minimizing logistics costs.
o Improper stock valuation will result in higher taxes
o Some jurisdictions have exemptions from sales tax on inter-state trade transport
equipment
o Distribution activities not split into separate legal entities could put unnecessary
multi-state income taxation at the major centers of benefit
 Merchandising and Marketing
Critical in retail operations, they carry their own tax implications.
o site selection determines property tax
o Capitalization of the cost of shop design has tax consequences
 Finance
Finance structuring can have significant tax implications.
o A legal entity's capital structure can affect its franchise tax profile
o Internal leverage in some jurisdictions can reduce state taxes on income
 Retail
o Employee-intensive nature can result in process-based incompliance with payroll
tax and/or excessive overpayment
o State income tax savings on international distribution capital can often be found
o Inefficient gift card programs can lead to unnecessary funds scrapping
 Customer Relationship Management
Construction of an infrastructure to compile and store customer information has tax
implications.
o Wherever these data are processed and retained, there are state income tax
implications.
o The right to license and defend IP affects income tax jurisdiction
o Capitalization of CRM technology has an effect on property tax
Key Factors in Creating a Competitive Advantage

For those companies that look beyond tax compliance and towards tax self-determination, there
is a competitive advantage. Some of the key factors required to achieve this result are discussed
below.

Inter-departmental Coordination:
Some departments need to coordinate their efforts to effectively manage a supply chain from a
tax perspective. Tax planning is best done if tax planners know what functions they plan to
perform before they do it (purchase of assets, restructuring or reload of facilities). For particular,
procurement and distribution activities as well as information technology (IT) with the tax
department of a corporation will review prospective planning, acquisitions, and adjustments for
operations. In fact, reaching out to the tax department and urging them to work on reducing
operating costs can often yield significant results.

Holistic Approach:
There is a special structure in each supply chain. For efficient and sustainable tax planning, a
detailed understanding of the supply chain's functional elements is important. In addition, a
multidisciplinary approach is needed within taxation to recognize a broad range of potential
efficiencies (property, sales and use, license, excise, state and federal income tax).

Conclusion:
In reality, the supply chains structure is constantly changing, as are the goods they are
transmitting. The need for flexibility in supply chains architecture contributes to ongoing tax
efficiency or inefficiency opportunities, depending on whether the company has an operationally
based tax feature. Significant investments in technology and processes can be squandered if tax
is ignored in an attempt to create a competitive advantage.