Shifts in global strategies and business models caused by the COVID-19 pandemic have had an impact on numerous segments of the end-to-end supply chain, especially in the Chinese market. These supply chain changes may have direct and indirect tax consequences, which could lead to better tax-aligned supply chain considerations.
Numerous multinational companies are currently considering alternatives for sourcing, manufacturing, and distribution. Planning these changes from an efficient tax perspective may be crucial for future business decisions.
Business professionals have shifted to new decision criteria for key tax-aligned supply chain considerations including an increased focus on transparency and risk management, liquidity, and cash management, and shifting to regional and local models to address changes in supply and demand.
A strategy that optimizes tax policies and incentives is critical to the overall business development of medium and large corporations, and cross-border businesses. Complex supply chains need a comprehensive tax-effective planning.
The entire supply chain should be considered in the tax planning process, while tax policies should be applied with a deep understanding of the company’s business model. This systematic approach would facilitate the effective deployment of tax policies for the whole corporate group.
A company may experience changes to the supply chain—and related tax impacts—such as location of people and functions, adoption of new and different business models, or entering or exiting markets. For example, labor shortages, reduced headcounts, and travel restrictions may impact existing local tax incentives.
In the case of a new or modified business model or value chain strategy, tax should be consulted for alignment with transfer pricing policies. Such supply chain changes in business models, inter-company transactions, and the physical flow of goods through new geographies may impact customs and VAT requirements.
However, they may also provide an opportunity to reevaluate transfer pricing and IP portfolio and capture the value of adjusted priorities in areas such as procurement and risk management.
Though the financial department usually decides which tax policies to apply and leverage based on the industry, the supply chain management committee should be included during the tax planning stage to make sure that the entire supply chain is taken into consideration. When done properly, the most beneficial policies for the entire operation can be applied.
Companies can reduce tax burdens and increase revenue through the analysis and utilization of supply chain information. As earnings increase and expenses decrease, the working capital of the company grows and releases more cash flow for daily operation and reinvestment.
A corporation may identify vulnerable areas before risks occur by sharing and analyzing daily tax management and information. Errors in a tax declaration can be reduced by monitoring all aspects of the operation and production, and correcting mistakes early.
Penalties and risks can be significantly reduced when tax strategies are adjusted and supplemented in real time and accordingly to the situation.
A priority should be the creation of synergies between business and finance. Continuously strengthening and upgrading precise strategies for the whole supply chain can systematically improve the supply chain governance and ensure that financial and business information is delivered faster and more precisely.
As a result, the finance department can improve the tax plans based on real-time business targets and sufficient information.
Companies shall adhere to Article 41 of China’s Tax Law if the main objective is solely to transfer profits. Under the article, the tax authorities have the right to adjust it according to reasonable methods when business transactions between an enterprise and its related parties do not conform to the principle of independent transactions and reduce the taxable income or income of the enterprise or its related parties.
However, the Tax Law does permit companies to propose pricing principles and calculation methods of business transactions with their related parties to the tax authorities.
Preferential policies such as deductions of R&D expenses, could be used in the group structure. For example, the existing structures could be examined and dissembled to lawfully apply reasonable preferential policies in China – for example, restructuring the company, responsibility, employees, and assets, among others.
Credits and incentives are an integral part of the organizational structure and should not be overlooked. Factors such as the current tax return policy for excess VAT paid (or overpaid VAT) in China are crucial when the company plans to clear or integrate sub-companies in the same incorporation.
The adoption of digital systems due to COVID-19 has been happening throughout the end-to-end supply chain, with faster and broader incorporation of data and predictive analytics, cognitive automation and artificial intelligence (AI), application and infrastructure platforms, digital reality, and e-commerce, among others.
Companies may look for tax guidance on digital initiatives impacting product development, manufacturing (such as digital twins), and distribution (such as demand sensing).
Tax, along with the rest of the business, will need to understand the broad scope of the impact of digital and how it reverberates through and drives supply chain decisions. For example, you may need to provide tax guidance on where to align new digital assets or how digital initiatives will impact existing IP structures.
Businesses may also seek advice on how changes such as expansion of e-commerce or a transition to a true omnichannel experience should be approached from a tax perspective.
Supply chain tax planning can be complicated. Companies should follow national policies and consider the role of taxation in macroeconomic regulation. At the same time, operations and business purposes shall be integrated into the planning stage so that finance departments can plan and design complete feasibility assessments, and effectively apply legal tax policies. To learn more about our services in China, contact our Head of Business Advisory - Ms. Kristina Koehler-Coluccia at firstname.lastname@example.org.
DISCLAIMER: All information in this article is verified to the best of our ability and is assumed to be correct at time of release; however, Woodburn Accountants & Advisors does not accept responsibility for any losses arising from reliance on the information provided within. The information provided is for general guidance and does not replace specialized advice.