The main objective of global value chain management is to achieve the greatest value possible at the lowest cost possible. In order to achieve this objective, it is important for the value chain professional to consider every possible line item in the Income Statement. The search for cost savings has commenced!
The Problem: Taxes
One item often glossed over in evaluating the Income Statement is taxes. This line item typically represents 20% of the costs incurred in the global value chain. While members of the company’s Finance or Accounting team understand taxes, what they typically have no understanding of is how value chains work. Thus, until the Finance / Accounting and the Value Chain teams are on the same page, tax saving opportunities are missed. This is especially true for Middle Market companies where various members of the management team wear several hats.
The Solution: Tax Efficient Value Chain Platform (TEVCP)
The solution is to conduct a robust review of the tax inefficiencies buried within the value chain. A process utilized by Global Tax Focus to guide a company in identifying tax inefficiencies and discovering tax saving strategies is TEVCP. TEVCP is a process of overlaying available tax, transfer pricing, global mobility, indirect taxes and trade and customs strategies to a company’s business processes. The first step is to map transactions flows and sort the activities within each process as high value versus routine functions. High-value functions drive companies’ strategic decisions; they determine what products to produce, which markets to enter and how best to execute the corporate strategy. High-value functions entail risk and should as a result earn higher returns.
As a result of this analysis following are examples of tangible actions often put into place:
- Reconsideration of jurisdictional selection and physical location of the company’s logistics, purchasing, and operations;
- Reevaluation of suppliers and their physical location, focusing primarily on manufacturing and distribution locations;
- Examination of when, within the value chain, goods are branded and therefore value is added. This exercise determines the situs of taxability and the value of goods for both income and property tax purposes; and
- Quantification of the value attached to certain intellectual property as it may impact customs and duties charged on the importation of goods.
The Result: Tax Savings
Once the TEVCP exercise is completed the company may realize material operational and tax benefits through efficiencies and by earning a greater proportion of their profits in a tax-efficient location. Activities, deriving a smaller amount of taxable profits, might remain in higher-tax jurisdictions or re-locate elsewhere as business needs dictate.
The results are completely driven by the industry, business processes and the curiosity of “what if” when evaluating both operational and organizational changes to the company. The objective is to realize a reduction in tax costs. Global Tax Focus is your guide to help you achieve the greatest value possible at the lowest cost possible by reducing your tax costs.
About The Author:
James Dawson, CEO of Global Tax Focus LLC, is an experienced international business and tax advisor to growing global enterprises and their owners. His focus is on providing cross-border planning to reduce the tax cost to global supply chains. He advises global clients on both U.S. and foreign tax planning, structuring of international operations, cross-border transactions, project management and coordination of services in foreign jurisdictions. He can be contacted at www.globaltaxfocus.com