Business are experiencing fundamental changes triggered by the global pandemic, greater diversification of supply chains, the reset of international tax rules and geopolitical forces shaping global tax policies. This volatility is colliding with profound shifts in customers, business operations, technologies, ecosystems, and workforce. Together it has exposed the vulnerabilities lurking in supply chains. What are the lessons for companies?
In this article, we offer our perspective on how organizations can navigate the tax impacts of global trade volatility to reconfigure and build supply chain resilience.
Companies that make the right investments to enhance their global supply chains can now build an enduring competitive advantage in the post-pandemic world.
What capabilities should tax leaders prioritize? How can tax leaders manage the risks of global trade to improve trade compliance and product accessibility challenges caused by tax policy shifts changing the geographical flow of goods?
Resilient organizations will capitalize on opportunities to adapt their business models and processes and strengthen their long-term strategic positions. These efforts require tax leaders to manage the risks of global trade by making investments in resilient strategies, starting with three priorities
Fierce trade frictions and ever-increasing geopolitical strains, on top of a global pandemic, have to some degree led to higher tariffs, regulatory changes, temporary import/export exceptions and limitations, diminished supplier/vendor capabilities, limited cargo capacity, and/or shortages of products.
As a result, companies have started to rethink their operations with a view to diversifying their supply chains to minimize trade uncertainties and reduce customs taxes. At the same time, decision makers need to remember that diversification or business model changes can lead to unintended tax costs or presence.
Tax leaders need to be engaged early to analyze potential impacts on a company’s tax profile, its transfer pricing policy, direct and indirect taxes and more operationally to consider matters such as the need to update documentation based on the entity of the importer of record, tracking implications on customs duties and registrations, possible duty and VAT relief, and the potential use of free trade zones for the new product flows. See also Deloitte’s recently published article on supply chain resilience, which looks at balancing business strategy and tax efficiency.
Severe economic stress related to the has pandemic led to a variety of government interventions. Many central banks and governments worldwide took unprecedented policy actions — making significant short-term changes to tax and spending policies and announcing economic recovery packages offering stimulus and new incentives, but this has created increased levels of government deficits and debt.
Some jurisdictions now are dealing with the need for extra revenue as they strive to recover economically, while others are looking at additional economic assistance (and debt) to help with the ongoing impacts of the pandemic.
Some governments are considering short-term fiscal strategies to raise revenue, such as increasing tax rates, creating new taxes, broadening tax bases, eliminating wage subsidies and other incentives, and/or taxing previously exempt goods. They are also weighing these options against measures designed to revitalize their economies in the medium- to long-term. For example, stimulus programs and other incentives aimed at business expansion and attracting foreign investment, including programs that incentivize digital infrastructure and operations.
For Deloitte’s views on tax policy implications post pandemic, see “A path forward: Five priorities for tax leaders.” The uncertainties surrounding countries’ future tax policies make projecting tax costs challenging and underscore the need to maintain transparency and flexibility in supply chains. Above all, tax leaders need to be able to scenario plan.
Business leaders can consider multiple actions to adapt their supply chains to tax policy changes, both those already implemented and those still on the drawing board:
Resilient supply chains will include models that can adapt quickly to newly imposed tariffs or controls. Advanced data analytics capabilities can help forecast global trade impacts of future disruptive events and help to mitigate supply chain risk.
Business leaders should consider how new tools and technologies can provide greater insights for decision-making. Consider how to leverage automation to facilitate continuity and assess operations in a cost-efficient manner. For example, using AI, machine learning, or robotics, companies can reduce manual global trade tasks and enhance global trade master data process design by using product control and tariff classification technologies.
Resilient tax and trade teams should be prepared to assess the impact on customs taxes of alternative supply chain scenarios as a result of changes to the geographical flow of goods, free trade agreements, and duty-free zones. Additional above-the-line cost of higher duty rates in a new location must be weighed against other benefits, such as more predictable open borders, or greater certainty regarding suppliers.
In an era of rapid change, the future will always remain uncertain. Anticipating and reacting to disruptions and shifts on the tax policy landscape require a resilient global supply chain strategy.
Tax leaders should keep in mind the following four key takeaways:
Deloitte Global Leader, Tax Policy
Principal, Global Trade Advisory Services
Partner, Business Tax