Geopolitical upheaval has profoundly disrupted the growth of global supply chains in recent years, and the impacts have reverberated throughout industries. In 2024, more than 60 countries went to the polls ¹. With political leadership transitions, there is increasing uncertainty arising from trade, tariff, regulation and tax moves on a global level.

As well as making decisions on where to trade, businesses need to be more agile, often diversifying their supplier base and geographic footprints to mitigate risk. All while maintaining a laser-like focus on costs, with CFOs of the largest British businesses rating cost reduction as their top priority for the next 12 months, in the latest Deloitte CFO Survey.

What do we mean by cost pressures and cost optimisation?
 

Broadly, we are referring to a spectrum of pressures influenced by the increasing cost of labour and regulation, a shift towards resilient and digitalised supply chains, and external pressures to remain at the forefront of industry to ensure fluctuations in demand are met with equal flexibility. Often, we see the tax and legal functions at the forefront of owning levers to be able to fundamentally support in this.

Craig Conte, Partner at Deloitte Legal, highlights that from a legal perspective, “Assessing the regulatory environment of the value chain will enable businesses to forecast costs more accurately”. This, along with better and more integrated management of regulations [for example, optimising data for multiple reporting requirements through a single data review, rather than multiple siloed assessments] will contribute to a more holistic action plan.

Understanding the tax and legal landscape
 

Globally, the landscape is a patchwork of different – and diverging – rules and regulations. These include emerging indirect tax initiatives like the EU's Carbon Border Adjustment Mechanism (CBAM), which can significantly impact cross-border trade.

Adding to this complexity is the US plan to introduce tariffs on imported goods, some of which have already been imposed, and retaliatory measures from impacted trade partners.

This evolving geopolitical situation highlights the need for companies to carefully consider their sourcing, production, and distribution strategies. Proactive engagement with these changes can potentially lead to new partnerships, diversified supply chains, and a more resilient business model. The contribution of tax and legal departments is likely to focus on the following aspects:

• Due diligence: having appropriate safeguards and controls in place to conduct thorough due diligence on suppliers, customers, and all parties involved in transactions as part of onboarding processes to identify potential red flags and ensure compliance.
• Legal considerations: seeking legal counsel is crucial to navigate the complexities of sanctions, export control laws, and a wide range of regulatory risks. This includes addressing recent changes such as labelling regulations and other emerging compliance requirements, ensuring compliance with all applicable regulations, and minimising potential legal risks.
• Direct and employment tax implications: carefully considering the tax implications of scaling down or shifting operations, including potential tax liabilities associated with restructuring, contract termination, and asset transfers.
• Indirect tax, customs, and tariffs: addressing indirect tax and customs matters related to new or more versatile supply chains, ensuring compliance with VAT, customs duties, and other relevant regulations in new jurisdictions. This includes modelling the impact of tariffs on supply chains and exploring mitigation strategies such as sourcing diversification or price adjustments.
• Trade policy monitoring and advocacy: staying informed about changes in trade policies and engaging in advocacy efforts to promote free and fair trade.

This comprehensive approach will help businesses mitigate the risks associated with sanctions and export controls while maintaining business continuity.

While entire businesses are focusing on cost control amidst the current geopolitical landscape, tax and legal functions often possess the expertise and tools to help create efficient, resilient, and sustainable supply chains, despite the inherent complexities. Some areas for consideration include:

The relationship between costs and contracts

For large multinationals, the raft of change can mean navigating, across geographies, different inflation rates, tariffs, trade routes and regulatory regimes. To manage that level of complexity, getting the contract right is essential. Agreements need to be drafted carefully and should cover issues such as IP rights, liability, termination clauses and dispute resolution mechanisms.

“There is the idea that ‘we don’t know what we don’t know.’ But is that really the case? There is a great deal of uncertainty, but we know the areas that are most likely to be impacted, and we can make assumptions on the costs to comply, to re-route and to export,” Gareth Pritchard, Deloitte Tax Partner and Supply Chain Lead, explains.

“Now, the need – and the trend – is to make sure the contracts for distribution and supply have a clear vehicle for which party bears the costs and what the thresholds are that trigger renegotiation.

During Covid, many companies either tried to enforce or override change or force majeure clauses. This led to instability, loss of profits and overall relationship erosion. We have a good sense of the categories of change out there. The most prudent way forward it to set up the contractual guidelines in advance”.

What role can tax and legal play?
 

The current climate demands a strategic and agile approach to managing supply chains, as well as a thorough understanding of the hurdles.

Tax and legal teams must have a seat at the table to ensure the right people are involved in decision-making and assessing impacts. The ability to explore fiscal or legal-led efficiency opportunities is vital.

“While challenging, the journey presents opportunities for growth and innovation, allowing businesses to emerge stronger,” says Gareth.

“In-house teams should monitor global developments, analyse jurisdictional nuances and develop robust yet flexible strategies that can adapt to a shifting environment. Building a network of cross-border expertise, ensuring internal alignment within the company and engaging with tax authorities and industry groups are essential.”

At Deloitte, our specialists are supporting clients across a range of industries to dissect and address their cost pressures and identify optimisation methods, in response to geopolitical developments. Contact a member of our specialist Supply Chain team to find out more.

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References

^{1 Global Elections in 2024: What We Learned in a Year of Political Disruption | Pew Research Center}