Tax-efficient supply chain planning in a COVID-19 world

Prior to COVID-19, many organizations were already considering diversifying production geographically, as rising costs, free trade agreements, and tariffs put pressure on existing manufacturing locations. This strong trend, based on our experience of assessing production locations such as nearshoring (such as Mexico), has now been accelerated, as has considering onshoring alternative production options for local markets, including evaluation (labor force skills, technology, costs) of relocating manufacturing to market jurisdictions (such as the United States).

Many companies are responding to demand volatility and product accessibility challenges during COVID-19 by seeking diversification of suppliers and geographies in the sourcing of raw materials, intermediate products, and finished goods, and the implementation of effective flex-and-surge supply and capacity management.

These changes may have significant direct tax implications that should be analyzed. Your company’s direct tax and transfer pricing profile may also be impacted by new intercompany transactional relationships. Business model changes may require rethinking existing tax structures on a company’s tax profile and transfer pricing policy.

Tax teams should be prepared for global trade and VAT impacts, such as adjusting to transactional changes that may require updating which entity is the importer of record and tracking implications on customs duties and registrations; reviewing applicability of duty and VAT relief; and potential to use duty-free zones for the new product flows.

For state taxes, analyze factors such as shifts in state taxable income based on change in activity situs and nexus considerations or identify potential opportunities to use credits and incentives.

COVID-19 has accelerated the need for adoption and or expansion of e-commerce, bringing changes to how products are sold and delivered that will likely endure even after businesses reopen. While cost has historically been the driving factor, and distribution was primarily conducted through physical retail locations, the rise of e-commerce has raised customer expectations for just-in-time and consistent experiences regardless of market channel.

Tax should anticipate exploration of more agile delivery models in response to changes in demand, as well as options for addressing new trade barriers COVID-19 has revealed or exacerbated. Business leaders will be looking to understand the tax implications around changes to the delivery models. Your organization will likely be weighing trade-offs, such as carrying costs of excess inventory to accommodate just-in-time demand, while exploring different sales channels, wholesale, retail opportunities, and online platforms. Understanding the tax implications will help inform related business decisions about how and where value is created—who owns the risk and return and where the organization may incur potential tax costs.

Be prepared for more complexity in direct and indirect taxes as companies move to an omnichannel business model potentially requiring changes to intercompany and third-party transactions. VAT and global trade impacts may include addressing export controls, ensuring access to free trade agreements, applying for customs duties and VAT relief, transaction mapping, and reviewing the impact of distance sales rules on digital sales.

As COVID-19 impacts financial performance and future projections, value attributed to IP pre-COVID-19 should be reassessed given the changes in global economic outlook. For instance, the value of legacy IP may have declined as a result of new business realities; therefore, companies may want to reassess their IP strategies. COVID-19 could also potentially bring changes to R&D activities, including the development of new products or adaption of existing products, which will lead to the creation of new IP.

Your organization should review IP used and developed throughout the end-to-end supply chain and align tax-efficient supply chain considerations for different scenarios. For all IP (such as trademarks, trade names, know-how, brand, and patents), tax can help business leaders revaluate business models in light of changes to both the value and nature of IP while addressing tax and regulatory considerations such as the EU Anti-tax avoidance directive (ATAD) and other Organisation for Economic Co-operation and Development (OECD) initiatives.

IP-related tax implications are likely to be triggered by changes to existing risk and value drivers such as brand value, new product development, and know-how, as well as new IP generated by accelerated digital adoption. Tax may need to weigh in as companies consider tax implications of new economic conditions and changes to business models.

If your organization is considering moving IP between geographies in response to operational changes, be prepared to provide tax input on how to best structure the transaction taking into account updated IP values, changes to key value drivers, future growth expectations, and direct tax impacts of transitioning into a new structure. Your organization may look to you for the tax input into key business decisions, including funding and control of new and existing IP, location of development, enhancement, maintenance, protection, and exploitation (DEMPE) functions, as well as the overall impact of the Global Tax Reset.