Tax Directors often bemoan the fact that they are given very little face time with their boards. Being seen as “boffins” who sit silently at their desks, heads immersed in large books analysing pages and pages of legislation, hardly helps to secure that tantalising, career-changing invitation to the next board meeting. And, when they speak, their words are met with alarm: What is this alien language?
Such unfair stereotyping of tax professionals is now a thing of the past, with the role of Tax Directors undergoing a significant transformation. Not only do they no longer need to wait for an invitation to the boardroom, but they are knocking down the doors with the gusto of an advertising executive ready to wax lyrical about the next revenue-busting idea.
What has caused this radical change? The answer is: Supply Chain Planning. Tax Directors have recognised that in order to succeed and drive value for the shareholders, it is essential to integrate with the business and adapt quickly to business model changes. In fact, it is often the Tax Director or advisor who extols the virtues of centralisation, discussing the pros and cons of a limited risk distributor, a commissionaire or a toll / contract manufacturer. In a relatively short period of time, tax has moved from the back office to the forefront of business strategy.
What's in a Name?
Supply Chain Planning is known in the market in various guises that include Tax Efficient Supply Chain Management (TESCM) and Value Chain Planning. No matter what it is called, it exhibits the same key features: the centralisation of functions, assets and risks. As multinationals seek to become more global or regional, adopting a business model that involves centralising key functions, assets and risks drives costs out of the business, while simultaneously creating operating efficiencies (see diagram below). The result is the realisation of significant above-the-line savings.
Challenged with key performance indicators influenced by below-the-line savings, the savvy Tax Director has recognised that a crusade of centralisation alone generates only part of the potential benefits. By locating the centralised entity (often referred to as the “principal”) in a tax efficient location, significant tax arbitrage can be achieved. The resulting benefits are indeed eye-catching for board members and shareholders alike.
The Tax Director, therefore, provides key insight into both potential locations for the principal and, importantly, which key entrepreneurial risk takers must relocate and manage the principal’s business.
In addition, the Director will have crucial input to the business process design, the benefits analysis, the IT reconfiguration, arrangements with suppliers and customers, and the internal service level agreements — not to mention VAT. All in all, the tax function is pivotal when implementing business model changes and, importantly, ensuring that the robustness of the operating model is safeguarded when challenged by tax authorities.
While TESCM is not a new phenomenon, it remains in relative infancy in the UK when compared to the US. Also, the early adopters (from the late 1990s) were predominantly in the consumer goods sector. Indeed, there is a plethora of household names that have undertaken supply chain planning, most of which opted for transformational change across the entire supply chain.
Over the last few years, the increasing trend has been towards “discrete” supply chain planning, such as centralised procurement. There is a clear shift towards this type of planning rather than “big-bang” implementation. Interestingly, as the market has become more aware of the benefits, typically through competitive pressure or post-merger integration, most sectors (e.g., telecoms, ENR, pharma) have now embraced TESCM.
The state of the global economy has undoubtedly raised the profile of TESCM with boards of directors and tax authorities alike. Multinationals are under increasing pressure to maximise shareholder return, while governments are under increasing pressure to maintain their revenue base. The inevitable result is tension among stakeholders and much debate in the media about the merits of globalisation versus national obligations. From a Tax Director’s perspective, this has resulted in increased scrutiny on “exit charges” and transfer pricing (the latter underpinning all such reorganisations), leading to prolonged debate with tax authorities.
TESCM has put tax truly in the boardroom, creating operational efficiency and achieving a sustainable reduction in the effective tax rate. The result is that today’s Tax Director faces greater challenges than ever before – transfer pricing disputes, exit charge negotiations, PE analysis, designing the optimal business model, reconfiguring business processes and IT design, and even determining from where the business should be run. Fortunately, the transformation from “boffin” to business strategist is complete.
For More Information:
Transfer Pricing Services
Supply Chain Tax Optimization
About Alvarez & Marsal Taxand
Alvarez & Marsal Taxand, an affiliate of Alvarez & Marsal (A&M), a leading global professional services firm, is an independent tax group made up of experienced tax professionals dedicated to providing customised tax advice to clients and investors across a broad range of industries. Its professionals extend A&M's commitment to offering clients a choice in advisors who are free from audit-based conflicts of interest, and bring an unyielding commitment to delivering responsive client service. A&M Taxand has offices in major metropolitan markets throughout the US, and serves the UK from its base in London.
Alvarez & Marsal Taxand is a founder of Taxand, the world’s largest independent tax organisation, which provides high quality, integrated tax advice worldwide. Taxand professionals, including almost 400 partners and more than 2,000 advisors in nearly 50 countries, grasp both the fine points of tax and the broader strategic implications, helping you mitigate risk, manage your tax burden and drive the performance of your business.
This newsletter is not intended or written by Alvarez & Marsal Taxand UK LLP to be used, and cannot be used, by a client or any other person or entity for the purpose of avoiding tax penalties that may be imposed on any taxpayer. Readers should not consider this document to be a recommendation to undertake any tax position, nor consider the information contained therein to be complete, and should thoroughly evaluate their specific facts and circumstances and obtain the advice and assistance of qualified tax advisors.
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