Making value chains transparent & flexible, to read the other chapters in this publication, click here.
To compete in this new world, companies need value chains nimble enough to respond quickly to new developments --new tariffs and duties, shifting trade agreements --that could jeopardize economical access to raw materials, components and finished products. For many, this will require a new focus on identifying options for sourcing goods, services and labor from alternate locations. It also may require a close review of existing contracts with vendors and suppliers, and, in some cases, rewording of those contracts to give companies the flexibility they need to make changes when necessary.
In all this, the ability to make fast decisions will require transparency and flexibility in the value chain. Although companies have been striving to build resilient supply chains for years, many have yet to be fully optimized.
Popular options for sourcing include on-shoring, in which operations are moved into the company's own country, and near-shoring. With the latter approach, companies move operations closer to their customers while still maintaining access to low-cost labor, often using free trade agreements to enter their end market. Mexico, for example, has long been a near-shore option for companies with US-based customers. Vietnam, Malaysia and Thailand have been popular options for companies that wish to exit China but remain close to Asian suppliers and continue to take advantage of lower labor costs than those in developed economies.1
Finally, companies also can look to multi-origin sourcing: sourcing supply from more than one jurisdiction.
Companies also need to improve their ability to work with tax authorities around the globe who are looking closer at the value added to products produced or altered in their countries, and be prepared to accurately defend their business's calculations in this area. This means companies must be able to understand and document exactly where, how and by whom every component, subcomponent and raw material has been sourced, altered and transported to assure they are both in compliance with trade regulations and that they pay the appropriate level of taxes to the right tax authorities. Especially for multinationals, this includes being able to accurately defend intercompany transactions and transfer pricing decisions.
“The level of information tax authorities have today regarding your intergroup transactions and your flow of goods and services is incredibly higher than it was 5 years ago,” says Alfonso Pallete, Latin America Head of Markets, Americas Tax, KPMG in the US. “This reflects the implementation of OECD rules for country-by-country reporting, as part of its Base Erosion and Profit Shifting (BEPS) project. Tax authorities are concerned that companies are allocating profits wherever it's more convenient, and not leaving their fair share of the profit in each jurisdiction.” Pallete notes that not only do authorities have the technology to access more information about companies in the past, but that companies are being required to provide them with more information, too. At the same time, many tax authorities are creating specialized teams that are becoming more and more expert in transfer pricing, and better able to analyze intergroup transactions. “The consequence,” he says, “is that you really need to be able to substantiate your activities, your functions and your risks in the countries where you operate.”
For now, getting a better handle on where materials are sourced will largely be a manual process at most companies. Over time, though, blockchain, the distributed ledger technology whose most visible application to date has been cryptocurrencies, may be able to help. Rapidly maturing, blockchain can now be implemented in parts of the supply chain in stages with an often surprisingly modest investment, sitting in most instances atop existing information systems. It has the ability to help businesses document, end-to-end, exactly what's in their products and where those things came from, no matter how many suppliers, manufacturers, distributors, logistics firms, warehouses and retailers have touched them along the way.
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KPMG in the US
KPMG in the US
Head of Australian Tax Centre
KPMG in Australia
Latin America Head of Markets, Americas Tax*
KPMG in the US
Director, Trade and Customs
KPMG in the UK
* KPMG Americas Ltd. is not an accounting firm and is not licensed or registered to practice accounting in any jurisdiction.
1. “Global Trade: The Evolving World Order,” pg. 14, KPMG International, 2019.
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