Supply chain sustainability is a core ESG issue for many organisations. As my earlier blog made clear, it must therefore be a priority for the tax function.
ESG is fast becoming a focus for investors, customers, regulators and NGOs. And as a crucial aspect of business operations, supply chains must be at the heart of ESG efforts.
Greening the supply-chain will mean growing the circular economy and shifting to more ethical business models. And while supply chains touch on all aspects of ESG, they’re particularly important to decarbonisation: 80% of manufacturers’ emissions, for example, come from their supply chains.
So how can tax leaders drive sustainable supply chain transformation?
Supply chain considerations
Tax leaders will be key to formulating the vision for a sustainable supply chain, and implementing and managing that vision. Plus, they have the opportunity to add significant value along the way.
Key considerations for tax leaders during the supply chain transformation journey include:
- Value chains
Overhauling the supply chain will change the organisation’s underlying value drivers and economics, by shifting how and where it operates. For example, greening the supply chain may shorten your value chain. In addition, new value may derive from green intellectual property (IP) and technology, and from renewable energy generation.
Transformations of this kind have far-reaching tax implications. They upend transfer pricing (TP) and IP models, as they take organisations into new markets and value chains, while exiting or restructuring others. And as the physical and transactional footprint of your goods changes, so will your indirect tax and customs profile. All of which carries risks of increased costs and compliance burdens; but also the opportunity to revisit and optimise your tax profile.
With this in mind, make sure you carry out a tax value chain analysis (VCA) on your organisation’s refined business model. That should be your first step towards managing the IP, TP and indirect tax consequences.
You’ll also need to document any new TP and IP policies, along with a clear rationale for the changes. Meanwhile, historic structures, activities and financing arrangements may need to be unwound. That will mean accounting for trapped losses, tax attributes such as interest capacity, incentives subject to clawback, and any de-grouping charges when winding up entities.
To drive supply chain sustainability, organisations will often radically change their approach to sourcing and procurement, ensuring their suppliers follow the same ESG standards as themselves. These standards may include environmental factors, such as carbon footprint or biodiversity impact, and social credentials on issues like human rights and modern slavery.
End-to-end visibility is vital to demonstrate supply chain sustainability. So it’s essential to engage with those suppliers that meet your transparency standards.
The growing trend for shortening and strengthening supply chain resilience is another reason for changing where organisations source products and services. This may impact how and where those products and services take title (are owned) in the value chain.
Change of this sort is an opportunity to optimise your tax position. For instance, choices around where you source goods or materials, and how you transport them, will affect your customs and excise duty position. Such decisions may also allow you to unlock VAT trapped in the supply chain. Similarly, as sustainable procurement takes a more prominent role in organisations, tax leaders will need to value its contribution for TP purposes.
- Carrots and sticks
Governments around the world are increasingly using tax to drive sustainable behaviour from organisations, often focussing on the ‘E’ of ESG.
For example, tax credits, incentives, grants and subsidies can promote investment in greener business alternatives. At the same time, environmental taxes, such as plastic and carbon taxes, discourage pollution and waste.
As outlined in my blog on decarbonisation, tax leaders play a critical role in understanding how this ever-changing regulatory landscape affects the incremental cost to the business.
A successful transition to a sustainable supply chain may therefore accomplish more than achieving your organisation’s ESG objectives. It can also reduce your ‘stick’ tax costs, bringing a financial benefit to the business. Monitoring the tax landscape will also put you in a better position to gain from some of the ‘carrots’ along the way – a genuine value-add to ESG workstreams.
A central role
For all these reasons, it’s crucial that tax leaders are integrally involved in the design and execution of the supply chain transition process.
Otherwise, the tax function will struggle to create a transparent, defensible tax profile that’s aligned with the organisation’s new operational reality.
KPMG’s tax team is experienced at supporting organisations through supply chain transformation and its tax implications. Please get in touch if you’d like to find out how we can help.