How to Design a Tax-Effective Supply Chain

Companies often limit operating gains when they overlook their Effective Tax Rate (ETR) while transforming their supply chains for margin improvement, according to Tompkins Associates’ paper, Leveraging the Supply Chain for Increased Shareholder Value.

ETR is the summation of all taxes paid by a company – such as income, property, customs, sales, energy, and environmental – and each of these vary by country. Ranging from 14% to more than 50%, a company’s ETR can be altered by changing the design of its supply chain.

“Most notably, for companies that operate on an international scale and are subject to a larger variety of taxes, their supply chain design can significantly increase or decrease their ETR,” says Gene Tyndall, EVP, Global Supply Chain Services, Tompkins Associates and co-author of the paper. “Yet, surveys show that less than half of MNCs have tax-effective supply chains, and even fewer have a formal process for safeguarding their tax or operating benefits.”

Tax planning can be integrated into the overall management of the company’s supply chain through Tax Effective Supply Chain Management (TESCM). TESCM can be complex and conflicting, as tax laws and regulations change, but conducting an analysis and having a tax-effective structure in place is a step toward creating and maintaining value.

“The importance of tax-effective supply chains may appear too complex or challenging for many,” adds Jim Tompkins, President and CEO of Tompkins Associates. “But the benefits are too important to ignore, and the issue is growing more visible to senior executives and boards. Working collaboratively, operations and finance managers can make a significant difference in their company’s shareholder value.”

Operating margins can also be improved with strategies for reducing Cost of Goods Sold (COGS) and improving speed and productivity.

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