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What’s Tax Got to Do With It?

Supply chain professionals rarely have a degree in tax law. That's too bad… because understanding international regulations is important and getting more important every day.

“As country-level agencies issue regulations and increase enforcement, manufacturing and compliance become more complex for manufacturers. Supply chain leaders must collaborate with their regulatory affairs groups to assess pending and new regulations and changes, and to reduce and manage complexity.” This is the summary of a report from Gartner Inc. titled “Supply Chain Collaboration With Regulatory Affairs Reduces Supply Chain Complexity and Risk” (registration required).

Coincidentally, the same day I read this Gartner report, I came across an article in the Financial Times about Nokia’s ongoing tax dispute with the government of India. If you are not familiar with the Nokia story, essentially Nokia and the Indian government are at odds over the amount of taxes Nokia should have to pay on the transfer price for payments made by the Nokia division in India to its parent company in Finland for software used in handsets manufactured in India. With fines, the original $320 million tax bill has escalated to a $1.1 billion tug-of-war. In addition, in December, the continuing battle caused a disruption in the transfer of ownership of Nokia's Chennai factory to Microsoft, which is acquiring Nokia's devices and services unit.

Reading the Gartner and Nokia accounts reminded me of just how critically important it is that we supply chain professionals stay aware of and up-to-date on country-specific regulatory mandates. Think about how often your company conducts intercompany inventory/asset transfers. I know it is something we at Avnet do all the time. It's easy to forget how such a seemingly simple and benign transaction can expose your organization to significant liability.

When Avnet works with customers — from startups to the biggest OEMs in the world — to establish a plan for global production and distribution activities, these supply chain teams often assume that the regulatory structure in their destination country will be the same as that of their originating region. This is rarely, if ever, the case, particularly when you are dealing with emerging markets.

That's why, whenever we start working a project of this nature, my first stop is Avnet's tax department. I will then confer with our legal team about our entities within those countries, then our trade and compliance group, and finally the logistics team. All these inputs give me a much clearer picture of how we can support our customers in a particular region, as well as what the potential risks are. In addition to this internal vetting process, we also ask customers to conduct their own analysis.

I can't say for sure what steps Nokia took before it started producing product in India. It's entirely possible that it did everything right and still ended up in this predicament. Or maybe, the supply chain team expected the tax department to make sure everything was in order, while the tax department assumed legal and compliance would cover the bases.

The bottom line is, there is very little room for error in these international transactions. The best way to protect your company's interests is to understand the regulatory policies of a proposed region, make sure all the relevant departments within your organization are informed and involved, and leave nothing to chance.

4 comments on “What’s Tax Got to Do With It?

  1. Ashu001
    March 10, 2014

    The very interesting thing about this article lies in the fact that Most SMBs tend to overlook Taxes especially across Multiple Jurisdictions.

    Even if you have people who are reasonably well-versed with Tax Laws on your Organizational Team ;will they be able to keep themselves abreast with Rapid Changes in Taxes Globally?

    I don't think so.

    That's where you need Outside Counsel to tackle this Vexing issue.

    The Only Thing Certain About Life is Death & Taxes is what a very smart person one observed on this issue.

     

  2. CPeterson
    March 11, 2014

    Great article Wade.

    We've seen countless articles about what do SC professionals need to know, or what skills does SC talent lack or how to develop our SC community. Well you've clearly identified in what global SC players need to be conversant: tax, legal, compliance, logistics, finance, etc. Get studying!

  3. Hailey Lynne McKeefry
    March 11, 2014

    @CPeterson, I agree with you. There's no more excuse for supply chain professionals to claim its not their job…or to say, echoing Dr. Leonard McCoy of Star Trek, “I'm a Supply Chain Professional, not a Tax Accountant!”

  4. ahdand
    March 12, 2014

    @Hailey: I think that particular job has several levels of escalation. So identifying which level it is important. Then the claim can be figured out 

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