The Tax-Efficient Supply Chain: Considerations for Multinationals

Many multinational enterprises are restructuring supply chains to reduce their cost structures. As trade barriers fall and communications technologies improve, it has become easier and more cost-effective to manage business operations across international borders. This has motivated businesses to centralize, reorganize, and relocate many business processes to perform them in the most efficient manner. While they do this, many businesses are shifting business activities from high-tax to low-tax jurisdictions. This trend has not escaped tax authorities in high-tax jurisdictions, who are concerned with the lost tax revenue.
Schwarz and Castro (2006) write, "The globalization of markets and products and the development of technology have created an impetus for specialization within multinational groups. The co-existence of low-cost and high-cost jurisdictions drives cost reduction strategies, including transportation costs as well as those associated with labor-intensive activities." They write, "Whether motivated by commercial or tax reasons, some countries have observed a reduction in tax revenues when modern business models are adopted compared with more traditional models" (p. 187), a trend observed by tax practitioners in France, South Africa, Switzerland, Mexico, Argentina, and the United States. Companies are restructuring their supply chains and simultaneously reducing their income tax obligations.

This article demonstrates that MNEs should link income tax and supply chain considerations when restructuring their supply chains, and they should endeavor to maximize net income when doing so. This recommendation differs from the great majority of supply chain literature, which has generally recommended that businesses seek to minimize pretax costs. One of the most important activities for both supply chain and tax organizations is determining where to locate business operations, so these organizations should collaborate to make optimal decisions. This article explains how linking supply chain and income tax analysis can lead to better decisions and improve net income. It evaluates the MNE's international tax model -- specifically a variety of legal organizations within the MNE -- to determine the best opportunities for integrated supply chain and income tax planning. This article also identifies a number of tax issues firms need to consider when making these important decisions.