Complex supply chains require comprehensive tax planning.
Especially in cross-border businesses or middle-size and large-scale corporations, integrated tax planning which optimises tax policies and incentives is crucial. Namely, it effects the overall business development and operations.
For comprehensive tax planning, tax policies should be applied with a deep understanding of the company’s business model and process. Equally, the entire supply chain should be considered including planning, purchasing, manufacturing, delivery, and after sales. Through this systematic approach with a focus on the business model, tax policies can be efficiently deployed for the entire corporate group.
Below, we highlight the top aspects of tax-effective supply chain planning.
Integrate information sharing
Traditionally, the financial department determines which tax policies to apply, and leverage based on its industry. Such methodology is limited to a single finance application and does not consider the impact on the entire supply chain. We advise that a holistic approach is deployed by including the supply chain management committee during the tax planning stage. In this manner, the supply chain management committee can determine the most beneficial policies for the entire operation.
Moreover, through the analysis and utilisation of supply chain information, enterprises can reduce tax burdens within the legal scope thereby increase revenue. As earnings increase and expenses decrease, the working capital of the company increases and releases more cash flow for daily operation and reinvestment. Therefore, the overall working capital use can be improved.
Establish daily tax management
Through daily tax management and information sharing, the company can monitor and pinpoint vulnerable areas before risks occur. For example, errors in a tax declaration can be reduced or minimised by timely monitoring all aspects of the operation and production and remedying errors quickly. Simultaneously, tax strategies can be adjusted and supplemented in real time. This should be done accordingly to the situation to reduce tax risks and penalties.
Incorporate finance into business plans
Establishing synergies between business and finance should be prioritised. Continuously strengthening and upgrading precise strategies can systematically improve the supply chain governance. And ensure that financial and business information is delivered faster and more precisely. As a result, the finance department can improve the tax plans based on real-time business targets and sufficient information.
Establish pricing principles and calculations
If the main objective is solely to transfer profits, then companies shall adhere to Article 41 of China’s Tax Law. Under the article, the tax authorities have the right to adjust it according to reasonable methods when business transactions between an enterprise and its related parties do not conform to the principle of independent transactions and reduce the taxable income or income of the enterprise or its related parties. However, the Tax Law does permit companies to propose pricing principles and calculation methods of business transactions with their related parties to the tax authorities.
Restructure and optimise the supply chain
Preferential policies such as deductions of R&D expenses could be utilised in the group structure. Namely, the existing group structures could be analysed and dissembled to lawfully apply reasonable preferential policies in China – for example, restructuring the company, responsibility, employees and assets, and so forth.
Identify opportunities to use credits and incentives
When establishing the organisational structure, credits and incentives should not be neglected. For example, the current tax return policy for excess VAT paid (or overpaid VAT) in China, brand goodwill, and so on. Such factors are crucial when the company plans to clear or integrate sub-companies in the same incorporation.
Supply chain tax planning can be complex. Companies shall adhere to national policies and consider the role of taxation in macroeconomic regulation. Simultaneously, the company’s operations and business purposes shall be integrated into the planning stage so that finance departments can plan and design, complete feasibility assessments, and effectively utilise legal tax policies.