11

Tolls, Taxes, Duties, FTZs and other SC distortions

Vande Vate

Fall, 2011

22

Tolls, Taxes, Duties, ….• Some Examples

– Tolls: Municipal/Provincial investments in highways in China• 30-40% of transport costs

– Taxes: • Circulation tax in Brazil (ICMS) by State

– Avg % of total cost directly attributable to ICMS» Toys: 42%» Computer: 38%» Television: 46%

• VAT – in EU (>15% with some exceptions)– Generally recovered for exports, but that takes time

• Duties– Brazil Average Applied Tariff 12%

– Export Incentives– Quotas

– Absolute Quotas on some textiles– Tariff rate quotas on raw sugar

– Cross Trade requirements• Especially in Aerospace/Defense

– Politics• Embargoes

– Regulations• WEEE, RoHS, CE, ….

33

Logistics Costs

• Typical Logistics Costs– 8-9% of GDP in US– Lower in EU– 18% of GDP in China

44

The Point

• Factors other than – Inventory– Transport– Time

Can have significant impacts on logistics decisions

55

Two Contradictory “Facts”

• Company’s generally will not allow taxes and the like to influence logistics decisions

• Supply Chain Engineers are Tax (& Duty & Tolls &…) Engineers

66

Why Not be influenced

• Competitors have to pay the same taxes, tolls, duties, …

• These factors can change over night…

• Being too clever can come back to haunt you…

77

Why be influenced

• These factors can place products out of reach of consumers

• Opportunity to gain short term advantage

• In many cases significant competition from grey market that does not comply

88

Some Examples of Influences

• Circumventing high duties– Product design/classification– Product Origin

• Manipulating the content especially via sourcing from particular countries regions

• Value added processing in strategic locations

• CKD/SKD: Complete/Semi-Knock down

• Local manufacturing

99

Deferring Duties & Taxes

• Cash flow impacts

• Inventory impacts: Transport and duties add to value in the pipeline

• Delaying or deferring duties can be attractive

• How?

1010

VAT in the EU

• Duty calculated on– Value of goods– Freight to EU border

• VAT calculated on – Value of goods – Total Freight– Duty

1111

Example• Shipment value FOB price = 400.00• Freight = 50• Duty = 3%• VAT = 15%• Reduction on freight 32% (EU Border)• Duty calculation:• 400 + 34 (= 68% of 50) = 434 base duty amount• 3% of 434 = 13.02 is duty • VAT calculation:• 400 + 50 + 13.02 = 463.02 x 15% = 69.45 VAT

• Different interpretation on rounding rules in various countries • Rate depends on where the customer is• Same impact as sales tax, but it’s always charged, not just charged to

end users (who are they?)

1212

Manufacturer Trader Consumer

1000 + 20%VAT (200) = 1200

2500 + 20%VAT (500) = 3000

3500 + 20%VAT (700) = 4200

Raw materials

Mechanics of VAT Italy

VAT declaration

-0 input tax+200 VAT

=200 VAT

charge

1200

pays3000

charge

pays

4200

charge

pays

VAT declaration

-200 input tax+500 VAT=300 VAT

VAT declaration

-500 input tax+700 VAT=200 VAT

IT Tax authority

1313

Manufacturer GBTrader IT

Consumer IT1000 €+VAT Ident No.

2500 €+VAT Ident No.

3500 + 20%VAT (700) = 4200

Raw materials DE

Mechanics of VAT multiple countries

Intrastat declaration1000 € supply0 € acquisition

charge

1000

pays2500

charge

pays

4200

charge

pays

Intrastat declaration2500 € supply

1000€ acqu.

DE Tax authorityIntrastat

UK Tax authorityIntrastat

Tax declaration

-0 input tax+700 VAT

=700 VAT

Intrastat declaration

2500 € acqu.

IT Tax authorityIntrastat

ITTax authority

----------clearing process / no payment----------

1414

VAT Reclaimed for Exports

• Exports generally have 0 VAT rate

• So the exporter has a credit

• Exporter maintains VAT account

• Applies to reclaim VAT paid

• Because of opportunities for fraud, there is processing and bureaucracy involved

• Leads to delays

1515

FTZ, EPZ, BLP …• FTZ: Free Trade Zone

– Trade, Manufacturing, Logistics & Services

• EPZ: Export Processing Zone– Manufacturing

• BLP: Bonded Logistics Park– Trade and Logistics

• Bonded Warehouse

• Inland (Dry) Ports

1616

Uses

• Position goods or components close to customer or factory without committing them to country

• Take advantage of low cost labor without complexity of entering country

1717

Disadvantages

• Administrative overhead from customs

• Various restrictions on export %, activities, …

• Typically limited land area

• Often positioned in disadvantaged areas

1818

Major FTZ’s

• Waigaoqiao FTZ in Pudong outside Shanghai, – Largest in China

• Colon FTZ in Colon, Panama– Largest in South America

• Manaus, Brazil– Middle of the Amazon

• Dubai, UAE– Several FTZs

1919

Time & Reliability

• Clearing customs can take time

• How long is not always reliable

• Customs strikes, slow downs, …

• Large importers push for automated customs clearance processes, pre-clearance, …

• Customs authorities push for more access, transparency, controls….

2020

Free Trade Agreements

• Failure of Progress in WTO negotiations

• Slow progress on Regional Trade agreements

• Proliferation of bi-lateral agreements

• Spaghetti of agreements that complicates trade

• Hong Kong has been left out

2121

Project Presentations

• Thursday, December 1st

–   3:00 Team Mintz–   3:30 Team Safari– 4:00 Audi Team

2222

Project Presentations

• Tuesday, December 6th

– 3:05 – Team Buzzkill– 3:50 – Team Delirium

• Can we use Skype and share desktop?

• Please test this capability in Exec. Classroom

• Hook up speakers

• Class in Exec. Classroom

2323

Expectations• For Dell Projects

– Project Overview• What’s your project focus• What data did you review• Acknowledge support from Elizabeth and anyone else who helped• Agenda

– Findings• What you were asked to present• What additional actionable findings you have, NOT how you got them• Make sure your presentation is clear, compelling, self-explanatory, true, organized• Make sure we know where we are relative to the agenda

– Summary • Quick statement of main recommendations/findings• Acknowledge Elizabeth again • Thank Dell for allowing you to participate• Brief overview of your backgrounds (or this can go in the beginning as you prefer)

– Back up• Anticipate any probing questions, clarifications of anticipated misconceptions, …Only

show this in response to questions