IPD 2012 Le Aligning global distribution structures with ... · Purpose of the lecture •...

International trade and legal issues:Aligning Global Distribution with TaxAligning Global Distribution with Tax

MTT045 International Physical DistributionLund, 2012-02-09

Professor Andreas NorrmanDept of Industrial Management and LogisticsLund University Faculty of Engineering

Jur Dr Oskar HenkowDept of Business LawLund University School of Economics andLund University, Faculty of Engineering

SwedenLund University, School of Economics and ManagementSweden

International Physical Distribution: The ’Red Thread’ of the Course

Vehicle routing

Modal choice & shipment

Network design & l i

Operations

& shipment size

& planning

Road Airconsignees

Performance objectives

Logistics service providersRail Sea

Modesj

Security/risk issuesSustainability challenges

International trade issuesHumanitarian aid distribution

MarketsInfrastructure

Intermodality Terminalsconsignors

Norrman & Henkow, Lund University, Sweden

Aligning and integrating Supply chain and Tax decision could have great benefits.

100%

60%

80%

20%

40%

0%

20%

Operat io ns T ax o nly Integratedo nly (40%) (10%) appro ach

(87%)

The benefits of integrating supply chain & tax


The benefits of integrating supply chain & tax(Source: Deloitte 2005, referring to Keller International)

To redesign logistics structures withoutTo redesign logistics structures without fiscal knowledge might create problems…

“a multinational company located a new distribution centre in Germany, and realised only after the facility was built that Germany’s corporate tax rates eliminated most of the “operational savings”

(Sweeney, 1998)


Penalties are also high if you handle taxes wrong…

Seller FR Customer FRDirect

Delivery

Seller SEOrderInvoice

Order

Invoice

Order

OrderInvoice

•Seller in Sweden is not registred for VAT in France, selling without VAT

•Penalties – as high as the missed VAT payments

ExempleExempleSales: 10 000 000 EuroVAT(19,6%): 1 960 000 Euro (normally refundable)


Penalty: 1 960 000 Euro

Purpose of the lecture

• Highlight challenges in the interface between Logistics and

Purpose of the lecture

Highlight challenges in the interface between Logistics and Legal (regulatory framework), especially fiscal issues

• Introduce basic principles regarding CIT and VAT

• Propose a combined framework for logistics and fiscal


mapping

Our discussed system and subdomainsOur discussed system and subdomains

Direct taxes, S bCIT

Indirect taxes, VAT

Customs

Fiscal systemSub system interrelation

Logistics systemMaterial/goods flow

Value adding unit

Warehouse

Payment flow

Information flow


AgendaAgenda

• Logistics principles/distribution structures and l l h lllegal challenges

• Basic principles of CIT and VAT• Mini-cases• Process and framework for analyzing theProcess and framework for analyzing the

interface• Conclusions• Conclusions


Action oriented principles for logistics d i t t l h i t kdrives e.g. structural changes in networks

La Londe & Persson(1995) Andersson et Abrahamsson La Londe Kotzab & OttoLa Londe & Mason (1995)8 principles

Persson(1995)

9 principles

Andersson et al (1997)7 principles

Abrahamsson (1999)9 principles

La Londe (2003)5 principles

Kotzab & Otto (2004)9 principles

Persson’s 9 Principles

•Reduce or Redistribute Lead time

•Reduce or Adopt to Uncertainties

•Differentiate

•Postponep

•Redistribute or Increase frequencies

•Eliminate or Adopt to Expected Pattern

Postpone

•Improve Information and Decision

Support SystemEliminate or Adopt to Expected Pattern

of Demand

•Simplify structures systems and

Support System

•Strengthen Internal and External

Integration


Simplify structures, systems and

processes

Integration

Short discussions – base it on your “Localization knowledge”knowledge

• When Japan and China have grown to your major markets in this region – would you move your regional DC (distribution centre) to China?

• If you need a regional DC for Middle East – in which country would you probablyin which country would you probably locate it from a “logistics point of view”?


Illustration: The company .... p y

• Centralised “regional spare part stock” in Singapore &part stock in Singapore & major market in Japan.

• Expects growth in China, and t k thmove stock there..


Illustration: Postponement and centralization …


Customs: Example product classesCustoms: Example product classes

• Different VAT and customs classes for different goods in different countries. E.g. software & hardware

– How a product is packaged and distributed impact tax and customsdistributed impact tax and customs...

Example of combined product:Example of combined product:– HW: 1 000 millions, 12% customs– HW: 100 millions (12%),HW: 100 millions (12%),

SW: 900 millions (0%), CD value1$ (CD is HW (12%))


Drop shipment simplifies structures and flows –an effective logistics solution...

Definition:The selling company does not touch the goods, but co-ordinate a g p y gshipment directly send from one supplier to the final customer

Supplier CustomerDirect Delivery

SellingCompany OrderInvoice

Order

Invoice

Order

p y OrderInvoice Invoice


Case illustrations: Is American Drop shipment a feasible solution?feasible solution?

Scenario 1 Scenario 2High Corp

HQ Contract Owner

Sweden


HQ Contract Owner

Sweden

Supplier CustCo

US

Supplier CustCo

USC C

Sales tax in scenario 1 was higher thanSales tax in scenario 1 was higher than extra transportation cost in scenario 2

-> Environmental impact


Cost curves for transportation, warehousing, service and inventory must be complemented with other insights!inventory must be complemented with other insights!

Updated view on cost curves

Total cost

p

Inventory cost

Warehousing costCos

ts

Transportation cost

Cost for lost sales (service dimension)

Number of stocking points


(Abrahamsson, 1992)

To design a logistics network is a complex problem

COMPETITIVE STRATEGY

INTERNAL CONSTRAINTS GLOBAL COMPETITIONPHASE I

Supply Chain

Capital, growth strategy, existing network

TARIFFS AND TAX

Strategy

PRODUCTIONTECHNOLOGIES

Cost, scale/scope impact, support required, flexibility

INCENTIVES

REGIONAL DEMANDSize, growth, homogeneity,

l l f

PHASE IIRegional Facility

Configuration

COMPETITIVE ENVIRONMENT

pp q ylocal specifications

POLITICAL, EXCHANGE RATE,

AND DEMAND RISK

g

PRODUCTION METHODSSkill needs, response time

AND DEMAND RISK

AVAILABLE INFRASTRUCTURE

PHASE IIIDesirable Sites

FACTOR COSTSLabor, materials, site specific

LOGISTICS COSTSTransport, inventory,

coordinationPHASE IV

Location Choices


coordinationocat o C o ces

Källa: Chopra & Meindl, 2004, p. 107

AgendaAgenda





Tax Law Basics – Corporate Income Tax (CIT)Tax Law Basics Corporate Income Tax (CIT)

Direct taxes, CITCIT

Indirect taxes, VAT

Customs

Fiscal system

Direct taxes, CIT

• CIT is a tax on the profit companies make (Corporate Income Tax)Income Tax)

• CIT is cost for companies B i f t ti i T bl i i d d tibl• Basis of taxation is Taxable income minus deductible costs


Presence and type of transaction determines!yp

Corporate Income Tax (CIT)The world

WHAT?

Sweden

Subsidiary

Stock

WHAT?

Interest, t

Kind of d t

Branch

Agent

etc.product

Where?Agent

CustomerSource Establishment

Overall purpose is to divide the tax base!


Overall purpose is to divide the tax base!

Important term:Permanent establishment (1)Permanent establishment (1)

A permanent establishment (PE) means a fixed place of business through which the business of an enterprise is wholly or partly carried on.

Three conditions need to be fulfilled:1. a presence in the form of a facility, such as premises, or,

in certain cases machinery or equipment;in certain cases, machinery or equipment;2. a certain degree of permanence of the presence; and 3 the business in question has to be carried on through the3. the business in question has to be carried on through the

PE in question.


The enterprise must NOT be based on own facilities.

Important term: Permanent establishment (2)Permanent establishment (2)

When a permanent establishment (PE) is present, business profit may be taxed by the source state (thebusiness profit may be taxed by the source state (the place of activity).

If facilities for storage and delivery of goods shall beIf facilities for storage and delivery of goods shall be considered as PE or not, depends on if the activity or preparatory/auxiliary or essential/significant... p p y y g


Tax Law Basics – Value Added Tax

Direct taxes, CITFiscal system

Indirect taxes, VAT

Customs

y

Indirect taxes, VAT

• VAT is a tax on consumption, aimed at being neutral for companies

• VAT is due on supply of goods • Supplier accounts for VAT• Place of supply is important• Complicated when more than two parties involved…


VAT – examples

VAT: 250VAT: 500

-250 VAT: 750

-500

Inside

Textile factory TailorLamb wool Cloth Suit

Sheep farm

1250 2500 3750= 250 = 250

Value add 1000

Value add 1000

Value add 1000

VAT: 750Import VAT: 500

Cross border trade

Textile TailorSheep

1250 2000 3750VAT: 250 VAT: -250 -500

= 250-500

factory TailorLamb wool Cloth Suitfarm

Value add 1000

Value add 1000

Value add 1000


Important term: SupplySupply

• Supply of goods is when the right to dispose of tangible property as owner is transferred (which is nottangible property as owner is transferred (which is not equal to change of ownership).

• What is decisive is whether the right to dispose of the property is transferred. (Who acts as owner?)

• Place of supply is the actual location of goods (beginning and end of the transport)


The goods location and movement d t i h VAT i t d fdetermines where VAT is accounted for

VAT• Who? (Seller/Buyer)

The World

• What? (Transaction type)• Where? (Route of good)

European Union

Sweden2

3

Customs• Who? (Importer)

13

4

• What? (Type of good)• From where? (Origin)5

Overall purpose; Tax Consumption

Transactions


Overall purpose; Tax Consumption

AgendaAgenda





Case illustrations: European Reroute

Illustration

Case illustrations: European Reroute

• Contract owner in Sweden

Scenario 1High Corp

HQ Contract Owner

(closes the deal)• Customer, and production

plant, in France.Contract Owner

Sweden

France • Could the deal be made more logistics effective

High CorpSub

Factory

CustCoFR

more logistics effective than distribution to Sweden and back again?

• The logisticians proposeThe logisticians propose Drop Shipment

Goods flow

InvoicePayment flow

V l ddi tiLegal person

Is Drop shipment a good solution in this case – what

InvoiceValue adding operationVAT registrationInternal border in

customs unionChange of ownership


Is Drop shipment a good solution in this case – what could create problems?

Example of analysis and found issuesExample of analysis and found issues


Case illustrations: European Reroute – the Illustration

company’s solution

Scenario 1Hi h CHigh Corp

HQ Contract Owner

Sweden

F

High CorpSub

Factory

CustCoFR

France

y


Case illustrations: American Reroute –Legal analysis

company’s solutionsScenario 1 Scenario 2

High CorpHQ

Contract Owner

Sweden


HQ Contract Owner

Sweden

Supplier CustCo

US

Supplier CustCo

USC C

Scenario 3Sales taxes are not VATs – imperfections of consumption tax system

High CorpHQ

Contract Owner

Sweden

Supplier CustCo

US


MexicoAmerican Hub

Case illustrations: Asian Reroute

Illustration

Case illustrations: Asian Reroute• Contract owner in Sweden

(closes the deal)

Scenario 1

(closes the deal)• Contract with supplier

(country X) who have outsourced manufacturing

High CorpHQ

Contract Owner

Sweden

SuppCoOrder/HQ

X-countryoutsourced manufacturing itself

• Customer and production plant in China (differentC O

EMS CustCo

China

plant in China (different regions).

• Could the deal be made more logistics effectiveEMS

FactoryCustCoC more logistics effective

than distribution to Sweden and back again?

• The logisticians propose• The logisticians propose Drop Shipment…

Is Drop shipment a good solution in this case –


what could create problems?




Illustration


Scenario 1

High CorpHQ

Contract Owner

Sweden

SuppCoOrder/HQ

X-country

C O

EMS CustCo

China

EMSFactory

CustCoC


AgendaAgenda





Time and location (logistics issues) are importantimportant

When ownership passes between the parties in h ia chain,

and where the goods are when ownership passes or where they are delivered,

have an impact upon fiscal rules.p p


Proposed overriding process for analyzing tax

1 Do a logistics mapping of the network

effects of distribution structures

1. Do a logistics mapping of the network2. Understand/map the data needed for the tax lawyer3. Combine your knowledge and data4. Evaluate different Total landed cost for potential

scenarios: Landed CostTOTAL =

5. Understand the risk the lawyer finds acceptable ,

Landed CostLOGISTICS + Landed CostFISCAL + Landed CostENVIRONMENTAL

y p ,and how a logistics solution can be made more acceptable.


1. Do a Logistics mapping of networks & flows

Combining framework

1. Do a Logistics mapping of networks & flows

• Overview of real life’s complex structures processes & flows• Overview of real life s complex structures, processes & flows• Platform for decision making• Detailed data added on nodes and links:

– time, locations, value, volumes, frequencies, distances, uncertainties etc

Logistics systemMaterial/goods flow

Value adding unit

Warehouse

Payment flow

Information flow


2. Tax Lawyers’ information need for analysis

Combining framework

2. Tax Lawyers information need for analysis

Direct taxes, CIT

Direct taxes,

• WHAT kind of product• WHO is the tax subject• WHAT type of relationship

CIT

Indirect taxes, VAT

Customs

Fiscal systemWHAT type of relationship

• WHERE in which country is the activity carried out

• WHERE country of

Indirect taxes, VAT• WHAT kind of transaction

• WHERE country of residences

Customs• WHAT kind of transaction• WHO are buyers/sellers• WHAT route do products

t k

Customs• WHO is importing• WHAT type of product

WHERE i it i itake• WHERE do transport begin

and end

• WHERE is its origin


• WHAT territory is delivery in

3. Combined framework for logistics and fiscal i

Combining framework

mappingPhysical constructs Abstract constructs

Material/goods flow

Invoice flow

Payment flow

Value adding unitChange of ownership

Information flow

Value adding unit

WarehouseWarehouseLegal person

Permanent establishmentService flow

Permanent establishment for CIT purposes

VAT i t ti

Internal border; within Customs union

VAT registrationExternal border of a country or trade union

Free trade area /C


customs warehouseC Customs procedures

AgendaAgenda





Conclusions

Conclusions

Conclusions

• When restructuring Global supply chains you should involve tax specialistsinvolve tax specialists

• In some companies Tax specialists are driving the restructuring of supply chains…g pp y

• Combined efforts might lead to big savings – or at least less legal problems

• VAT and CIT have different logics, and might create problems “together” for a logisticianBe able to understand the Tax basics and how to map it• Be able to understand the Tax basics, and how to map it

• There is a future for specialists/advisors in this area!


• There is a future for specialists/advisors in this area!

Questions?Questions?

Ask a lawyer -Ask a lawyer

but have knowledge enough to find the issues -and map them together!


and map them together!


Illustration: The company hesitates to move the spare part stock from Singapore to China due to p p g pVAT-costs when re-exporting.

• Centralised “regional spare part stock” in Singapore &part stock in Singapore & major market in Japan.

• Expects growth in China, and t k thmove stock there..

• VAT on all import to ChinaVAT on all import to China• Not all VAT refundable when

re-exporting -> extra cost

• China hence not good location for only central stock


location for only central stock in the region...

Illustration: Postponement and centralization not l iblalways possibly

• Foreign company must show invoice to final customer to be able to export to Saudiable to export to Saudi Arabia.

“Ship without customer – ifShip without customer – if not sold at arrival warehouse in harbour and pay penalties”

• Saudi Arabia has laws against re-export

– Not suitable for regionalNot suitable for regional warehouse…

– Difficult handle returns



Analysis• Who gets profit from whom (CIT)?

Issues the company found• The HighCorp HQ did not want to

i t PE i F (b• Is there any PE (or must there be)? • Where should CIT be paid in this

transaction?

register a PE in France (because of CIT strategy)

• Who supplies who (VAT)?• Where must there be a VAT

• By law the HQ should be VAT registered in France, as goods supplied from here

• Where must there be a VAT registration?

• Will VAT be deductible and/or refundable?

• A VAT registration might increase “risk” of Permanent establishment

• They calculated with 19% extra refundable? y %cost if not able to net the VAT


Case illustrations: European Reroute – the Illustration

company’s solution

Scenario 1Hi h C High Corp

Scenario 2High Corp

HQ Contract Owner

Sweden

F

High CorpHQ

Contract Owner

Sweden

F

High CorpSub

Factory

CustCoFR

France

High CorpSub

Factory

CustCoFR

France

y

High CorpVAT reg

Belgium



A l i I th f dAnalysis• Who gets profit from whom (CIT)?• Is there any PE (or must there be)?

Issues the company found• The HighCorp HQ did not want to

register a PE in China (because of Is there any PE (or must there be)? • Where should CIT be paid in this

transaction?

g (CIT strategy).

• Sub supplier’s location (2 tiers away) has an impact in this drop shipment

• Who supplies who (VAT)?• Where must there be a VAT

has an impact in this drop shipment

• A VAT registration might increase “risk” of Permanent establishmentregistration?

• Will VAT be deductible and/or refundable?

risk of Permanent establishment• Cumbersome processes at internal

Chinese bordersDiffi lt t k d• Difficult to know every source and supply in long outsourced supply chains – company might move or h l t l ti


change plant locations


Illustration


Scenario 2Scenario 1

High CorpHQ

Contract Owner

Sweden

SuppCoOrder/HQ

X-country

High CorpHQ

Contract Owner

Sweden

SuppCoOrder/HQ

X-country

EMS CustCo

China

C O

EMS CustCo

China

EMSFactory

CustCo

SingaporeHigh Corp

EMSFactory

CustCoC

g pHub


Ikea's labyrinthine tax structure is unpackedBelfast Telegraph 110129

Probe reveals Ikea tax structureProbe reveals Ikea tax structurePublished: January 26 2011 20:06. FT.com

Fresh details of the complex web of foundations and companies behind the global IkeaFresh details of the complex web of foundations and companies behind the global Ikeaflat-pack furniture empire, including some based in tax havens, have been revealed by a Swedish media investigation.

“TaxesIt goes without saying that both Inter IKEA and the IKEA Group pay taxes, as any other company, in every country they operate aro nd the orld The operations compl ith all rele ant la s andaround the world. The operations comply with all relevant laws and regulations and thus pay taxes accordingly.However, we have always viewed taxes as a cost, equal to any other cost of doing business. An optimized tax structure allows us the flexibility to use funds that have already been taxed in onethe flexibility to use funds, that have already been taxed in one market, in new markets for further business development without the additional burden of double taxation.IKEA has grown to become a global and well recognized brand that contributes to the publicity of Sweden around the globe But


that contributes to the publicity of Sweden around the globe. But our roots are in Småland in the south of Sweden. And we are very proud of that. “http://www.ikea.com/at/de/about_ikea/newsitem/statement_Ingvar_Kamprad_comments

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