Global Tax Disrupters Are Real. Are You Prepared? An interview with James W. Dawson, CPA
Audit / Tax / Advisory / Risk / Performance
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Crowe Global 360 Solutions
As Jim Dawson, international tax partner at Crowe, was talking to clients and prospects this past year, he noticed that most middle-market companies with cross-border transactions were approaching their taxes the same way they had been for years. Such an approach may have been acceptable in past years, but today is different. Today’s global tax environment looks different with global tax disrupters such as Brexit, the OECD’s base erosion and profit shifting (BEPS) monitoring, and tax reform in the United States. These disrupters can affect a company’s entire business, from their operations and structures to reporting of transactions. But many of these companies hadn’t considered this impact. So Dawson set out to develop a new approach that considered the entire supply chain and could help clients better understand how these disrupters can affect their businesses. This new approach, called Crowe Global 360 Solutions, is a comprehensive review that looks at all aspects of international tax within a company’s supply chain. Recently, we talked to Dawson about Crowe Global 360 Solutions, the supply chain, and how Crowe has already helped clients.
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Q: What does Crowe Global 360 Solutions look like? Dawson: The Crowe Global 360 Solutions approach takes a fresh look at a company’s entire supply chain from beginning to end – where transaction flows cross a national border from a tax perspective. It is important to realize there are elements of tax embedded in many components of the supply chain that could, if reviewed, provide opportunities for effective tax planning, enhancing cash flow savings and reducing risk.
Crowe Global 360 Solutions
Global Trade and Customs
Global Indirect Taxes – VAT/GST
Global Tax Strategy
Global Transfer Pricing Global Mobility
We focus on five primary areas that in many ways are interlinked with one another: 1. 2. 3. 4. 5.
Global tax strategy Global transfer pricing Global mobility Global indirect taxes Global trade and customs
It is a process-driven approach from the perspective that it considers each company’s definition of value. Then, we can take them through the process of mapping transactions and identifying where tax is embedded within their supply chain. Often we find that if they were to reconfigure or even investigate what they are doing, they can affect the worldwide effective tax rates (or local country tax rate), enhance cash flow, and reduce risk.
Q: Do you have an example of how you helped a client through this approach? Dawson: Recently we had this discussion with a company we were working with in the United States. They defined value as helping them review how their operations in one specific country were affecting their supply chain from a tax perspective. What we discovered was an opportunity to reconfigure their holdings in this country. This realignment resulted in a substantial decrease of their corporate income tax in this jurisdiction. Additionally, during the process, we also reviewed their trade and customs activity in that same country. Our international tax services team completed a trade and customs analysis and found their imports were being miscoded. This discovery led to a recovery of hundreds of thousands of dollars from the customs authority.
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Q: Why do you think it is the right time to introduce the Crowe Global 360 Solutions approach to the market? Dawson: The biggest impact is the heightened awareness of tax globally. We hear about it all the time from clients and prospects in the United States. Many of these companies are anxious about U.S. tax reform legislation and how such legislation may affect their companies. The United States is not alone when it comes to change in its tax laws. Other countries are likewise changing their local laws and tax treaties in response to global tax disrupters such as BEPS and Brexit. Thus when you look at the global tax disrupters’ impact on a globally active company, the cost of not reviewing the impact on the supply chain can be very expensive.
Q: What are you hearing and seeing in middle-market companies that is driving this need? Dawson: I’ve had these conversations throughout North America, Europe, the AsiaPacific region, and Latin America, and the one common theme is change. If a country changes its law, a company operating under the previous law or process may be paying a tax or duty at a higher rate than required, or they face the risk of noncompliance in tax reporting. That’s where inefficiencies have arisen. Many middle-market companies don’t have the resources or in-house technical ability to address the constant tax changes that are affecting their supply chain. Time and resource constraints are their biggest impediments to actively being engaged in reviewing the tax impact of their supply chain. As a result, the path of least resistance is to follow the same processes as the prior year. They understand very well the supply chain process, since they created the process. What is often overlooked is that a supply chain is constantly changing due to a number of external factors – many of which the company cannot control. One such uncontrollable change is the application of embedded taxes. Examples of where tax law changes can affect a supply chain include, among many others: revisions to how the concept of permanent establishment is applied to activities taking place in a country; changes in VAT rates on the supply of goods and services; changes in goods classification for customs purposes; the movement of personnel, whether permanently or temporarily, from country A to country B; and the heightened focus on transfer pricing.
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Another factor to consider that many companies are operating in structures that no longer provide the tax benefits that were intended. These structures are part of the how the supply chain functions. Thus reviewing the effectiveness of the structures may result in the need to change processes within the supply chain. This is a holistic opportunity to have a conversation and help a company see the blind spots that may exist in their supply chain.
Q: Can you share more on the importance of the supply chain? Dawson: The supply chain phenomenon exists in every industry. Let’s look at the automobile industry. In an average car there are thousands of parts of different value that are components of an automobile. These parts are moved among many different countries and ultimately end up in an assembly plant. The assembly plant combines the various global components during the assembly process, resulting in an automobile that may be distributed locally or exported. When you step back and look at the supply chain process, there are hundreds, if not thousands, of cross-border transactions. The question is what is the cost of taxes embedded in the supply chain and how have the global disrupters affected those costs? Has anything changed from a tax perspective that may drive a change to the supply chain? Can the worldwide effective tax rate and risk of noncompliance be lowered? Can we enhance cash flow?
Q: Do you have an example of how you connected the dots to show a company where tax and risk affect their supply chain? Dawson: In the last 60 days I’ve seen a lot of foreign companies looking to come into the United States. Recently I spoke to a middle-market, globally active company looking to enter the U.S. market for the first time. We were talking about their global supply chain and discussed the importance of understanding the operational and a tax cost associated with their cross-border distribution route. We mapped, at a high level, their cross-border transactions and processes. Each transaction was affected in some manner by the global tax disrupters. The outcome was eye-opening for this company. By being able to talk about supply chains, cross-border transactions, and the tax aspects of conducting business globally, we are speaking the client’s language.
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Q: How do CFOs and tax directors react when you start talking about their supply chain? Dawson: When you talk to people who really understand the supply chain, you see that they realize and understand in great depth the value of not paying more VAT taxes than they have to, for example, or minimizing the amount of local country taxes or duties.
Q: How do you start the conversation around Crowe Global 360 Solutions? Dawson: We ask three questions. The first is: Do you know if your supply chain is efficient from a tax perspective, maximizing cash flow and reducing risk? The answer typically is: We are not sure. We then ask how global tax disrupters (BEPS, Brexit, and U.S. tax reform) are affecting their supply chain and business strategies. The last question we ask is: Have you considered the impact of these disrupters on your global taxes, cash flow, and risks? Here’s an example: One U.S. company was purchasing replacement automobile parts from a related supplier in China. The automobile parts were drop shipped to a warehouse in another country. The parts were then sold to distributors across the European Union, which currently includes the United Kingdom. The current view is that once Brexit is fully implemented there will be an extra tariff on this distribution chain. But the company hadn’t considered this. In my experience, a global tax disrupter like Brexit is something you have to plan for well in advance of the law coming into effect, otherwise you will be unprepared for its impact. This gives us the opportunity to have a conversation about how tax affects the global supply chain. We keep it practical, short, and simple, all in the spirit of meeting the client’s definition of value.
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Learn More For more information on Crowe Global 360 Solutions, please contact: Jim Dawson Partner, International Tax +1 404 442 1621 james.dawson@crowe.com
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The information in this document is not – and is not intended to be – audit, tax, accounting, advisory, risk, performance, consulting, business, financial, investment, legal, or other professional advice. Some firm services may not be available to attest clients. The information is general in nature, based on existing authorities, and is subject to change. The information is not a substitute for professional advice or services, and you should consult a qualified professional adviser before taking any action based on the information. Crowe is not responsible for any loss incurred by any person who relies on the information discussed in this document. Visit www.crowe.com/disclosure for more information about Crowe LLP, its subsidiaries, and Crowe Global. © 2018 Crowe LLP.
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