Leading the Way is a column written by PricewaterhouseCoopers professional staff. It appears in the Business section of the Bangkok Post twice each month. The column provides specialised advice to corporate decision-makers in Thailand on global and local business trends.
This article appeared in the September 5, 2006 issue of the Bangkok Post.
By Paul Summer, Pichpajee Saichuae, Vatin Chalermdamrichai, Niphan Srisukhumbowornchai and Kulvech Janvatanavit
This is the third instalment in a series of articles discussing the restructuring of supply chains. In the first and second instalments, Niphan, Vatin and Parima examined the issues and operational challenges of supply-chain restructuring. This week, they look at how tax issues affect the two extremes of supply-chain organisation: centralised and decentralised distribution.It's noon on Tuesday, and three colleagues from Tax and Advisory at PricewaterhouseCoopers Thailand are sitting down to lunch.
''Great to see you again,'' says Niphan, as he places his steaming bowl of tom yum on the table. ''Last week, we discussed how cost, speed and security were three of the main operational challenges to supply-chain management. This week, I want to talk about how tax issues may affect supply-chain distribution structures.''
''Good idea,'' agrees Vatin. ''Structure has more implications than some people might think. At their most extreme, supply chains can be centralised or decentralised, although most companies usually fall somewhere in between the two. Our clients want to know where they are on this spectrum, and whether or not they are at the right place.''
''Then let's start at one end of the spectrum. What potential tax issues would a company with a very centralised distribution system face?'' asks Niphan.
''Well, apart from general compliance tax, transfer pricing would be significant as products are sold to only one overseas customer,'' replies Parima. ''All parties in this supply chain, hub, manufacturer and distributor, need an appropriate return by taking into account their risks, roles and responsibilities. This is in order to avoid transfer pricing challenges from each local revenue department.
''These challenges can lead to conflicting opinions among revenue departments in each country which want to maximise taxable profits in their country. They may also lead to conflicts with Customs in the country of import, which would want the import price to be high, whereas the revenue departments in receiving countries would prefer the import price to be low, in order to achieve a higher level of taxable profitability.''
''Now let's look at the other extreme, decentralisation. Will transfer pricing again be an issue?'' asks Niphan.
''It will,'' replies Parima. ''If all distributors make the same percentage margin but the local selling prices vary by market, then the manufacturers will have to sell each product at different prices based on the distributor selling price. Imagine the complexity of maintaining this many prices.
''Alternatively,'' she continues. ''The manufacturer could set one price to all distributors. The distributors would have to bear the risks of different selling prices in different markets, as well as risks arising from market price fluctuation.''
''Are there consequences to these two different approaches?'' asks Vatin.
''Yes,'' replies Parima. ''If the group policy is the multiple-price approach, the question would be, how to convince tax authorities that the transfer prices have not been manipulated. In practice, this can be difficult. In addition to transfer pricing, there is a customs duties issue. Multiple prices may make applications for free trade benefits based on export prices more complex.''
''Another concern is profit remittance,'' adds Vatin. ''With multiple pricing, the manufacturer may make significant profits. The tax-efficient remittance to overseas shareholders is a key ethical and operational challenge to consider. Also, there is always the possibility they could potentially incur losses. This could trigger questions from the local revenue departments.''
''So what do you think are the tax implications for the importer?'' asks Niphan.
''If the importer obtains fixed returns from its operations, the tax consequences should be quite low, as long as the revenue authority agrees that the margin it make is appropriate,'' replies Parima. ''However, there may be a challenge from customs if the price is too low.''
''Whew!'' says Niphan. ''Our clients have a lot of tax issues to consider when it comes to their supply-chain structures. It's always helpful connecting with others who have different experiences. Why don't we meet in two weeks to discuss how our clients can assess their distribution systems?''
''Sure thing,'' replies Vatin. ''So, Niphan, are you going to finish your tom yum? Maybe I should help you with that.''
''Oh, Vatin!'' exclaim Parima and Niphan with laughter.
In the final instalment of this series, Niphan, Vatin and Parima will look at how companies can assess their supply chains.
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