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 19, 2006 issue of the Bangkok Post.
By Paul Summer, Pichpajee Saichuae, Vatin Chalermdamrichai, Niphan Srisukhumbowornchai and Kulvech Janvatanavit
This is the fourth instalment in a series of articles on the restructuring of supply chains. In the first three instalments, Niphan, Vatin and Parima examined the issues, operational challenges and tax concerns that affect different supply-chain structures. This week, they look at how companies can assess their supply chains and prepare themselves for change.
Three colleagues from PricewaterhouseCoopers (PwC) Thailand are on a plane to Hanoi, where they will meet with some colleagues from PwC Vietnam.
"You know, this whole issue of supply chain structuring is really complex," remarks Vatin. "I mean, we've talked about this topic for weeks now, but we've only just scratched the surface."
"That's true," says Niphan. "Actually, we have one very important question still to answer. How can our clients assess whether they need to change their current supply chains?"
"Well, the key drivers for change are customers, competitors and the supply chain," replies Vatin. "This may seem obvious, but it's quite complicated. Businesses can begin to self-assess by asking themselves a number of questions."
"Leading companies are where they are largely because they are leaders, not followers," says Parima. "This means they take the right actions before their competitors do. Forward-looking companies foresee future change and prepare for the transformation accordingly. Some even go further by applying learning from other industries."
"Exactly," agrees Vatin. "For example, if cost is your competitive advantage, then you need to ensure your supply chain helps create that advantage. You may need a structure that consists of a few suppliers to take advantage of economies of scale, low-cost labour, potentially in low-cost countries, and centralised purchasing to increase negotiation power and lower transport cost. You may also need to control your product range and plan operation and distribution strategies to maximise efficiency.
"If your organisation values agility or speed, then you may need a wider supplier base to minimise risk of supply disruption, more skilled labour with extra capacity, more decentralised purchasing to reduce bureaucracy, and more direct distribution strategies."
"What are the specific tax issues?" asks Niphan.
"The first issue is transfer pricing," replies Parima. "All parties in the chain need to ensure that their profit is appropriate to their restructured functions, risks and assets to avoid challenges from the tax authorities.
"If a business goes ahead with supply chain restructuring, possible changes in price structure and flows of money may prompt questions from local tax authorities. All parties may need to establish documentation to substantiate the restructuring and basis of calculation, or setting up transfer prices.
"The second issue involves indirect taxes such as VAT and customs. These are generally imposed on consumption or activities among parties. Therefore, changes in supply-chain structure may lead to big changes in indirect tax implications and may create additional transaction tax costs to some, or all, parties."
"Exactly," agrees Vatin. "While restructuring may aim to reduce existing tax risks or maximise efficiency of operations, inadequate planning or study may create other major tax risks such as permanent establishment or corporate income tax issues, customs duty and VAT issues, or the parties possibly being required to meet tax registration requirements in local countries."
The plane lands smoothly at the Hanoi Noi Bai airport and the three colleagues make their way through the terminal. Waiting for them is their colleague Quynh Van from PwC Vietnam.
"Great to see you all again," says Quynh Van with a smile as they head to the car.
"Good to see you too," replies Niphan. "Sorry to jump right into it, but could you tell us what customs implications a business could face when restructuring its supply chain?"
"Oh Niphan, you're always thinking about work," laughs Quynh Van. "Actually, customs duty affects different businesses in different ways. Some industries face low duties and insignificant non-tariff barriers, whereas for others, duty can be the critical component of the decision. Companies need to assess the impact of customs duty early in the restructuring consideration.
"One often overlooked issue of restructuring supply chains is the impact on benefits under free trade agreements. If goods are shipped through a third country, or even invoiced via a third country, the duty savings may be lost, depending on both the specific FTA and the commercial circumstances."
"But on the positive side," interjects Parima, "restructuring can create an opportunity to review the basis of customs value and identify non-dutiable elements. For example, management fees and certain advertising costs may not need to be included in the customs value. However, the impact of withholding taxes must be considered at the same time."
"Absolutely. There are usually trade-offs to consider," remarks Vatin. "Understanding conflicting objectives and how your decisions affect the trade-offs are often prerequisites before any transformation project. Clearly, changing your supply chain is not an easy task, and different companies will require different solutions. You need to break out of the functional silos and consider the needs of all stakeholders. The art is finding the best balance between a centralised and decentralised supply chain and recognising that it is a continuous process."
"Great discussion everyone! Thanks for bringing a fresh perspective to this topic," says Niphan as he looks out the window at the bustling city streets of Hanoi. "Now let's go get some pho!"
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