Tax reform, trade, and tariffs are reshaping supply chain fundamentals. Is your supply chain ready?

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The windfall from US tax reform was expected to trigger long-planned capital investments, many of which could focus on improving supply chains. But as the dust begins to settle and individual rules continue to get clarified, many business leaders are continuing to press the pause button on key supply chain decisions. For many, that’s because they are still evaluating the gains from tax reform, while tariffs and trade wars are affecting their cost structures.

What are the key issues that should inform today’s conversations about supply chain strategy – and what steps should leaders be taking? Let’s take a closer look.

Accelerate updates to your supply chain strategy in order to reap the benefits

Want to take advantage of new tax benefits that favor select supply chain investments? You may need to move fast. For example, companies that may have been planning to make big supply chain investments in recent years have accelerated those investments (in systems, machinery, and more) in order to align the supply chain to their businesses, as well as to reap potential tax advantages more quickly. Many are already doing so, due to everything from the need for accelerated expensing to acting on accelerated depreciation – opening the door to big investments that were once delayed because they were cost-prohibitive but are now within reach. Such changes shouldn’t be made in isolation. Even for organizations not currently pursuing full-blown supply chain transformation, they should be incorporated into a broader, long-term transformation strategy. 

US strategic trading location

Converge tax reform, trade, and tariff issues to inform significant supply chain decisions

Is it possible to have an in-depth discussion about your supply chain in response to tax reform without also considering the effects of trade and tariff issues? It’s definitely not recommended, because these issues are deeply intertwined – a tax-related decision may have an unanticipated impact in the context of tariff impacts (and vice versa), for example. Any important meeting on supply chain decisions should not only include senior tax leaders who understand tax reform implications in detail, but also peers who can speak to trade and tariff impacts in depth.

For some companies, these converging issues are shifting their underlying assumptions about where and how to arrange their organizations. For example, some are beginning to view the US as a strategic trading location for business operations – not just headquarters. Expect more tectonic shifts as further changes in policy – such as the United States-Mexico-Canada Agreement (USMCA) and further China-US trade skirmishes – unfold. For example, many anticipate that USMCA will lead companies with large US markets to shift their supply chains from China to nearby Mexico – but such decisions are paused pending clarity on the rules of origin under USMCA, as well as ongoing uncertainty regarding the US-China relationship. 

Ramp up automation and digitization to achieve next-level supply chain flexibility

Recent political developments have shown that the business environment can shift in significant ways at a moment’s notice, leaving companies scrambling to make sense of landmark changes to the tax code as they attempt to make decisions that leave them well positioned for whatever’s next. At times like these you need to be able to respond more quickly and nimbly – especially in your supply chain. It can make all the difference in your ability to maximize your business advantage while others are playing catch-up.

That’s one big reason companies across industries have been moving to digitize their supply chain operations in recent years – some more aggressively than others. And they are taking advantage of significant advances in automation, machine learning, robotics, AI, and other digital capabilities to deliver on the promise of an agile supply chain, often in ways that were unthinkable only a few years ago.

Growth initiatives

Map out the broader impact on your industry

With so many potential changes to your own supply chain strategy, it may be tempting to focus internally, at the expense of considering other powerful industry-level factors. For example, your customers may change where they do business, requiring suppliers and competitors to adjust their operational footprints. You could be locked in a war for talent as companies deploy their tax savings to jump-start hiring. Suppliers may start passing along the costs of tariffs to you – or they may be reaping the benefits of tax reform themselves, generating savings which could be passed along to you and your customers. The cumulative impact of changes such as these could be huge. Make sure you’re prepared for them, using modeling and scenario planning to game out different likely possibilities. As a result of this kind of thinking, for example, some companies are reshaping their approach to global transfer pricing based on a rigorous analysis of their own value chains and how they compare to others in their industries. Benchmarking is only the start – the impact is real and can be immediate. 

Supply Chain Actions

Key aspects of tax reform impacting supply chains

Base erosion and anti-avoidance tax (BEAT)

What is it?

The BEAT targets certain related-party deductible payments (and, notably, not cost of goods sold) that shift income outside the United States. It is imposed if the taxpayer’s modified taxable income (meaning without the deductible payments) exceeds the taxpayer’s regular taxable income after certain allowable credits.

How could it impact supply chain decisions?

For many foreign-based companies with US operations (in-bound companies), the cost of doing business in the US suddenly went up – which may require a significant FFG/cost takeout for the US subsidiary.

BEAT also will be a cost for many US-headquartered companies, given the evolution of many companies’ global operations and customer base.

Companies may need to reevaluate their legal entity structure and refresh VCT/Ops strategy.
 

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Global intangible low-taxed income (GILTI)

What is it?

This provision is designed to tax low-taxed foreign income that under current law is not taxed until repatriated to the United States (such as a shelter company in Bermuda).

How could it impact supply chain decisions?

Companies may need to reevaluate their legal entity structure (specially tax inversions) – need to refresh VCT/ Ops strategy.

For many, the tax cost of the GILTI rules will be an unexpected cost to balance with overall tax savings – a greater impact on US MNCs with low asset bases overseas.
 

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Foreign derived intangible income (FDII)

What is it?

This new provision provides tax benefit to companies that export goods and services generated by a trade or business in the US. It allows a 37.5% deduction (reduced to 21.875% for tax years starting after 2025) for FDII produced in the United States. The resulting effective tax rate is 13.125%.

How could it impact supply chain decisions?

Limited short-term impact – long-term, it may require companies to revisit on-shoring foreign IP back to the US – need to refresh VCT strategy/R&D footprint.

While beneficial for many companies, FDII provisions may not be around forever – they may be challenged by some countries, and are being examined by the WTO. In the meantime, companies that have FDII-eligible charges are likely to take advantage of them.
 

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Capital depreciation

What is it?

Instead of depreciating over 5-15 year, companies can expense 100% of capital investments (such as PP&E and IT software) between Sept 26, 2017 to Jan 1, 2023. After 5 years, the expensing rate drops to 80%, 60%, and so on, to normal depreciation rules. Investments in both new and used assets now qualify for the full expensing provision.

How could it impact supply chain decisions?

Significant unit volume growth opportunity for IPS companies that make capital equipment, such as:
− Sales campaign to make customers aware of tax deduction option
− New Pricing strategy that incents buying
− Supply chain strategy to accommodate increased growth volumes over 5 years followed by potential slowdown

Opportunity to upgrade aging technology infrastructure that is not integrated/fit for purpose
− Transformational IT capital projects (e.g. SAP/Oracle/Salesforce) become attractive
− Digital/IIoT investments become attractive
 

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Christopher Desmond

Partner, Value Chain Transformation Co-leader, PwC US

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Mark Hermans

Managing Director, PwC US

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