December 8, 2023 Smart Tax Strategies to Navigate Global Trade Dynamics

Volume 26 | Issue 2

Ray Grove outlines the impact global sanctions have on multinationals; tips to align supply chain & tax strategies.

Click here to read the complete illustrated article or continue below to read the text article.

In the ever-changing landscape of global trade, multinational organizations face a plethora of challenges that impact their operations on a daily basis. In fact, recent data reveals that retaliatory tariffs, inflation, supply chain shortages, and disruption are among top concerns for trade professionals. As we move into Q4 and 2024, these challenges continue to increase in frequency and importance, adding further tax complexities into the mix.

The Impact of Global Sanctions on Multinational Organizations

Global sanctions are a powerful tool used by governments to exert pressure on nations, entities, or individuals to achieve specific political, economic, or security objectives. While sanctions are intended to promote international peace and security, they do pose compliance changes for multinational organizations. After Russia’s invasion of Ukraine in early 2022 for example, the EU, U.S., and UK––alongside several other countries worldwide––introduced sanctions on Russian commodities like oil that continue to impact organizations operating and selling globally. Sanctions like these can create far-reaching challenges for multinationals, including:

• Disruption of Supply Chains: Sanctions disrupt the flow of goods and services by restricting trade with sanctioned countries. Multinational organizations with operations or suppliers in these regions must navigate these sanctions in a way that minimizes their impact on their supply chains without damaging delays, costs, and inefficiencies.
• Financial Consequences: Sanctions may also freeze assets or limit financial transactions with sanctioned entities which can impact a multinational organization’s ability to conduct business and access necessary funds. Further, compliance with these financial restrictions becomes paramount in order to avoid severe financial and/or legal consequences.
• Reputational Risks: Multinational organizations operating in sanctioned regions also run the risk of potential damage to their reputation should they fall out of compliance. Being associated with countries or entities under sanctions can have a negative impact on their brand image and market position if compliance with government sanctions is not managed properly.

The Evolution of Taxes in Supply Chain and the Shift to Transactional Tax

Sanctions aren’t the only issue impacting the interconnectivity between effective supply chains and taxes. The role of taxes in supply chain management has evolved over the years, with a growing emphasis on transactional tax. Transactional tax refers to taxes levied on specific transactions, such as the sale of goods or services. The rise of e-commerce and digital transactions, for example, has led to new tax challenges, with many countries around the world imposing digital services taxes and changing their approach to value-added tax (VAT) to capture revenue from online transactions.

Other regulatory concerns could have significant impacts on multinational organizations’ tax planning strategies. For example, the increasingly stringent transfer pricing rules and the Organization for Economic Co-operation and Development’s recently imposed global minimum rate are making it increasingly difficult to operate on a global scale. Not to mention, ESG considerations are becoming progressively more challenging to comply with in terms of global trade and tax planning. More and more organizations are aligning their tax strategies with sustainability goals to enhance their reputation and meet stakeholder expectations. All of these ever-changing developments (and more) are resulting in significant impacts to the way global trade is being conducted.

A Tax-First Approach to Supply Chain Management

As the waters continue to muddy surrounding sanctions, transactional taxes regulations, and supply chain efficiencies, multinationals and corporate finance leaders are rethinking their business models in an effort to stay afloat ––it is officially time to reconsider the way tax leaders and supply chain teams work together in order to get the job done!

Traditionally, taxes have been seen as separate from supply chain and global trade management. However, in today’s complex and interconnected world, taxes can no longer take a back seat. The financial impact alone makes the case for this argument, considering that a well-structured tax strategy can lead to substantial savings, while poor tax planning can result in unexpected liabilities. Further, tax laws and regulations are constantly evolving, with governments worldwide seeking to maximize their revenue. Failure to stay compliant can lead to legal and financial consequences. Tax risks, such as transfer pricing issues, can pose significant threats to multinational organizations. Proactive tax planning and risk management are essential to avoid costly disputes.

Taxes can (and should!) influence supply chain decisions, including where to source materials and where to manufacture products. Integrating tax considerations into supply chain strategy can enhance efficiency and cost-effectiveness. In order to navigate the complexities of global trade––and mitigate the impact of continuously evolving sanctions and regulations–– multinationals must align their supply chain and tax strategies, adopting a tax-first approach. Consider the following best practices:

• Supply Chain Visibility: Global trade leaders must establish a comprehensive supply chain visibility system that allows real-time tracking of goods and materials. This enables organizations to identify potential disruptions early and implement alternative sourcing strategies.
• Diversification of Suppliers: Many companies have learned the hard way that they need to actively reduce dependency on suppliers in regions prone to sanctions. Diversifying a supplier base to include sources from different geo graphic areas ensures a more resilient supply chain overall.
• Compliance and Due Diligence: Implement rigorous compliance and due diligence processes to ensure that suppliers and partners alike adhere to international regulations. This includes regularly screening suppliers for potential sanctions violations.
• Scenario Planning: Contingency plans––that account for various trade scenarios, including the impact of sanctions––should be developed in order to outline alternative routes and suppliers and help mitigate disruptions.
• Incorporating Technology: AI tools on the market can help to determine things like Harmonized System (HS) Codes, accurately calculating import duties and taxes in real time, effectively increasing speed and confidence in trade compliance and optimization.
• Cross-Functional Collaboration: Leaders should work to foster collaboration between supply chain and tax departments. Close coordination between the departments ensures that tax strategies align with supply chain decisions and vice versa, optimizing overall efficiency.

As global trade complexities and supply chain volatility continue to dominate the business landscape, multinational organizations must adapt and evolve. The impact of global sanctions, the shift towards transactional tax, and the alignment of supply chain and tax strategies are all critical considerations. By embracing best practices and staying ahead of evolving tax regulations, multinational organizations can navigate these challenges successfully and position themselves for sustained growth in an ever-changing global marketplace.

Ray Grove
Head of Corporate Tax and Trade, Thomson Reuters
Ray leads the ONESOURCE portfolio across Direct, Indirect, Platform, Trust, and Global Trade product teams at Thomson Reuters. In this role he works with clients, regimes, technologists, and partners around the globe creating solutions to real problems in the ever-changing landscape of transactional compliance. Ray is no stranger to these challenges and the leveraging of technology to solve those challenges. Previously to Thomson Reuters he worked at EY and another technology provider in the space leading product and technology efforts. Ray is passionate about building customer obsessed teams who deliver world class products above all else.

Subscribe to Industry Today