“An organization’s true tax burden is embedded in operations and throughout the company’s supply chain,” says Fowler.
Smart Business spoke with Fowler about how tax planning can and should become a management tool for a company by making tax strategy an integral part of business strategy.
In what business areas should taxes be given the most careful consideration?
At Grant Thornton, we typically examine a company’s tax position along critical areas of the supply chain: research and development, procurement, processing, assembly, distribution (which includes both transportation and warehousing), sales and marketing, service, and support. We also consider the functions that surround the supply chain including brand management, merchandising and marketing, finance, customer relationship management, distribution and asset management, and retail.
For example, take an area such as brand management. Many companies view brand management and the related ability to influence the look and feel of the customer experience, as the primary organizational value driver. From a tax viewpoint, value is added at the point in the supply chain when goods are branded. This, in turn, determines the jurisdiction of taxability as well as value of those goods for income and property tax purposes.
In addition, where licensing and intellectual property are attached to the brand through copyrights, patents and trademarks also impacts the jurisdiction of taxation and may impact custom and duty charges when a product is imported.
If managing taxes can have such grave implications on profits, why isn’t it done?
The problem lies in our history as well as in the way our organizations are typically structured. The corporate tax department is rarely looked to for innovation. The prevailing views are these: (1) The less we hear from the corporate tax people, the better or (2) the tax department is a post-mortem compliance function.
Many companies don’t want to undergo this kind of tax planning because they have the mistaken assumption it will have a negative impact on customers. Good tax planning will be transparent to customers, but it won’t be easy. There has to be a culture and discipline present around having tax professionals at the table at the front end of business decisions.
Frankly, the time period of tax shelters in the late ’90s actually hurt the cause I’m advocating. Organizations in general now have a ‘don’t-get-burned’ attitude and have relegated the tax function even further into the back office. In the tax shelter days, companies would sign a few documents, make some quick superficial changes, and large tax savings would somehow fall out. Of course, those savings weren’t sustainable and don’t represent true strategic tax planning. Because of this, many organizations are now very risk-adverse and may avoid embracing the tax function.
What are some steps an organization can take to make that cultural shift?
It starts from the top down with CEOs and audit committees. Taxes need to be pulled out of the financial cost center, embedded in the operational profits centers and given a seat at the table whenever there are strategy decisions, great or small.
In my view, taxation is the last management frontier. We’ve tackled our supply chains with Total Quality Management, ‘Just in Time,’ Six Sigma and other methodologies. We have embraced many changes, such as developing closer relationships with suppliers and sharing once-sensitive information. Our supply chains have become more global, more technologically advanced and cross ownership is common. I contend that the truly competitive organization will now look to taxation in every part of its supply chain as a management tool and competitive advantage.
Are there businesses that have embraced taxes as a management tool?
Yes, and they regularly involve tax professionals along the entire business process, including all production and supply chain conversations and IT decisions. All types of taxes are considered before making decisions, including transaction taxes, income taxes and international levies. This kind of front-end management of taxes cannot only save a lot of money, but it is the only way to truly understand operational product margins.
There is no better time than now to change the way organizations think about taxes. With Sarbanes-Oxley, most companies have been required to examine their business processes … why not examine the way taxes are viewed as well?
JAMIE B. FOWLER is a partner and Tax Practice leader for the Dallas office of Grant Thornton LLP. Reach Fowler at (214) 561-2306 or Jamie.email@example.com.