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International trade and legal issues:Aligning Global Distribution with TaxAligning Global Distribution with Tax
MTT045 International Physical DistributionLund, 2012-02-09
Professor Andreas NorrmanDept of Industrial Management and LogisticsLund University Faculty of Engineering
Jur Dr Oskar HenkowDept of Business LawLund University School of Economics andLund University, Faculty of Engineering
SwedenLund University, School of Economics and ManagementSweden
International Physical Distribution: The ’Red Thread’ of the Course
Vehicle routing
Modal choice & shipment
Network design & l i
Operations
& shipment size
& planning
Road Airconsignees
Performance objectives
Logistics service providersRail Sea
Modesj
Security/risk issuesSustainability challenges
International trade issuesHumanitarian aid distribution
MarketsInfrastructure
Intermodality Terminalsconsignors
Norrman & Henkow, Lund University, Sweden
Aligning and integrating Supply chain and Tax decision could have great benefits.
100%
60%
80%
20%
40%
0%
20%
Operat io ns T ax o nly Integratedo nly (40%) (10%) appro ach
(87%)
The benefits of integrating supply chain & tax
Norrman & Henkow, Lund University, Sweden
The benefits of integrating supply chain & tax(Source: Deloitte 2005, referring to Keller International)
To redesign logistics structures withoutTo redesign logistics structures without fiscal knowledge might create problems…
“a multinational company located a new distribution centre in Germany, and realised only after the facility was built that Germany’s corporate tax rates eliminated most of the “operational savings”
(Sweeney, 1998)
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Penalties are also high if you handle taxes wrong…
Seller FR Customer FRDirect
Delivery
Seller SEOrderInvoice
Order
Invoice
Order
OrderInvoice
•Seller in Sweden is not registred for VAT in France, selling without VAT
•Penalties – as high as the missed VAT payments
ExempleExempleSales: 10 000 000 EuroVAT(19,6%): 1 960 000 Euro (normally refundable)
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Penalty: 1 960 000 Euro
Purpose of the lecture
• Highlight challenges in the interface between Logistics and
Purpose of the lecture
Highlight challenges in the interface between Logistics and Legal (regulatory framework), especially fiscal issues
• Introduce basic principles regarding CIT and VAT
• Propose a combined framework for logistics and fiscal
Norrman & Henkow, Lund University, Sweden
mapping
Our discussed system and subdomainsOur discussed system and subdomains
Direct taxes, S bCIT
Indirect taxes, VAT
Customs
Fiscal systemSub system interrelation
Logistics systemMaterial/goods flow
Value adding unit
Warehouse
Payment flow
Information flow
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AgendaAgenda
• Logistics principles/distribution structures and l l h lllegal challenges
• Basic principles of CIT and VAT• Mini-cases• Process and framework for analyzing theProcess and framework for analyzing the
interface• Conclusions• Conclusions
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Action oriented principles for logistics d i t t l h i t kdrives e.g. structural changes in networks
La Londe & Persson(1995) Andersson et Abrahamsson La Londe Kotzab & OttoLa Londe & Mason (1995)8 principles
Persson(1995)
9 principles
Andersson et al (1997)7 principles
Abrahamsson (1999)9 principles
La Londe (2003)5 principles
Kotzab & Otto (2004)9 principles
Persson’s 9 Principles
•Reduce or Redistribute Lead time
•Reduce or Adopt to Uncertainties
•Differentiate
•Postponep
•Redistribute or Increase frequencies
•Eliminate or Adopt to Expected Pattern
Postpone
•Improve Information and Decision
Support SystemEliminate or Adopt to Expected Pattern
of Demand
•Simplify structures systems and
Support System
•Strengthen Internal and External
Integration
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Simplify structures, systems and
processes
Integration
Short discussions – base it on your “Localization knowledge”knowledge
• When Japan and China have grown to your major markets in this region – would you move your regional DC (distribution centre) to China?
• If you need a regional DC for Middle East – in which country would you probablyin which country would you probably locate it from a “logistics point of view”?
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Illustration: The company .... p y
• Centralised “regional spare part stock” in Singapore &part stock in Singapore & major market in Japan.
• Expects growth in China, and t k thmove stock there..
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Illustration: Postponement and centralization …
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Customs: Example product classesCustoms: Example product classes
• Different VAT and customs classes for different goods in different countries. E.g. software & hardware
– How a product is packaged and distributed impact tax and customsdistributed impact tax and customs...
Example of combined product:Example of combined product:– HW: 1 000 millions, 12% customs– HW: 100 millions (12%),HW: 100 millions (12%),
SW: 900 millions (0%), CD value1$ (CD is HW (12%))
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Drop shipment simplifies structures and flows –an effective logistics solution...
Definition:The selling company does not touch the goods, but co-ordinate a g p y gshipment directly send from one supplier to the final customer
Supplier CustomerDirect Delivery
SellingCompany OrderInvoice
Order
Invoice
Order
p y OrderInvoice Invoice
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Case illustrations: Is American Drop shipment a feasible solution?feasible solution?
Scenario 1 Scenario 2High Corp
HQ Contract Owner
Sweden
Scenario 1 Scenario 2High Corp
HQ Contract Owner
Sweden
Supplier CustCo
US
Supplier CustCo
USC C
Sales tax in scenario 1 was higher thanSales tax in scenario 1 was higher than extra transportation cost in scenario 2
-> Environmental impact
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Cost curves for transportation, warehousing, service and inventory must be complemented with other insights!inventory must be complemented with other insights!
Updated view on cost curves
Total cost
p
Inventory cost
Warehousing costCos
ts
Transportation cost
Cost for lost sales (service dimension)
Number of stocking points
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(Abrahamsson, 1992)
To design a logistics network is a complex problem
COMPETITIVE STRATEGY
INTERNAL CONSTRAINTS GLOBAL COMPETITIONPHASE I
Supply Chain
Capital, growth strategy, existing network
TARIFFS AND TAX
Strategy
PRODUCTIONTECHNOLOGIES
Cost, scale/scope impact, support required, flexibility
INCENTIVES
REGIONAL DEMANDSize, growth, homogeneity,
l l f
PHASE IIRegional Facility
Configuration
COMPETITIVE ENVIRONMENT
pp q ylocal specifications
POLITICAL, EXCHANGE RATE,
AND DEMAND RISK
g
PRODUCTION METHODSSkill needs, response time
AND DEMAND RISK
AVAILABLE INFRASTRUCTURE
PHASE IIIDesirable Sites
FACTOR COSTSLabor, materials, site specific
LOGISTICS COSTSTransport, inventory,
coordinationPHASE IV
Location Choices
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coordinationocat o C o ces
Källa: Chopra & Meindl, 2004, p. 107
AgendaAgenda
• Logistics principles/distribution structures and l l h lllegal challenges
• Basic principles of CIT and VAT• Mini-cases• Process and framework for analyzing theProcess and framework for analyzing the
interface• Conclusions• Conclusions
Norrman & Henkow, Lund University, Sweden
Tax Law Basics – Corporate Income Tax (CIT)Tax Law Basics Corporate Income Tax (CIT)
Direct taxes, CITCIT
Indirect taxes, VAT
Customs
Fiscal system
Direct taxes, CIT
• CIT is a tax on the profit companies make (Corporate Income Tax)Income Tax)
• CIT is cost for companies B i f t ti i T bl i i d d tibl• Basis of taxation is Taxable income minus deductible costs
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Presence and type of transaction determines!yp
Corporate Income Tax (CIT)The world
WHAT?
Sweden
Subsidiary
Stock
WHAT?
Interest, t
Kind of d t
Branch
Agent
etc.product
Where?Agent
CustomerSource Establishment
Overall purpose is to divide the tax base!
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Overall purpose is to divide the tax base!
Important term:Permanent establishment (1)Permanent establishment (1)
A permanent establishment (PE) means a fixed place of business through which the business of an enterprise is wholly or partly carried on.
Three conditions need to be fulfilled:1. a presence in the form of a facility, such as premises, or,
in certain cases machinery or equipment;in certain cases, machinery or equipment;2. a certain degree of permanence of the presence; and 3 the business in question has to be carried on through the3. the business in question has to be carried on through the
PE in question.
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The enterprise must NOT be based on own facilities.
Important term: Permanent establishment (2)Permanent establishment (2)
When a permanent establishment (PE) is present, business profit may be taxed by the source state (thebusiness profit may be taxed by the source state (the place of activity).
If facilities for storage and delivery of goods shall beIf facilities for storage and delivery of goods shall be considered as PE or not, depends on if the activity or preparatory/auxiliary or essential/significant... p p y y g
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Tax Law Basics – Value Added Tax
Direct taxes, CITFiscal system
Indirect taxes, VAT
Customs
y
Indirect taxes, VAT
• VAT is a tax on consumption, aimed at being neutral for companies
• VAT is due on supply of goods • Supplier accounts for VAT• Place of supply is important• Complicated when more than two parties involved…
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VAT – examples
VAT: 250VAT: 500
-250 VAT: 750
-500
Inside
Textile factory TailorLamb wool Cloth Suit
Sheep farm
1250 2500 3750= 250 = 250
Value add 1000
Value add 1000
Value add 1000
VAT: 750Import VAT: 500
Cross border trade
Textile TailorSheep
1250 2000 3750VAT: 250 VAT: -250 -500
= 250-500
factory TailorLamb wool Cloth Suitfarm
Value add 1000
Value add 1000
Value add 1000
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Important term: SupplySupply
• Supply of goods is when the right to dispose of tangible property as owner is transferred (which is nottangible property as owner is transferred (which is not equal to change of ownership).
• What is decisive is whether the right to dispose of the property is transferred. (Who acts as owner?)
• Place of supply is the actual location of goods (beginning and end of the transport)
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The goods location and movement d t i h VAT i t d fdetermines where VAT is accounted for
VAT• Who? (Seller/Buyer)
The World
• What? (Transaction type)• Where? (Route of good)
European Union
Sweden2
3
Customs• Who? (Importer)
13
4
• What? (Type of good)• From where? (Origin)5
Overall purpose; Tax Consumption
Transactions
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Overall purpose; Tax Consumption
AgendaAgenda
• Logistics principles/distribution structures and l l h lllegal challenges
• Basic principles of CIT and VAT• Mini-cases• Process and framework for analyzing theProcess and framework for analyzing the
interface• Conclusions• Conclusions
Norrman & Henkow, Lund University, Sweden
Case illustrations: European Reroute
Illustration
Case illustrations: European Reroute
• Contract owner in Sweden
Scenario 1High Corp
HQ Contract Owner
(closes the deal)• Customer, and production
plant, in France.Contract Owner
Sweden
France • Could the deal be made more logistics effective
High CorpSub
Factory
CustCoFR
more logistics effective than distribution to Sweden and back again?
• The logisticians proposeThe logisticians propose Drop Shipment
Goods flow
InvoicePayment flow
V l ddi tiLegal person
Is Drop shipment a good solution in this case – what
InvoiceValue adding operationVAT registrationInternal border in
customs unionChange of ownership
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Is Drop shipment a good solution in this case – what could create problems?
Example of analysis and found issuesExample of analysis and found issues
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Case illustrations: European Reroute – the Illustration
company’s solution
Scenario 1Hi h CHigh Corp
HQ Contract Owner
Sweden
F
High CorpSub
Factory
CustCoFR
France
y
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Case illustrations: American Reroute –Legal analysis
company’s solutionsScenario 1 Scenario 2
High CorpHQ
Contract Owner
Sweden
Scenario 1 Scenario 2High Corp
HQ Contract Owner
Sweden
Supplier CustCo
US
Supplier CustCo
USC C
Scenario 3Sales taxes are not VATs – imperfections of consumption tax system
High CorpHQ
Contract Owner
Sweden
Supplier CustCo
US
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MexicoAmerican Hub
Case illustrations: Asian Reroute
Illustration
Case illustrations: Asian Reroute• Contract owner in Sweden
(closes the deal)
Scenario 1
(closes the deal)• Contract with supplier
(country X) who have outsourced manufacturing
High CorpHQ
Contract Owner
Sweden
SuppCoOrder/HQ
X-countryoutsourced manufacturing itself
• Customer and production plant in China (differentC O
EMS CustCo
China
plant in China (different regions).
• Could the deal be made more logistics effectiveEMS
FactoryCustCoC more logistics effective
than distribution to Sweden and back again?
• The logisticians propose• The logisticians propose Drop Shipment…
Is Drop shipment a good solution in this case –
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what could create problems?
Example of analysis and found issuesExample of analysis and found issues
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Case illustrations: Asian Reroute
Illustration
Case illustrations: Asian Reroute
Scenario 1
High CorpHQ
Contract Owner
Sweden
SuppCoOrder/HQ
X-country
C O
EMS CustCo
China
EMSFactory
CustCoC
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AgendaAgenda
• Logistics principles/distribution structures and l l h lllegal challenges
• Basic principles of CIT and VAT• Mini-cases• Process and framework for analyzing theProcess and framework for analyzing the
interface• Conclusions• Conclusions
Norrman & Henkow, Lund University, Sweden
Time and location (logistics issues) are importantimportant
When ownership passes between the parties in h ia chain,
and where the goods are when ownership passes or where they are delivered,
have an impact upon fiscal rules.p p
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Proposed overriding process for analyzing tax
1 Do a logistics mapping of the network
effects of distribution structures
1. Do a logistics mapping of the network2. Understand/map the data needed for the tax lawyer3. Combine your knowledge and data4. Evaluate different Total landed cost for potential
scenarios: Landed CostTOTAL =
5. Understand the risk the lawyer finds acceptable ,
Landed CostLOGISTICS + Landed CostFISCAL + Landed CostENVIRONMENTAL
y p ,and how a logistics solution can be made more acceptable.
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1. Do a Logistics mapping of networks & flows
Combining framework
1. Do a Logistics mapping of networks & flows
• Overview of real life’s complex structures processes & flows• Overview of real life s complex structures, processes & flows• Platform for decision making• Detailed data added on nodes and links:
– time, locations, value, volumes, frequencies, distances, uncertainties etc
Logistics systemMaterial/goods flow
Value adding unit
Warehouse
Payment flow
Information flow
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2. Tax Lawyers’ information need for analysis
Combining framework
2. Tax Lawyers information need for analysis
Direct taxes, CIT
Direct taxes,
• WHAT kind of product• WHO is the tax subject• WHAT type of relationship
CIT
Indirect taxes, VAT
Customs
Fiscal systemWHAT type of relationship
• WHERE in which country is the activity carried out
• WHERE country of
Indirect taxes, VAT• WHAT kind of transaction
• WHERE country of residences
Customs• WHAT kind of transaction• WHO are buyers/sellers• WHAT route do products
t k
Customs• WHO is importing• WHAT type of product
WHERE i it i itake• WHERE do transport begin
and end
• WHERE is its origin
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• WHAT territory is delivery in
3. Combined framework for logistics and fiscal i
Combining framework
mappingPhysical constructs Abstract constructs
Material/goods flow
Invoice flow
Payment flow
Value adding unitChange of ownership
Information flow
Value adding unit
WarehouseWarehouseLegal person
Permanent establishmentService flow
Permanent establishment for CIT purposes
VAT i t ti
Internal border; within Customs union
VAT registrationExternal border of a country or trade union
Free trade area /C
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customs warehouseC Customs procedures
AgendaAgenda
• Logistics principles/distribution structures and l l h lllegal challenges
• Basic principles of CIT and VAT• Mini-cases• Process and framework for analyzing theProcess and framework for analyzing the
interface• Conclusions• Conclusions
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Conclusions
Conclusions
Conclusions
• When restructuring Global supply chains you should involve tax specialistsinvolve tax specialists
• In some companies Tax specialists are driving the restructuring of supply chains…g pp y
• Combined efforts might lead to big savings – or at least less legal problems
• VAT and CIT have different logics, and might create problems “together” for a logisticianBe able to understand the Tax basics and how to map it• Be able to understand the Tax basics, and how to map it
• There is a future for specialists/advisors in this area!
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• There is a future for specialists/advisors in this area!
Questions?Questions?
Ask a lawyer -Ask a lawyer
but have knowledge enough to find the issues -and map them together!
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and map them together!
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Illustration: The company hesitates to move the spare part stock from Singapore to China due to p p g pVAT-costs when re-exporting.
• Centralised “regional spare part stock” in Singapore &part stock in Singapore & major market in Japan.
• Expects growth in China, and t k thmove stock there..
• VAT on all import to ChinaVAT on all import to China• Not all VAT refundable when
re-exporting -> extra cost
• China hence not good location for only central stock
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location for only central stock in the region...
Illustration: Postponement and centralization not l iblalways possibly
• Foreign company must show invoice to final customer to be able to export to Saudiable to export to Saudi Arabia.
“Ship without customer – ifShip without customer – if not sold at arrival warehouse in harbour and pay penalties”
• Saudi Arabia has laws against re-export
– Not suitable for regionalNot suitable for regional warehouse…
– Difficult handle returns
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Example of analysis and found issuesExample of analysis and found issues
Analysis• Who gets profit from whom (CIT)?
Issues the company found• The HighCorp HQ did not want to
i t PE i F (b• Is there any PE (or must there be)? • Where should CIT be paid in this
transaction?
register a PE in France (because of CIT strategy)
• Who supplies who (VAT)?• Where must there be a VAT
• By law the HQ should be VAT registered in France, as goods supplied from here
• Where must there be a VAT registration?
• Will VAT be deductible and/or refundable?
• A VAT registration might increase “risk” of Permanent establishment
• They calculated with 19% extra refundable? y %cost if not able to net the VAT
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Case illustrations: European Reroute – the Illustration
company’s solution
Scenario 1Hi h C High Corp
Scenario 2High Corp
HQ Contract Owner
Sweden
F
High CorpHQ
Contract Owner
Sweden
F
High CorpSub
Factory
CustCoFR
France
High CorpSub
Factory
CustCoFR
France
y
High CorpVAT reg
Belgium
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Example of analysis and found issuesExample of analysis and found issues
A l i I th f dAnalysis• Who gets profit from whom (CIT)?• Is there any PE (or must there be)?
Issues the company found• The HighCorp HQ did not want to
register a PE in China (because of Is there any PE (or must there be)? • Where should CIT be paid in this
transaction?
g (CIT strategy).
• Sub supplier’s location (2 tiers away) has an impact in this drop shipment
• Who supplies who (VAT)?• Where must there be a VAT
has an impact in this drop shipment
• A VAT registration might increase “risk” of Permanent establishmentregistration?
• Will VAT be deductible and/or refundable?
risk of Permanent establishment• Cumbersome processes at internal
Chinese bordersDiffi lt t k d• Difficult to know every source and supply in long outsourced supply chains – company might move or h l t l ti
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change plant locations
Case illustrations: Asian Reroute
Illustration
Case illustrations: Asian Reroute
Scenario 2Scenario 1
High CorpHQ
Contract Owner
Sweden
SuppCoOrder/HQ
X-country
High CorpHQ
Contract Owner
Sweden
SuppCoOrder/HQ
X-country
EMS CustCo
China
C O
EMS CustCo
China
EMSFactory
CustCo
SingaporeHigh Corp
EMSFactory
CustCoC
g pHub
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Ikea's labyrinthine tax structure is unpackedBelfast Telegraph 110129
Probe reveals Ikea tax structureProbe reveals Ikea tax structurePublished: January 26 2011 20:06. FT.com
Fresh details of the complex web of foundations and companies behind the global IkeaFresh details of the complex web of foundations and companies behind the global Ikeaflat-pack furniture empire, including some based in tax havens, have been revealed by a Swedish media investigation.
“TaxesIt goes without saying that both Inter IKEA and the IKEA Group pay taxes, as any other company, in every country they operate aro nd the orld The operations compl ith all rele ant la s andaround the world. The operations comply with all relevant laws and regulations and thus pay taxes accordingly.However, we have always viewed taxes as a cost, equal to any other cost of doing business. An optimized tax structure allows us the flexibility to use funds that have already been taxed in onethe flexibility to use funds, that have already been taxed in one market, in new markets for further business development without the additional burden of double taxation.IKEA has grown to become a global and well recognized brand that contributes to the publicity of Sweden around the globe But
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that contributes to the publicity of Sweden around the globe. But our roots are in Småland in the south of Sweden. And we are very proud of that. “http://www.ikea.com/at/de/about_ikea/newsitem/statement_Ingvar_Kamprad_comments