Supply chain complexity remains a fiscal and taxing problem.
That sentence has two meanings: first, as more business leaders discover each week, supply chain disruptions pose severe challenges. Second, tax groups play an essential role in addressing these disruptions and helping their organizations develop greater supply chain resilience.
Ripple effects from Russia’s war on Ukraine and new COVID-driven lockdowns in Chinese manufacturing hubs represent the latest in a series of significant supply chain disruptions. Supply chain snafus are one of several “elements of chaos” that more tax leaders need to address in their planning activities. That’s the term my co-panelists and I used to describe external shocks that are beyond the control of any single country or company in our presentation at the Tax Executives Institute’s annual conference last month.
Inflation, fiscal policy, and tax policy also qualify as other elements of chaos, and these forces are interrelated. Tax leaders should understand the reciprocal correlation between inflation and taxation, its circular effect on our economy, and its influence on fiscal policy. I also think that business and tax executives should recognize the distinction between cost-push inflation and tax-push inflation (what I call “taxflation”) — regardless of how inflation began — and whether it is derived in a demand or supply shock, or even another causal shock. While some of the current supply chain bottlenecks causing additional price surges may be resolved relatively soon, other core economic factors contributing to higher prices appear much more entrenched, suggesting that we’re in for a more sustained inflationary cycle. (I examine those factors in more detail here.)
Regardless of its duration, high inflation combined with trade barriers, geopolitical risks, and labor shortages focuses executive and board-level attention on supply chains. These leaders want their organizations to develop or redesign supply chains to withstand global disruptions more effectively and efficiently. Alternatively, we should also become mindful of the profound costs of “re-shoring and on-shoring” production and re-structuring supply lines, either domestically or internationally. In the long- run, this will not be easy, economical, or efficient.
Tax groups can help their organizations operate more agile and resilient supply chains by ensuring tax compliance as tax policies, rules and rates change – and as companies enter into new relationships with suppliers and customers in new countries (and tax jurisdictions). This won't be easy given that:
- U.S. legislative changes appear likely to result in more state and local transaction taxes.
- VAT/GST changes, including those related to e-commerce, continue to change at a fast clip; and
- Businesses respond to new risks and opportunities by expanding global footprints, transacting on new marketplace platforms, and investing in new internal systems.
Getting the right strategy, technology, and talent in place will help address those difficulties – and give tax leaders more time to focus on supporting their organization’s supply chain transformations.
“Supply chain agility and resilience will be critical to building a sustainable organization,” according to The Conference Board’s 2022 CEO Outlook survey report. Only 28 percent of chief executives reported that their organizations were “well prepared to deal with a future supply chain crisis.” We should expect future crises, as a complex and unpredictable global economy filled with interdependent and diverse (economic and fiscal) agents and entities, arises.
Please remember that Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information. The views and opinions expressed in Tax Matters are those of the authors and do not necessarily reflect the official policy, position, or opinion of Vertex Inc.