Multinational Tax Planning for Supply Chain Facilities

This is an excerpt of the original article. It was written for the July-August, 2010 edition of Supply Chain Management Review. The full article is available to current subscribers.

July-August, 2010

I’ve always liked that old saying that good fortune favors the prepared mind (though I’ve faltered in my adherence to the principle as often as not). Reading the feature articles in this July/August issue only affirms the validity of that wisdom, this time in a supply chain context. From several instructive perspectives we learn about the value of carefully thinking about what you want to accomplish, how you want to accomplish it, and why you need to be flexible enough to respond if things don’t go exactly to plan. As our cover illustration suggests, it’s really about executing a supply chain game plan.

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The Obama administration, in its last two budgets, has proposed changes in the tax laws that would increase tax burdens on corporations that have operations in foreign jurisdictions. So far the U.S. business community has successfully resisted these proposals, but the pressure is certain to continue. At the same time, business executives and policymakers believe that measures such as lower corporate tax rates are needed to make the United States more competitive in global markets. Thus, current and proposed taxation of international transactions plays an important role in where multinational organizations chose to locate their operations.

Although most supply chain managers have become increasingly familiar with the transportation and pipeline inventory costs that threaten the savings expected from overseas facilities, they are less comfortable with the tax issues that pertain to international transactions. Proper attention to these issues can potentially increase the profitability of multinational organizations.

The objective of this article is to give supply chain managers a basic understanding of the fundamental tax ramifications of international location decisions and to provide a framework for assessing proposed changes put forth by the Obama administration. The complex nature of the tax law precludes a detailed analysis in this article. Therefore, we have opted to focus on three of the most influential factors: the foreign tax credit, the potential deferral of U.S. taxation on foreign earnings, and transfer pricing between related entities in different tax jurisdictions.

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