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Focus: Sourcing/Procurement

Feature Article from Our Sourcing and Procurement Subject Area - See All

From SCDigest's On-Target e-Magazine

- Oct. 15, 2014 -

 
Supply Chain News: Procurement, Tax Considerations, and a Procurement Operating Company

 

It's Time for Procurement to Get Better Aligned with their Company's Tax Experts, Deloitte Partners Say

 

SDigest Editorial Staff 

 

Just how tax-aware should a company's procurement organization be? Is the development of a distinct "procurement operating company" model a smart move for global enterprises?

We ran across an interesting if at times difficult to follow article on these topics by several partners from the practice at Deloitte Tax LLP, published in the International Tax Review Journal.

SCDigest Says:

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"It is only when the business and tax are aligned that a truly sustainable tax-aligned procurement model can be implemented to drive sustainable tax and nontax benefits"

 

Deloitte Tax

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Tax considerations should often be an important factor in procurement and sourcing decision, the authors say, and are becoming even more important in coming years as the procurement function continues to define its scope of operations. With procurement increasingly focused on risk management, for example, tax considerations are often an element of risk profile.

Procurement's increasing intersection with a company's finance operations make a link to tax-aware procurement processes a more natural fit as well.

And tax considerations could be a new area for finding annual savings, given that "The ability of procurement to squeeze out the same year-over-year cost savings out of the same categories and suppliers has diminished" in recent years, the authors say.

With many companies also looking at how to structure and locate their global procurement organizations, "It is imperative that discussions about centralization versus localization also include tax, trade, and finance, so key roles and risks are not located in jurisdictions that may give rise to adverse tax implications," the authors also note.

A Procurement Operating Company Business Model?

Perhaps most interesting, the authors suggest companies should consider what they call a procurement operating company (POC) business model.

What does that mean? Instead of critical procurement roles that are involved in setting strategy and managing risk being dispersed on an ad-hoc basis throughout the globe, under a POC model they are co-located together in a tax-efficient jurisdiction such as Ireland, the Netherlands, Switzerland, or Singapore.

What does the POC do? Deloitte says it should provide the following services to the rest of the company:

• Global, regional, and local procurement strategy
• Category management
• Managing global and regional supplier relationships
• Consolidating buying data to identify savings opportunities
• Developing negotiating strategies
• Providing training to the organization on purchase-to-pay processes
• Managing the overall spend of the entire organisation from a direct and indirect perspective

Deloitte says that while the POC would centrally manage the overall procurement strategy and key global suppliers, regional procurement centers of excellence located close to suppliers would also be in place to manage local relationships and be responsible for negotiation and conclusion of procurement contracts with local suppliers.

"This procurement "hub and spoke" model allows the procurement function to achieve operational efficiencies while also providing the tax and finance functions with the ability to potentially locate a portion of the marginal improvement from the evolving model in locations with either a low statutory tax rate or where the tax authorities negotiate tax rates-based on the projected economic footprint of the new organization," the authors say.

This approach may not be right for everyone, but can have a number of advantages, from faster decision-making to increased standardization, Deloitte argues.


(Sourcing and Procurement Article Continues Below)

 

CATEGORY SPONSOR: SOFTEON

 

SCDigest notes that Procter & Gamble made such a move several years ago, when it relocated the procurement organization for its beauty business to Singapore. In 2006, IBM announced it was moving its procurement headquarters to Shenzhen, China, though in neither case is it clear how much tax considerations played in the move.

Such a strategy can be extremely expensive to undertake, especially when it involve moving highly compensated managers or modifications to existing systems. Therefore, companies will need pull together a business case comparing the potential group savings the procurement organization will provide against the one-time costs (system reconfiguration, people move costs, consultant and attorney fees, etc.) and the ongoing run-rate (incremental cost or savings of having roles located in new jurisdictions, administrative costs, potential tax-audit defense costs, etc.) to make a decision, the authors note.

"The tax function should be involved in defining the value that can be attributed to the POC and its spokes so an after-tax savings/benefit number can be used in the business case," Deloitte observes.

The authors add that "The role of tax is to share with the business the opportunities to align the model from a tax perspective (POC-type model, single central sourcing hub, country sourcing hub, etc) by explaining the tax requirements the business would need to live within so that both the tax and business benefits would be sustainable over the long term. The business - both procurement and key stakeholders - then decides whether it can live within the tax requirements. It is only when the business and tax are aligned that a truly sustainable tax-aligned procurement model can be implemented to drive sustainable tax and nontax benefits"

Once such a POC structure is established, how it will interact with local procurement functions and critically, what will be the legal title flows of procurement goods must be designed. We'll summarize that thinking in part two of this review.


Should procurement decisions be more informed by the tax implications? What do you think of the POC concept? Let us know your thoughts at the Feedback button (email) or section (web form) below.




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