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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What Do You Say?
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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)
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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.
