Enable a Tax-Efficient Supply Chain in SAP ERP

  • by Bryan Fricke, Senior Managing Consultant, IBM’s Global Business Services
  • November 8, 2010
With increased focus on international markets, companies running SAP are continually looking to better manage the flow of goods in a tax-efficient way to help grow their business and improve their bottom lines. Find out some best practices and financial considerations when distributing goods in international markets.
Key Concept

To reduce costs when distributing goods internationally, some companies establish a Principal – a legal entity in the lower tax jurisdiction to centrally buy and sell goods to move them through the supply chain in a tax-efficient manner to the end customer. However, the geographic location of the Principal often does not fit in with the optimal physical flow of goods. The result can be complex processes in which the financial flow of goods deviates from the physical flow. Enabling this type of distribution model can be challenging due to the increased complexity companies are required to manage. However, the financial benefit can be significant.

As the world economy becomes more integrated, company supply chains inherently become more international and complex. As a result, companies often look to less traditional ways to gain supply chain efficiencies. Reducing labor, transportation, and inventory costs and improving customer service are always a priority; however, optimizing the financial flow of goods across international markets is also an area where companies can achieve significant financial and taxation benefits.

One of the more common ways to optimize the financial flow is to establish a financially centralized distribution model that incorporates a Principal entity that is established in a lower tax jurisdiction. This type of supply chain model can help reduce a company’s overall effective tax rate when distributing goods to international markets. Whether you are looking to expand operations in international markets or better manage the financial flow of goods in international markets, understanding how SAP ERP can support a financially centralized distribution model will help you manage the increased complexity while taking full advantage of SAP ERP’s capabilities.

Enabling a financially centralized distribution model with a Principal structure is no small undertaking. It affects all core functions of a business as well as SAP ERP, including the materials management, planned production, finance, and sales and distribution modules. There is also regulatory risk that needs to be fully understood and mitigated to ensure the business restructuring is compliant with local government bodies. Because of the broad impact these initiatives have on an organization, a cross section of skills from the business, integrators, and tax experts needs to be actively involved from the outset. When the restructuring is complete, a positive byproduct is that the organization will have significantly increased its awareness of how to efficiently conduct business in various international markets and will be in a better position to take advantage of future distribution opportunities.  

Bryan Fricke

Bryan Fricke is a senior managing consultant with IBM’s Global Business Services. He works on supply chain management challenges with an emphasis on warehouse operations/warehouse management solutions. He has implemented both SAP and non-SAP warehousing systems. You may email Bryan at bryan.a.fricke@us.ibm.com.

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