Accounting and Taxes

Rethinking tax breaks in the supply chain

Consumers have soured on tax breaks, which were traditionally accepted as a part of doing business.
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· 4 min read

Corporate finance departments, watching the never-ending headlines about inflation and a possible recession, are looking across business units to do what finance is perhaps most known (and hated) for doing: cutting costs. One area where cost reduction has become a game of chess in the current economic climate, some CFOs have reported, is the supply chain.

“There’s a lot of focus right now on the supply-chain dislocation. While the CFO is not directly accountable…indirectly it’s having a massive impact on the cost base,” Ishaan Seth, global co-leader of McKinsey’s strategy and corporate finance practice, told CFO Brew.

And CFOs are trying to decide which levers to pull, while trying to avoid creating more disruptions to their supply chains. Greg Engel, vice chair of tax at KPMG, told CFO Brew that among those decisions, as usual, are potential tax implications.

But sometimes the cheapest option isn’t the best one, especially if it means a company isn’t providing sufficient tax revenue to the places where it does business. Because of the ESG movement’s push for transparency and accountability, many companies’ revenues and business practices are now subject to greater scrutiny.

Traditionally, when a company is seeking to relocate or build new facilities, local governments will offer incentives to lower a company’s overall tax bill to try to woo it. The hope, for governments that offer tax breaks, is that despite the loss in taxable income, the company will provide jobs and stimulate the local economy.

“If a local authority is willing to give the company a tax holiday as an inducement for them to move, that’s all good,” Engel said. But he added, when the company reports its taxes, it might look like it’s “not a good corporate citizen,” which could draw criticism. “They’re going to be an outlier,” Engel said. “Before, a tax holiday was just sort of part of doing business.”

Tax breaks have been part of many corporate success stories, even if they don’t always pay off for cities and states. But Engel and others tell CFO Brew that especially when it comes to their supply chains, companies are at risk of looking like bad corporate citizens if they’re getting a tax break that appears overly generous.

An extreme example of the lengths local governments will go to when trying to entice a company to come to town was Amazon’s drawn-out process for deciding where to locate its second headquarters. Among the two dozen serious contenders, Newark offered $7 billion in subsidies, and Virginia gave Amazon government subsidies that totaled around $750 million. New York City and state offered nearly $3 billion in incentives, but Amazon ultimately pulled out of the deal following backlash, settling on Arlington, Virginia.

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Alison Taylor, an adjunct professor at NYU Stern School of Business, told CFO Brew that while tax breaks can provide cost savings to a company, the company has to weigh whether the benefits outweigh the potential risks, including to its reputation.

For example, if a company's supply chain includes business in countries that have documented human rights issues, tax considerations “are likely to be less important,” Taylor said.And the links in the supply chain matter: Companies will need to demonstrate how its stuff was made, she added.

A Harris Poll survey commissioned by Google Cloud earlier this year supports that view: 82% of those surveyed said they wanted to buy from brands with values aligned to their own, especially when it comes to sustainability. Shoppers want to know that brands source their products responsibly, according to the survey.

So taxes shouldn’t be the only factor CFOs consider when making supply chain sourcing decisions. Engel said it was important for companies not to let the tax tail wag the dog—in other words, making business decisions solely for tax purposes could backfire. CFOs and supply-chain folks are spending a whole lot more time discussing these issues with one another than they did before the pandemic, Steve Gallucci, Deloitte’s global and US CFO Program leader told CFO Brew.

“CFOs need to have a better understanding of what the nuances are associated with supply chain and vice versa; supply chain leadership needs to understand the financial implications of the decisions they have made and will make,” Gallucci said.

The era of tax incentives is not yet over—governments continue to offer incentives to businesses that incorporate sustainability considerations in their supply chains. So, while the days of incentivizing companies merely for setting up shop in a city or state may be losing attractiveness, tax incentives will still factor in supply chain decisions. How large a role those incentives will play remains to be seen.—KT

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