Supply chains have undoubtedly faced significant disruptions when the COVID-19 crisis hit almost the entire world. These global supply chain disruptions have slowed manufacturing lines, paralysed ports, and contributed to increasing inflation, among others. The lockdowns and movement restrictions put in place in numerous countries particularly slowed down or even temporarily stopped the flow of raw materials and finished goods, thus leading to the disruption of businesses’ manufacturing processes.
However, aside from affecting manufacturing, the global supply chain disruptions have also largely impacted another major business area: transfer pricing. In the 2021 EY International Tax and Transfer Pricing survey, it was found that supply chain disruptions accelerated by the global health crisis as well as international tax reforms are now contributing to an unprecedented degree of uncertainty and risk for the transfer pricing functions of many businesses. Read on to find out how the current issues on supply chain are affecting transfer pricing and what businesses can do.
Major Factors Impacting the Supply Chain
While the COVID-19 crisis is the main catalyst for the supply chain disruptions, there are several other factors that impact the global supply chain, including international trade disputes, changing customer behaviours, changing tax policies, talent instability, disruption to logistics costs and routes, digital developments, and climate change.
In the Asian Pacific region, particularly, supply chain disruptions already started even before the inception of the health crisis. It all began when the trade war between China and the United States started to boil. And just when businesses thought they had already recovered from the disruptions caused by the trade dispute, the world was hit with the COVID-19 pandemic. This global crisis exposed the severe vulnerabilities of the supply chains.
As the pandemic was shattering healthcare systems and economies, businesses were seeing great limitations at borders due to inefficiencies, manufacturing lockdowns, requirement for huge amounts of documentation, and complex new laws that businesses must comply with.
Moreover, the necessity of supply chain visibility was also brought to light by the pandemic, as importers are obliged to make their entire supply chain visible to make sure there are no components or finished goods that are produced under forced labour or slavery. Shortage of ships or containers as well as the increase in costs of frightening goods by road, rail, sea, or air also caused significant disruptions to logistics and supply chains.
How the Disrupted Supply Chain is Affecting Transfer Pricing Leaders
As mentioned earlier, international tax reforms and disruptions to the supply chain driven by the COVID-19 pandemic are contributing to an unparalleled level of uncertainty and risk for the transfer pricing functions of businesses. The earlier cited EY report particularly revealed that the restructuring of supply chains as well as the changing working patterns will have substantial impact on transfer pricing.
In the said report, 979 transfer pricing professionals across 25 industries in 53 jurisdictions were surveyed and asked for their views on the current issues surrounding transfer pricing. Of the more than 900 transfer pricing professionals, 67% say they are challenged by the complexity and volume of global tax reforms. 71% particularly believe these reforms will result in increased transfer pricing-related costs for their businesses, with 30% even predicting that the costs will grow by at least 10% over the coming three years.
According to some transfer pricing leaders, the avalanche of new tax laws as well as market pressures, most of which are caused by the issues arising from the coronavirus crisis, put the supply chains under great strain. As supply chains confront an increasing number of disruptions, many transfer pricing leaders are already anticipating greater scrutiny of transfer pricing documentation and a rising number of more rigorous transfer pricing audits.
Because the global health crisis also forced businesses to increasingly work from anywhere, numerous transfer pricing leaders are also expecting impacts resulting from staff and executives being stranded outside the jurisdiction of their employment. 47% of the surveyed transfer pricing professionals by EY say they are already facing these challenges now, while 49% expect to do so over the coming two years. Additionally, 75% believe they will find it hard to find workers with the necessary transfer pricing talent.
Immediate Actions Businesses Must Take Now
In order to overcome the challenges caused by the pandemic-accelerated supply chain disruptions, it is important for transfer pricing leaders to take actions, find solutions, and adapt their transfer pricing model now. One of the most necessary actions they should take is to strengthen their connection with their businesses. They need to get a good grasp of the magnitude of the disruptions and locations within the supply chain and determine how their business will work with third parties when it comes to dealing with the impacts of the supply chain disruptions.
Moreover, it is necessary for transfer pricing leaders to understand the allocation of income or losses in the current transfer pricing system and reexamine intercompany agreements to analyse the allocation of risks. In terms of documentation and monitoring, on the other hand, some improvements are also called for. Businesses need to document every action they take as well as the reason for such action. They should always monitor the situation or process to facilitate continuous assessment.
Moreover, when it comes to the handling the challenges brought by the acceleration of digital innovation, workforce reskilling may be essential now more than ever. Businesses need to make workforce reskilling at least a second priority (next to enhancing efficiency) over the next three years. Such reskilling should involve assisting workers in using digital technologies, operating equipment with safety and health in mind, and adapting to changing company strategies and means of working, such as increased virtual collaboration.
There is no doubt that the current world affairs, international tax reforms, and COVID-19 health crisis have all brought significant disruptions to the global supply chains. These events have ultimately uncovered numerous vulnerabilities of the supply chain and revealed the lack of supply chain resilience in many industries and markets.
When it comes to transfer pricing, particularly, the supply chain disruptions have proven to be a pain in the neck that has far-reaching impacts. To manage these impacts, transfer pricing leaders need to secure stronger alignment with their businesses, optimise transfer pricing functions, improve documentation and monitoring, and embrace digital models, among others. To help you manage transfer pricing uncertainties and risks efficiently, feel free to reach out to us here at Max Lewis Consultants Pte Ltd, as we provide reliable transfer pricing services in Singapore.
Aside from transfer pricing, we also specialise in other essential business services, such as local and international tax planning, business and asset valuation, Employee Share Options (ESOS) valuation, and IP valuation services. To learn more about how our services can help streamline your business operations, do not hesitate to contact us today.