Metal Manufacturing Industry

Transcription

1 Metal Industry How steel manufacturers can maximize tax efficiency through effectivee supply chain management Evgenia Veter, Head of Transfer Pricing Practice June 27, 2012

2 Contents 1. Context 2. Potential TESCM models for metal manufacturing industry 3. Case studies Page 2 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

3 Section 1 Context Page 3 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

4 Many companies are aligning their business models and tax/legal structures to reduce costs and improve margin Types of operating models companies are adopting High Potential Value Low Supplier identification Demand aggregation Negotiation Contracting/ framework agreements Supplier management/ development Category sourcing services PLUS Trading Inventory ownership Central risk management PLUS Brand and IP (Intellectual property) mngt Sales and marketing strategy Pricing policies Sourcing company Supply chain company Full principal company PLUS Supply chain planning Inventory ownership and mgt strategy Research and development strategy Typical benefits Revenue/profit increases through: Improved demand/ supply balancing & planning control Better pricing decisions Improved service levels Greater inventory turns One face to the customer Cost decreases through: Elimination of duplicate functions Shared services Material price reduction Transactional simplification Logistics network optimisation Low Potential Business impact High The optimal model, or growth path, depends on a company s existing business and organisational model and its readiness for change Page 4 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

5 Tax effective supply chain management are increasing being adopted in various industries Typical alignment drivers Supply chain management, e.g. Spend aggregation, contract consolidation Supplier rationalisation & collaboration Integrated planning and S&OP across the end to end supply chain Industry Consumer goods TESCM maturity Industry standard Sample companies Kraft, P&G, Unilever, Nike, Cadbury, Kellogg s, Pepsico, Logistics contracting, network utilisation and performance management Inventory reduction Supply chain risk management Business management, e.g. Managing expansion in emerging markets Integrating mergers & acquisitions Customer management and sales, e.g. Centralised account management Central control over pricing Tech, electronics & telecommunications Chemical, pharmaceuticals, medical, oil & gas Automotive & other industrial Steel Industry standard Industry standard Widely used Increasing adoption Dell, Motorola, Cannon, Nokia, Flextronics, Cisco, Dow, BP, Shell, Merck, Roche, Johnson & Johnson, Siemens, Rockwell Automation, Volvo, Nissan, ArcelorMittal, Tata Corus, Finance, e.g. Outsourcing/ shared services centre model Transactional simplification Forward buying, hedging and forex management Retail s Source: public domain, annual reports, company publications, etc., stated companies are not necessarily clients of Ernst & Young Page 5 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary. Increasing adoption Few examples Staples, Mothercare, IKEA, Primark, GAP Paypal. PA Consulting

6 TESCM benefits are primarily driven by leveraging centralisation, business simplification, scale & existing synergies From Decentralised operating model Localdecision making Scale& cross business synergies difficult to leverage Complex transactional flows Tax paid in multiple jurisdictions To Centralised operating model Central decision making where it makes sense Scale & cross businesss synergies leveraged Simplified transactional flows Majority tax paid in one. Low tax jurisdiction Activities How TESCM works Lift risk management & value adding activities above market/ operating companies and manage centrally Focus operating companies on execution, e.g. rolling production and sales Harmonise and simplify business processes to leverage scale & eliminate duplication Organisation and Geography Create new roles to manage centralised business processes and integrate with local operating companies Align organisation, KPIs and performance management processes Locate central management company in tax effective jurisdiction Transactions Simplify and standardise inter company transactions, e.g. set up central buy- sell procurement function, centralise supply chain planning & inventory ownership Tax and Transfer Pricing Adjust transfer pricing to distribute profits to the valueadding, low taxed central management company Legal Optimise transactions for VAT and Customs Rationalise and simplify inter-co contracts to regulate roles, functions and rewards Page 6

7 The tax benefits are derived by locating the activities that manage risk & value in one low tax jurisdiction Activities classed by Risk, Value added & Core operations Foreign Currency Hedging Bad Debt Liability (insurance) Financing (WC or debt and equity) Market Inventory and Logistics risk In country logistics In country manufacturing In country sales In country back office operations Total profit before tax Risk Value added Core operatio ons Procurement Supply chain planning Alliance management Regional marketing and sales Inbound shipping & logistics planning Intellectual property All activities taxed in local jurisdictions Core operation activities taxed in local jurisdictions Value added & risk activities taxed in low tax jurisdiction Risk based profit Risk based profit Value added profit Profit from core operations Risk based profit Value added profit Profit from core operations Risk based profit Value added profit Profit from core operations Country 1 Country 2 Country 3 Profit from Core Profit Operations from Core Profit Operations from core operations Value added profit Risk based profit Value added profit Risk based profit Value added profit Country 2 Country 1 Country 3 Profit from Core Profit Operations from Core Profit Operations from Core operations Country 1 Country 2 Country 3 20% 40% 20% 40% 20% 40% Statutory Tax Range Statutory Tax Range Statutory Tax Range Page 7 Manufacturer Principal Company Sales Company 20% 40% Low 20% 40% Statutory Tax Range Effective Tax Range Statutory Tax Range

8 Section 2 Potential TESCM models for metal manufacturing industry Page 8 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

9 Metal manufacturing companies have a number of characteristics that lend themselves to adopting a tax effective operating model Likely TESCM drivers in the metal manufacturing industry Global company with multiple operating entities International supply chain with world wide suppliers and customers High cost, volume & cross border logistics requirements Vertically integrated business model Duplication of functions Intercompany trade Substantial revenues and above average profitability Propensity for high effective tax rates Page 9 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

10 Sourcing & inbound logistics Key Drivers for model Aggregate spend and consolidate contracts & suppliers (materials & shipping) Reduce shipping costs & leverage shipping synergies across the business Maximise supply chain financing, forward buying & hedging opportunities Better manage price volatility & forex risk Simplify transactional model Build integrated trading competency to balance supply & demand & grow new revenue stream Spend reduction & avoidance Logistics cost reduction Sourcing headcount reduction Benefits Category sourcing services model Working capital reduction (inventory & accounts payable) Risk reduction (currency, fuel& commodity cost fluctuation) Entity Sourcing Company / sales Key responsibilities/activities Strategic sourcing Demand aggregation Supplier selection Demand management Contract negotiation and management Supplier performance & relationship management Inbound logistics contracting/ chartering Forecasting Ordering/ requisitioning scheduling Supplier performance logging Sourcing company buy - sell model Sourcing Sourcing Sourcing company Sourcing company Sourcing s Commission Suppliers - Smelters Indirect suppliers Other direct suppliers Suppliers - Smelters Indirect suppliers Other direct suppliers s Products Legal title s Products Legal title Page 10 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

11 Planning, manufacturing & outbound logistics Key Drivers for model Improve forecasting quality Drive benefitsof vertical integration by fully integrating differentaspects of the supply chain Optimise S&OP and supply chain plans Synchronise demand with manufacturing,logistics infrastructure & equipment, planning and execution Improveinventory turns and reduce obsolete inventory Share manufacturing know how & best practices across all sites Eliminate planning duplication and manage talent effectively Simplify transactional model Working capital reduction (inventory) OEE improvement (production) Cycle times improvement Benefits Customer service levels improvement Fuelcost reduction Fleet utilisation improvement Entity Supply chain company / sales Supply chain company tolling model Key responsibilities/activities Long, medium & short term demand management Long, medium & short term supply and capacity planning Logistics contract management Inventory ownership & management & logistics strategy & footprint management Supply chain performance management Local forecasting Plan execution/ manufacturing Logistics execution Suppliers - Smelters Indirect suppliers Other direct suppliers fee Warehousing Supply Chain company fee Warehouse / Centre Local OpCo * Products Legal title s Customers * transferred on completion of production immediately prior to shipping Page 11 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

12 Sales Key Drivers for model Eliminate planning duplication and manage talent effectively Simplify transactional model Manage R&D and share output around the group Mange IP Multiple transaction elimination Improve speed of financial reconciliation Benefits Headcount reduction (accounts receivable) Price optimisation Entity Key responsibilities/activities Sales company Contractingwith customer Invoice customer Pricing Local sales Provide intelligence Input requirements to and liaise with R&D centre Manage operational relationships with customers Full Principal Company Supply Chain company Suppliers - Smelters Indirect suppliers Other direct suppliers fee Warehousing fee Warehouse / Centre * Local Distributor (Limited Risk) Sales support Local Sales Co (Limited Risk) fee s Products Legal title Customers * transferred on completion of production immediately prior to shipping Page 12 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

13 Transitioning to a fully centralised model can take place over time Transition criteria used to determine appropriate implementation & roll out approach: Ease of implementation Size of benefit Demonstrate early success Local culture & readiness for change Key stakeholder disposition Alignment with existing initiatives Category maturity Supplier maturity Supplier & customer contract renewal dates Tax conversion risk management Regulatory environment and future impacts Skill requirements People impact Appetite for risk / business impact High Medium Low Implementation Complexity 5 Benefit size 4 Lower 3 Higher Months months months Timing ID Initiative Description 1 Central procurement company service fee model implementation 2 Central procurement company, buy sell model implementation 3 & service centre supply chain planning implementation 4 Direct sales model 5 Full principal implementation Page 13 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.

14 Сontact details EvgeniaVeter Partner Tel.: Partner, Tax, Transfer Pricing Group, Ernst & Young Moscow Joined the firm as a partner in March 2011; before that worked for more than 15 years with another Big Four company where obtained an extensive experience in providing advisory services to Russian and international companies on various areas of taxation and conducting business in Russia, structuring investments, and coordinating approaches to tax planning; since 2007 has been focusing on transfer pricing; led transfer pricing planning and documentation projects for multinational and Russian clients in various industry sectors, including structuring of entry/exit strategies of clients from the transfer pricing perspective, adaptation of global transfer pricing policies to Russian requirements, business restructuring, development of sustainable transfer pricing methodologies, etc.; specializes on serving companies working in retail, consumer products and life science industries Graduated from the Finance Academy of Russia in 1996 as an economist; member of the Association of Chartered Certified Accountants (ACCA); co-leader of the Transfer Pricing working group of the Association of European Business and a frequent speaker on transfer pricing topics Page 14 Ernst & Young LLP 2011 All rights reserved. Confidential and proprietary.