Transfer pricing planning opportunities for manufacturing companies

Aug 09, 2021

RSM transfer pricing professionals highlight recent developments and planning opportunities for industrial manufacturing companies, and the impact the Biden administration and Organisation for Economic Co-operation and Development (OECD) proposals may have going forward. 

Emma Sweeny: I'm with Shruti Gupta, a senior manager with RSM’s transfer pricing team and a senior analyst in RSM US’s Industry Eminence Program, which positions analysts to understand, forecast and communicate economic, business and technology trends shaping the industries RSM serves. Shruti is focused on the industrials sector, and will speak with us about what's happening in that sector today.

Shruti, could you walk me through some of the impact of COVID-19 on the industrials manufacturing sector?

Shruti Gupta: Like many other sectors, manufacturers are impacted, but this is largely dependent on the end market to which manufacturing companies sell into. On the demand side, if you were considered an essential company or sold to markets like health care, you may not have had that much of an adverse impact on the demand side. However, on the supply side, irrespective of the end market, companies were impacted by workforce issues, rising costs and supply chain disruptions.

COVID-19 has made manufacturing companies rethink some aspects of their businesses, mainly as it relates to the adoption of technology and the ability to adapt to change. This focus on ability to adapt to change, or agility, is also driving their thinking around supply chains. There have been numerous disruptions in supply chains. We all know, right from the start of COVID-19, when Asian factories shut down, to even today, there have been various difficulties in accessing raw materials, increasing lead times, shortage of shipping capacity, rising logistics costs, you name it. These challenges are causing a rethink of global supply chains.

In fact, even before COVID-19, supply chains were under a shift because of trade wars, but COVID-19 has really galvanized this focus on having suppliers closer to your manufacturing operations, or having manufacturing operations closer to your customers. Companies are reviewing their supplier diversification strategies; they're increasing inventory levels, or perhaps reducing them if they are able to develop local suppliers. They are increasing the number of locations where some of the critical products are manufactured—and a few companies are, in fact, considering reshoring.

Obviously, with all the supply changes, we need to take into consideration the total cost of making these changes, which includes taxation. This is where transfer pricing solutions can help drive more value from supply chain changes. So be it a change in your procurement strategy or increasing operations at any particular location, tax and transfer pricing planning will help achieve a more efficient business outcome.

Emma: That's a great point. So touching back on those trade wars, and also tax planning, what are we seeing in the U.S. now under the Biden administration?

Shruti: The administration is focused on reinvigorating U.S. manufacturing, and it's taking many steps to build back better. At the same time, the government is also concerned about the tax base eroding as far as multinational companies are concerned. Through Biden’s tax proposals, it's targeting overseas profits owned by multinational companies to fund these infrastructure and manufacturing initiatives—for example, increasing the GILTI (global intangible low-taxed income) base, repealing some of the FDII (foreign-derived intangible income) incentives, and things like that. These are proposals only, and given all the political discussions and negotiations and the resistance to increases in tax rates, we need to see how the final proposals take shape. It's clear we need manufacturing and infrastructure investments, but how we finance these investments is where tax policy and discussions will be taking center stage in Washington. So it's wait and watch.

Emma: So that's what we're seeing in the U.S. What are we seeing on a global scale? Is there any talk coming out of the OECD?

Shruti: I think there are a couple of interesting things happening on the OECD or global level. Companies have recently been reducing their international tax bills, legitimately, by taking advantage of differences in tax rules in each country, using transfer pricing solutions to come up with tax-effective supply chain structures, and a host of other legitimate solutions. Given post-pandemic recovery, governments are looking for more revenue to finance their stimulus policies and the economic recoveries. Countries are actually coming together instead of competing with each other, to try to plug these international tax loopholes. One of the ways is a global minimum tax. As the name suggests, it's a minimum tax that the company pays irrespective of which country they are operating in.

The plan is to see some concrete proposals by fall, but we'll need to see, because these are global discussions. You need the buy-in of 139 countries. It's obviously going to take time, and these are not easy discussions. The important thing is also how these OECD discussions will impact the domestic U.S. tax proposals. So, most definitely, companies need to keep an eye on these proposals and also be proactive by modeling out scenarios on how these various proposals interplay, will impact the existing supply chains, and also any potential enhancements to their supply chains.

Emma: It sounds like there's a lot on the horizon, and we'll have to just stay apprised of any new developments going forward. Thank you for your time today. I look forward to catching up with you again, once we have an update on some of these proposals.