[Opinion] Is Supply Chain Management a mere Commercial Issue?

Ameet Baid, Roshni Chaurasia & Chirag Rajput – [2025] 181 taxmann.com 582 (Article)

1. Introduction

In today’s highly competitive global marketplace, every enterprise strives to minimise costs and gain a strategic edge over competition. To achieve this, enterprises tend to focus more on operational factors of a supply chain such as transportation, inventory and logistics processes while overlooking the broader strategic aspects that can create long term values. For example, Apple assigning manufacturing of its iPhones to entities in other jurisdictions which can offer reduced costs and technical capabilities along with economies of scale. However, an important question arises; is operational optimisation alone sufficient to secure sustainable competitive advantage?

This is where a deeper, more holistic view of supply chain management becomes crucial. The synergy between operational strategies and tax is immensely vital and this is where Tax Efficient Supply Chain Management (TESCM) becomes significant. It focuses on the optimisation of taxes via allocating business activities/functions among different entities based in different countries. Having said that, at the same time it’s important to keep TESCM out of tax evasion.

This article explores how TESCM can be carved within the legal framework, following Organisation for Economic Co-operation and Development (OECD)/Base Erosion and Profit Shifting (BEPS) guidelines to ensure that profit allocations and tax payments are transparent and supported by economic substance.

2. Traditional Supply Chain Model

• Traditional supply chain model focuses on function specific risks and rewards.
• For instance, a manufacturing entity, A Co., produces goods and sell them to distributors, who distribute/sells these products to customers across various markets. The risks associated with the same are also highlighted below.
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3. Implications

Under the traditional supply chain model, each legal entity within the chain assumes risk associated with its respective functions, and the profits generated by them are taxed according to the rules of its respective jurisdiction. Since tax rates and regulations differ widely between jurisdictions, this often results in a substantial cumulative tax burden for the main/manufacturing company, and to mitigate this cumulative tax burden, TESCM framework becomes particularly relevant.

4. TESCM – In Brief

• TESCM considers tax as an integral part of the overall supply chain processes to optimise global effective rate of tax of an enterprise. The fundamental concept of TESCM is to establish a Principal Company (P Co.) in a low taxed jurisdiction and transfer appropriate amount of functions, assets and risk to such low taxed jurisdiction to justify the allocation of taxable profit and thus get benefit of lower tax rate of that respective jurisdiction.
• P Co. should be allocated more management control and business risks to be entitled to entrepreneurial profits while other operating companies perform limited functions with limited risks, receiving a relatively low profit share. Hence, the structure and allocation of value-adding functions and commercial risks between P Co. and other operating companies are critical in designing a tax-optimal model.
• By carefully designing supply chain frameworks, companies can save tax outflows. This enables enterprises to reduce their global tax liabilities. TESCM, thus plays a crucial role in improving an organisation’s competitive edge and maximising value creation across its global operations.

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