In today’s global marketplace, building a supply chain that is both efficient and compliant is more complex than ever. Supply chains incur a wide range of costs from sourcing, manufacturing, transportation, and logistics, alongside direct and indirect taxes, and trade-related fees. Global supply chains face even greater financial intricacies, including transfer pricing challenges, tax credits, and Free Trade Agreement rules. Additionally, meeting the growing number of compliance requirements around export controls, sanctions, and ESG due diligence can add both financial and operational strain, causing delays and contributing to overall costs. A well-structured supply chain not only optimizes operational efficiency but also ensures adherence to complex regulatory frameworks governing tax laws, export controls, and environmental standards. Achieving this balance requires a holistic approach that integrates compliance into every aspect of supply chain management rather than treating it as an afterthought.

This article is written by Tim Verspeek ([email protected]) and Sefa Geçikli ([email protected]). Tim and Sefa are part of RSM Netherlands Business Consulting Services with a specific focus on International Trade and Supply Chain Management. 

Identifying Areas of Inefficiency and Non-Compliance

The relationships between various costs across the supply chain are often complex and not always fully understood across the organization, especially when decisions about global supply are made without a centralized approach. Additionally, when compliance is handled in a disorganized, ad-hoc manner and isn’t seamlessly integrated into the core business processes, the risk of non-compliance increases significantly. For example, procurement may prioritize securing the lowest prices from suppliers without factoring in potential compliance costs or long-term risks like export controls or sanctions. Meanwhile, logistics may focus on optimizing transportation without considering the tax implications of cross-border movement or how delays impact other departments. Legal and compliance departments may work reactively, addressing issues as they arise rather than embedding a proactive, integrated compliance framework into daily operations. This fragmentated approach can prevent teams from seeing the bigger picture of how costs, compliance, and efficiency are interconnected across the supply chain, leading to missed opportunities for optimization and increased risks of non-compliance. Therefore, entities should adopt a holistic approach for an efficient and compliant supply chain by considering different factors all together:

Tax Considerations

As businesses structure their global supply chain, tax compliance plays an important role in achieving and maintaining efficiency and sustainability of the business practices. Businesses must navigate a variety of tax rules across different jurisdictions, ensuring that they align with both international standards and local regulations. 

For internationally structured companies, transfer pricing -the pricing of goods, services, or intellectual property exchanged between related entities across borders- plays a crucial role in cost allocation and tax efficiency. However, when different departments focus solely on their own objectives without considering the broader implications, transfer pricing can become a source of inefficiency and compliance risk. For instance, in a global manufacturing company, Company X, the procurement team in a low-tax jurisdiction, Country A, focuses solely on securing the lowest price for raw materials from an external supplier in Country C, neglecting to consider transfer pricing implications. After obtaining a significant discount, they sell the materials to their manufacturing subsidiary in a high-tax jurisdiction, Country B, at a price well below market value. This oversight results in inadequate transfer pricing documentation, leading to increased tax liabilities when tax authorities in Country B challenge the pricing.

Another area to consider is corporate tax implications. In the European Union, directives such as the Anti-Tax Avoidance Directive (ATAD) play a crucial role in shaping tax compliance within multinationals by establishing a comprehensive framework designed to combat tax avoidance. These frameworks not only aim to prevent profit shifting to low-tax jurisdictions but also encourage companies to demonstrate substantial economic activity in the countries where they operate, thereby fostering a more equitable tax environment. By measures such as substance requirements, businesses are mandated to maintain a genuine economic presence in jurisdictions to qualify for tax benefits. The disregarded nature of certain low-tax countries -where profits might be subject to higher taxation in the parent company’s jurisdiction due to Controlled Foreign Company (CFC) rules- can result in unexpected tax costs. This means that profits earned in these jurisdictions could be taxed again upon repatriation, effectively negating the benefits of the lower tax rates that initially attracted companies to those locations.

Lastly, businesses should consider the compliance requirements regarding VAT. Understanding the implications of VAT and customs duties is essential for minimizing operational costs, as companies must navigate the complexities of recoverable versus non-recoverable VAT scenarios. For instance, a manufacturer importing components from a non-EU country may face substantial import VAT. If the import process is structured incorrectly, the company could end up with non-recoverable VAT costs. To mitigate this risk, businesses should ensure that all import documentation is complete, including proper invoicing and declarations, to maximize their VAT recovery. 

Export Control and Sanctions Considerations

As businesses expand globally, understanding export control and sanctions compliance is crucial for navigating the complexities of international trade. Many companies, especially those not directly involved in military items, often overlook the implications of these regulations. While businesses that supply military entities are typically more aware, those dealing with dual-use items—products with both civilian and military applications—may lack sufficient understanding, which can lead to regulatory risks, including hefty fines, legal penalties, and reputational damage.

Export controls, such as the EU Dual-Use Regulation and U.S. Export Administration Regulations (EAR), govern the transfer of goods and technologies across borders, requiring licenses for controlled items. The regulatory landscape is constantly evolving, particularly in response to geopolitical tensions. Recent U.S. reviews have scrutinized supply chains in sectors like defence, ICT, and energy, while the EU's focus has shifted toward semiconductors.

In addition to export controls, companies must be aware of sanctions, which restrict trade with specific countries, entities, or individuals for political or security reasons. Recent geopolitical events, such as Russia’s invasion of Ukraine and China’s strained trade relations, have underscored the growing importance of sanctions in supply chain management. Sanctions can range from targeting individuals to imposing country-wide embargoes, and often operate under strict liability—meaning companies are liable for violations regardless of intent. Beyond procurement, businesses must also conduct due diligence on customers and end users to avoid compliance risks and potential disruptions to their supply chains.

If not planned beforehand, these export control and sanctions obligations can significantly impact supply chain efficiency, particularly in terms of sourcing, procurement, and distribution. For instance, when companies source components or raw materials from countries subject to export restrictions, they may face unexpected delays due to the need to find alternative suppliers. This can increase lead times and complicate procurement processes. Additionally, sanctions may limit the markets where businesses can sell their goods, requiring more thorough due diligence on customers and end users to ensure compliance. The administrative burden of managing these controls -through documentation, record-keeping, and audits- can slow down operations, leading to inefficiencies and higher costs

ESG Supply Chain Requirements

As sustainability becomes a central focus in today's business landscape, organizations must integrate Environmental, Social, and Governance (ESG) considerations into their supply chains. These evolving requirements often bring significant upfront costs, particularly due to the lack of a standardized approach across different regions. Governments worldwide are implementing increasingly stringent ESG regulations, driven by a growing commitment to ethical and sustainable trade practices.

Several countries, including Canada and the U.S., have introduced laws aimed at preventing the import of goods produced with forced or child labor. The EU is following suit with the upcoming Forced Labour Regulation, further tightening the compliance landscape for companies doing business with or within the EU. Moreover, The EU’s ESG regulations place companies under heightened scrutiny to ensure their supply chains meet sustainability and compliance standards. For instance, the EU Deforestation Regulation targets commodity-based supply chains, requiring companies to trace the origins of high-risk products like wood and cattle to ensure they are not contributing to deforestation, with mandatory due diligence reports to authorities. The Carbon Border Adjustment Mechanism (CBAM) focuses on the carbon emissions of imported goods, such as steel and cement, obliging importers to document their carbon footprints, with full compliance and reporting set to become mandatory by 2024. Similarly, the Conflict Minerals Regulation requires companies to conduct audits and risk assessments across their supply chains to prevent the trade of minerals like tin, tungsten, and gold from funding conflicts. This regulation also includes an obligation for public reporting on due diligence efforts. Finally, the forthcoming Corporate Sustainability Due Diligence Directive (CSDDD) will compel businesses to assess human rights and environmental risks, incorporating sustainable practices throughout their operations and value chains. Companies will need to regularly report on their due diligence practices and issue annual statements outlining their actions. 

Incorporating stringent ESG regulations like the EU’s Deforestation Regulation and the Carbon Border Adjustment Mechanism (CBAM) can create specific efficiency challenges for supply chains. For instance, sourcing from compliant suppliers to meet deforestation standards often means switching to more expensive or less readily available materials, increasing procurement lead times. Similarly, the need to track and document the carbon intensity of imports under CBAM can slow down processes, requiring companies to implement new reporting systems and supply chain audits. Additionally, if suppliers are found non-compliant, businesses may face immediate disruptions, needing to find alternatives at short notice, which can delay production and delivery schedules. These changes, along with the administrative burden of ongoing due diligence and regulatory reporting, can result in higher costs and slower operations, affecting overall supply chain efficiency.

Forward Thinking

To navigate the increasingly complex landscape of global trade and compliance, companies must adopt a centralized and holistic approach that integrates all aspects of supply chain management—cost efficiency, tax considerations, export controls, sanctions, and ESG requirements. Instead of operating in departmental silos, where procurement, logistics, tax, and compliance teams each focus on their own objectives, a coordinated strategy can provide a clearer view of the broader impacts on both efficiency and compliance.
For instance, rather than procurement focusing solely on cost savings, a unified approach would ensure that decisions also account for transfer pricing implications, export control licenses, and ESG standards. This proactive, integrated framework would allow companies to identify potential inefficiencies and risks earlier in the process, avoiding costly last-minute changes or compliance failures. By aligning objectives across departments and fostering greater collaboration, businesses can streamline their supply chains, reduce administrative burdens, and ensure that compliance with regulations is embedded into day-to-day operations. Ultimately, this approach can enhance both cost-effectiveness and regulatory adherence, positioning the company to navigate future challenges more effectively.

RSM is a thought leader in the field of International Trade and Supply Chain consulting. We offer frequent insights through training and sharing of thought leadership based on a detailed knowledge of industry developments and practical applications in working with our customers. If you want to know more, please contact one of our consultants.