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Taxing times for Contract Managers

May 27, 2014

High-performing contract and commercial experts have always grasped the importance of understanding taxes. A smart approach to issues such as delivery or country of origin can have a substantial impact on price or profitability. But the stakes are about to get higher, if we believe a report by tax experts at Ernst & Young.

‘The Future of Tax’ is an excellent publication that outlines the E&Y view of trends in global taxation – and I think their predictions are right. At least five of the major trends have significant impact on contracting and should be influencing contract development and negotiation of any long-term agreement (i.e. exceeding 1 – 2 years). And they are unquestionably correct to say that Governments worldwide are focused on taxation issues and this will result in a multitude of changes over the next few years.

The five areas that have an obvious impact are:

  • Legislation: more of it, form more places, as Governments seek to address the issues created by a global economy
  • Transparency: greater disclosure, internal and external, including in key areas such as transfer pricing, governance and risk management
  • Big data: improved analysis and scenario planning to inform commercial decisions
  • Tax competition: as nations compete for business, where to position sources of production, supply, integration and jurisdiction
  • Conflicting interests: weighing and reconciling the perspectives of key stakeholders to balance opportunity with potential loss

This scale of change means that contracts must be drafted in ways that enable flexibility and that contract management will involve more active monitoring of shifts in policy or practice. For example, the country where supply or delivery occurs may need to alter. The assumptions on transfer pricing may change. The reputation impact on past decisions may mean they are no longer sustainable.

In addition to this need for flexibility and monitoring, such a volatile and sensitive issue raises the question of the contracts and commercial professional’s role in making judgments on ethics or fairness. As social and political expectations shift and transparency grows,  getting this right (or wrong) may result in significant reputational impact. And the issue is not confined to supplies since taxes represent a significant proportion of the purchase price. But against the wish to buy at the cheapest price, the buyer will need to be increasingly alert to the taxation ethics of their suppliers and the possibility for adverse publicity flowing from their relationship.

Overall, the subject of tax will be high on the commercial and contracts agenda for the foreseeable future and is an area in which professionals had better increase their awareness and understanding.

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