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Tax considerations for supply chain restructuring in the wake of COVID-19

Tanva Mahitivanichcha Tanva Mahitivanichcha

In the midst of lockdowns and government orders to halt non-essential businesses, companies around the globe are struggling to restructure their operations and supply chain to ensure some measure of continuity. While the Thai government has not suspended manufacturing activities, many factories have been forced to revise their operations due to economic and health constraints.

With retail outlets closed and consumers increasingly wary of spending amid an economic crisis, the sudden and steep drop in demand has led some manufacturers to suspend or reduce production. Even businesses operating in markets with inelastic demands – for example, producers of cleaning products and foodstuffs – are adversely affected by supply chain disruptions. Reduced working hours, logistics bottlenecks, and a scarcity of raw materials have wreaked havoc on both production and distribution.

In spite of these challenges, many manufacturers have promptly restructured their operations and supply chain to maintain business continuity. Inventory and materials may be re-routed from shuttered locations to plants still in operation; cost cutting measures can be implemented to reduce supply chain costs; and reshuffling and reduction of personnel could put in effect a leaner, more flexible workforce. Subsidies or soft loans may also be provided from a parent company to an ailing subsidiary.

While such measures are often necessary, they can create a host of tax planning issues in their wake. Inter-company transactions that had been carefully designed to comply with transfer pricing requirements are, in many cases, now being discarded. Supply chain structures, painstakingly assembled and refined for tariff and tax efficiencies, may be suddenly altered to meet existential necessities. When some semblance of normalcy returns, businesses will need to consider how these supply chain and operational changes have fundamentally altered their tax compliance footprints.

For instance, 2020 is the first year that Thai companies must report related party transactions to the Revenue Department under the new transfer pricing regulations. Businesses that altered their inter-company transactions during the course of the pandemic must review how their new structure aligns with transfer pricing requirements going forward. Re-routing inventory and changing transaction models will inadvertently alter pricing structures, and raise customs valuation inquiries in the future. These and other tax planning issues must be revisited and vetted at some point in time.

While tax considerations are not likely to be at the forefront of management consideration at this time, businesses must nevertheless take them into account and consider how to properly structure these supply chain revisions for the future.