Supply and value chains, especially those in the healthcare sector, were some of the most immediately affected business areas as the coronavirus pandemic spread throughout the globe.
In the second webinar in its Taxing Times series, specialist African transfer pricing advisory Graphene Economics invited a panel of experts to discuss the impact of Covid-19 on supply and value chains, and the ripple effects thereof.
This discussion included identifying weaknesses in supply chains exposed by the pandemic, examining possible solutions, and looking at the knock-on effects likely to be seen in policy shifts, particularly on the tax front.
Local legs of supply chain under scrutiny
Joining Michael Hewson, Director of Graphene Economics who facilitated the webinar, Bonface Fundafunda, an independent consultant with experience of working in health policy, planning, strategy, operational systems and business development, currently working with the Africa Resource Centre, explained that supply chains in Africa were affected as African countries enforced lockdown measures.
Even when goods were being allowed into countries, logistics companies were facing shutdowns, which meant that the local legs of the supply chain were often facing bigger challenges than the international ones.
MJ Schoemaker, director of ProscE2E and a director of SAPICS, notes that the challenges experienced were similar around the world, but in countries where local supply chain infrastructure was already difficult or underdeveloped, these problems were more apparent.
“Many countries have already started to look at relocating their supply chains to localise them or to tap into regional supply chains,” Fundafunda says. He says this is a form of protectionism that will in turn affect tariffs levied, as well as VAT and GST as policy around rules of origin adapt.
Hewson says that while it was a drive to minimise cost that saw pre-pandemic supply chains develop the way they did, some countries are now taking the view that security of supply trumps cost. This will likely result in higher production costs being passed on to consumers.
Implications for revenue collections
Duane Newman, joint-MD at Cova Advisory, says there are short-term and long-term implications for tax revenue. Many governments around the world have been trying to assist businesses to survive by offering tax deferrals.
Unlike a tax exemption, which means no payment needs to be made, deferrals mean businesses still need to pay their tax at some later point. In the longer term, however, Newman says the priority will be to stimulate economies. He foresees short-term pro-growth interventions, such as tax incentives.
“I think a lot of countries will be looking to make their policies more pro-growth, but also more inclusive,” he remarks. “Bear in mind that for developed economies, tax revenue collections from trade is around 1% of total tax collection, whereas for developing economies, it’s an average of about 10%.”
This disparity may result in emerging economy countries increasing protectionist measures, including customs duties.
Mzukisi Qobo, head: Wits School of Governance and member of the Presidential Economic Advisory Council, added that these sorts of policy shifts will be rationalised as helping to build local supply chains and industries. He foresees arguments being made for infant industry protection, specifically with regards to PPE and medical supplies.
“I think governments need to think more strategically and carefully about the kind of industries they want to promote as new sources of growth, such as your green industry, and digital industry infrastructure linking to socioeconomic development,” he notes. “And they need to overlay this with tax and other incentives to promote growth, because relying on the old sectors is not going to help economies to recover from the ravages of Covid-19.”
Developing supply chain solutions
The panel of speakers made various recommendations, including:
* Implement robust business health checks: Schoemaker suggested assessing business processes across all pillars of an organisation, rather than within silos, and developing a business continuity plan, to be reviewed on a regular basis.
* Reassess existing supply and value chains: Fundafunda said key questions to ask are “Why is this supply chain set up this way?” and “Is this still serving us well?” He added that both government and private sector players need to re-look each part of the chain and question the status quo.
* Seek partnership: Fundafunda emphasised the need to partner in building effect supply and value chains, while Qobo suggested there’s a missed opportunity by African countries on the African Continental Free Trade Agreement front. “This is the time in which they should be accelerating implementation, and out of the 54 countries that have signed I think only 28 have ratified the agreement. Only 18 or less have actually presented their tariff offers and this does not augur well for accelerated integration,” he says.
* Be prepared to defend decisions taken now later: While businesses need to prioritise cash-flow now, it’s important that they document decisions taken in preparation for tax audits later on.
* Use data and digitisation more effectively: Data allows for transparency in the supply chain system, which can drive optimisation. Newman noted that as digitisation increases, however, taxation policies will also adapt (for example, when France moved to implement 3% digital tax on US-based digital companies, the US responded by increasing tariffs on French products). This will in turn impact how supply chains are set up. Governments need to think carefully and to work with business to develop pro-growth policies that factor in digitisation.