Scientific ship passing an iceberg

How disruption is shaping opportunities for global trade

EY
EY Global

Ernst & Young Global Ltd.

Contributors

9 minute read 19 Jun 2023
Related topics
Tax
Tax compliance

In the face of continued geopolitical uncertainty, indirect tax and trade functions have an opportunity to show their real value.

In brief

  • There are different ways indirect tax leaders can help facilitate trade and reduce disruption in their organizations.
  • Indirect tax and trade functions should be taking key actions to show value in times of cost pressure.

There has never been a better opportunity for indirect tax leaders to add value to their organizations. They can affect change and achieve results by using their skills, building relationships internally and employing innovative tech.

They must also consider the bigger picture and how the overarching global trends of global trade, transformation and sustainability shape the indirect tax function. This is the third of a four part series of articles that dive deep into each trend to help leaders frame the indirect tax discussion within their business, navigate the challenges and grasp the opportunities.

Indirect taxes are inextricably linked to supply chain activities and global trade. Changes in the ways companies do business have a profound impact on these taxes. Equally, changes in these taxes may have a profound effect on companies' supply chains. They influence where activities are carried out, the cost of finished products, delivery routes, and timing.

In the year ahead, Jeroen Scholten, EY Global Trade Leader, believes that "trade disruption, customs valuation, transfer pricing and the interplay between trade policy and the Environmental, social and governance (ESG) agenda will continue to influence the trade policies of governments and the trade strategies of corporations in 2023 and beyond. In particular, new environmental taxes and initiatives will become even more important in the near future. Globally we are seeing a growing emphasis on measures to promote ethical trade. In the US, measures aimed at promoting near-shoring and decarbonization continue. In Europe, new environmental taxes and measures are expected to come into effect or be clarified, including a new plastic tax in Spain, the EU Carbon Border Adjustment Mechanism (CBAM) and deforestation regulation. These developments are leading to a reset of many global supply chains and more complexity for trade functions, including a greater demand for accurate data."

How EY can Help

Trade uncertainty to continue

A clear theme of the past year has been trading disruption. The war in Ukraine has contributed significantly to the levels of disruption, but it has not been the only factor. Trade disputes, new trade agreements and alliances, a rapidly changing regulatory environment and the ongoing effects of the COVID-19 pandemic have all contributed to creating high levels of trade uncertainty. These factors create new challenges and opportunities for companies worldwide, elevate trade and supply chain issues to the boardroom, and put the trade function in the spotlight as never before.

Trade can significantly impact global indirect tax policy in several ways. That can be done through trade liberalization; as countries open their borders to trade, they often reduce tariffs and other indirect taxes on imported goods. It can reduce indirect tax revenues for the importing country, increase economic efficiency and stimulate economic growth. Trade disputes, such as the trade dispute between the United States (US) and China, can significantly impact global indirect tax policy. When the US imposed tariffs on imported goods from China, it had a ripple effect on international indirect tax policy, as other countries responded with their own tariffs on imported goods.

Trade continues to be hindered by an increase in geopolitical instability and the ongoing war in Ukraine, widening export controls and sanctions, and increasing the focus on compliance among the US, UK and European Union. The expanded scope of sanctions to the professional services sector and IT-related services means that more companies must be aware of these regulations when working with their clients. Governments across the world are increasing sanctions and trade protection measures. In the US, for example, it is expected that the government will continue to focus on the series of significant updates to the Export Administration Regulations¹ it made in 2022 focused on export controls around semiconductors, integrated circuits, related manufacturing equipment, advanced computing and supercomputers.

This year, supply chain pressure is expected to ease somewhat. Shipping prices and other critical supply chain indicators have started to alleviate. However, a combination of US-China decoupling, governmental incentives for onshoring and regulatory requirements for companies to have greater visibility over their supply chains will mean continued broad shifts in procurement and sourcing decisions made by companies.

"We've seen a significant shift in models, whether because of the war in Ukraine or post-pandemic realignment of supply chains. From just-in-time to just-in-case supply chains, much work is going into that. If you adjust your supply chains, that significantly impacts your indirect tax accounting, both from a compliance and a cash flow perspective. Disrupted supply chains are also adding to costs," says Kevin MacAuley, EY Global Indirect Tax Leader.

Long-term trends and short-term shocks

There are two separate trends for trade happening at the moment, according to Sally Jones, UK Trade Strategy and Brexit Leader, Ernst & Young LLP. The crisis, such as COVID-19 and the war in Ukraine, that are creating relatively short, sharp shocks to the trading system but from which the trading system responds and recovers quite quickly. The second trend is a much more long-term, sustained change from a world in which the global consensus was one of reducing trade barriers. And that trend of lowering trade barriers started after World War II and continued for seven or eight decades. But it has now reversed.

Since the global financial crisis of 2008, there have been five times more protectionist measures introduced than liberalizing measures.

Sally Jones

UK Trade Strategy and Brexit Leader, Ernst & Young LLP

"Since the global financial crisis of 2008, there have been five times more protectionist measures introduced than liberalizing measures. And that trend of raising trade barriers and protectionism is showing no signs of slowing at all," says Jones. “The Buy America campaign, Brexit, the ongoing trade wars around steel and China's increasing isolationism compared with the rest of the global economy. All of this means it is getting increasingly difficult for international businesses.”

"Within that, there are three subsets: intangibles and intellectual property, digitalization and technology's role in transforming trade, and sustainability and the environment. There are sustainability impacts on trade or vice versa in a handful of different ways. We increasingly see measures introduced that intend to manage environmental risk but, nevertheless, impact trade."

How EY can Help

Drive the data strategy
 

One way indirect tax leaders can help facilitate trade and reduce trade disruption is by focusing on data strategy. Data can improve the efficiency of customs processes and reduce bottlenecks at ports of entry. It can also enhance the transparency and predictability of trade policies and regulations. By making trade-related data and information more readily available, governments can help businesses understand the rules and requirements for exporting and importing goods, which can reduce the risk of trade disputes and disruptions. It can increase the traceability of goods, reduce the risk of counterfeiting and smuggling, and forecast and plan global supply chains. For example, by analyzing data on global trade trends and patterns, businesses can identify potential risks and disruptions and take steps to manage them.
 

Data management is becoming increasingly important as companies struggle to balance the abundance of data they have with the need for accurate and effective analysis. The problem is compounded by the fact that many countries and government organizations have access to vast amounts of data that can be used to make tax assessments or other decisions that impact businesses. To manage this effectively, companies need to be proactive in their data management.
 

"For trade functions, analytics have been a challenge due to the overwhelming amount of data, making it difficult to extract meaningful insights," says Michael Heldebrand, Americas and US Global Trade Leader, Ernst & Young LLP. "Instead of simply using analytics to measure compliance metrics, the industry needs to shift towards a more predictive approach." This means using data analytics to identify patterns and trends in real-time, rather than reacting to issues after they have already occurred. By changing their mindset and embracing a more proactive approach to data analytics, trade functions can improve risk management and make more informed business decisions.
 

Now is the time for trade to show its value
 

In times of cost pressure, the trade function has an opportunity to show its value as a critical contributor to the company's success, rather than just a cost center, says Lynlee Brown, Global Trade Partner, Ernst & Young LLP. This can be achieved by pursuing duty-saving and duty-mitigating opportunities and presenting them to the C-suite. It's important to highlight the flexibility of trade functions, as they were instrumental in planning and strategizing for the last few years and are now equally important in cost-saving activities. From a personal perspective, those working in the export space are seeing VP-level promotions, leading to increased job satisfaction. These opportunities present a chance for trade functions to shine and showcase their contributions to the company's bottom line.

In times of cost pressure, the trade function has an opportunity to show its value as a critical contributor to the company's success, rather than just a cost center.

Lynlee Brown

Global Trade Partner, Ernst & Young LLP

"The opportunity is to capitalize on the increased visibility of the trade function, which was once the organization's best-kept secret. The focus now is on building the brand and shifting away from being seen as a cost center. The challenge is securing funding, but the trade group's willingness to be flexible and find solutions is key," adds Brown.

A critical way of showing value for trade remains agility. It previously presented a challenge for trade functions. In the past, trade functions often had a negative reputation due to their insistence on compliance, which led to being left out of supply chain discussions. However, the introduction of new initiatives has elevated the role of trade in many organizations and encouraged more thoughtful discussions on how to create adaptive supply chains.

Automate and outsource

Heldebrand highlights the potential impact of enterprise resource planning (ERP) systems moving to the cloud in the near future. That could lead to businesses focusing on finding ways to leverage this shift towards the cloud to benefit their trade programs. While some companies initially thought they needed to outsource the entire trade function, it has become clear that discrete activities can be effectively outsourced. This allows for increased flexibility and allows a core group of employees to focus on driving value for the company. Some necessary activities within trade, such as classification eligibility for trade zones, can still be outsourced to achieve savings and benefits.

Key actions for indirect tax and trade functions in the face of geopolitical uncertainty:

  • Drive out unnecessary duty costs.
  • Concentrate on cash flow.
  • Identify tax incentives and cash grants for green investments.
  • Deliver cost-efficient tax processes.
  • Use data analytics to compare the indirect tax costs and opportunities from new supply chains.
  • Stay agile.
  • Show the true value of the trade function, especially in times of cost pressure.

Summary

The global outlook is continuing to disrupt trade and supply chains. Indirect tax leaders must have the right strategy in place while remaining agile to navigate the challenges and grasping opportunities in a world of change.

Explore the Indirect tax trends series

    EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients.