ADVOCACY: EY: The inflection point of supply chain, sustainability and tax: what does business need from government?
G7 Summit

ADVOCACY: EY: The inflection point of supply chain, sustainability and tax: what does business need from government?

The G7 is working hard to tackle a host of global issues ranging from geopolitical upheaval to climate change. As businesses respond to the new taxes and trade regulations designed to help meet the challenges, they are transforming their supply chains in ways that support global goals while managing and leveraging the new policies and tax implications. Their one big ask of governments: reassurance that they will provide clear enough guidance so that success is everyone’s to share

The G7 is setting multiple goals and policies to deal with a variety of issues including global trade disruption, geopolitical upheaval and climate change challenges. Businesses tasked with compliance and implementation of policies designed to meet these goals face substantial pressure to transform supply chains in response.

Both governments and businesses need to understand each other’s goals and perspectives if these policies are to succeed. This is particularly true when evaluating the interaction of supply chains, sustainability and tax. 

Supply chain models in the new era of geopolitics

The complex distribution of power globally is a defining feature of today’s geopolitical environment, and it has profoundly changed the landscape for global investment, technology transfer and trade. Blocs involving North America, the European Union and China are transforming global supply chains into more regionalised systems. 

Wars and renewed superpower rivalries are also driving change, as seen in the recent upheaval in global sea-lane traffic that challenges the stability of markets and economies.

At a macro level, government policies affecting investment in supply chains are usually influenced by various interconnected public policy goals, including: 

  • Managing national security by enabling a stable local supply of vital goods, for example steel, active pharmaceutical ingredients and semiconductors
  • Fostering domestic resilience with nearshore and friendly-shore supplies of critical goods in case of globalised supply chain disruption 
  • Increasing employment through onshoring 
  • Addressing environmental concerns by using fiscal and tax policy to support green industries and circular business models, and to reduce disposal and transportation waste. 

Environmental concerns – and efforts to address them – have been the focus of the most active policymaking initiatives, but all these goals are likely to have a major influence on future supply chains.  

Sustainability and tax 

A surge of fiscal initiatives supporting the United Nations Paris Agreement’s global goal of net-zero emissions by 2050 is prompting companies to take action and play a meaningful role. Businesses are considering how to balance the new fiscal subsidies and incentives with the new liabilities from indirect tax, tariffs and customs. Clear government policy related to these “carrots and sticks” is vital to helping businesses advance social responsibility and meet commercial targets. 

The EU’s Carbon Border Adjustment Mechanism (CBAM), the new Corporate Sustainability Due Diligence Directive (CS3D) and the Indo-Pacific Framework for Prosperity (IPEF) supply chain agreement are prominent regional examples of clear policy. The EY Green Tax Tracker cites more than 2,000 taxes and levies and 1,000 incentives that support sustainability. And these will all have implications for business decisions about supply chains, product configuration, sourcing and manufacturing. 

CBAM, for example, will have profound implications for supply chains in carbon intensive industries. Specifically, new import fees could impel companies to shift manufacturing in industries such as cement, steel and paper into EU members or to other “green” nations. 

In addition, governments are asking businesses to monitor their supply chains so that they can recycle, reuse and repurpose products. This circular business model can only be delivered with a supply chain strategy that brings products back at the end of their lifespan to recycle or re-manufacture, eliminating waste and avoiding costly surcharges. Some EU countries are introducing minimum levels of recycled content in, for example, consumer electronics. Meanwhile, the garment industry, supported by incentives, is investing in biodegradable fabrics and alternative source material to boost circularity.

Global guidelines from the World Trade Organization, International Monetary Fund, Organisation for Economic Co-operation and Development and UN are meant to build business confidence in government support, fostering freer and more open investment and trade, in the hope that countries enact statutes and regulations consistent with these rules. 

Transparency is a result of clearly defined laws, regulations and enforcement procedures. CBAM as well as the US CHIPS and Science Act, Inflation Reduction Act and the EU Industrial Plan are examples of initiatives that build corporate confidence. 

Tax reforms such as the OECD’s Global Minimum Tax, by contrast, add more complexity to designing supply chain strategies and capital allocation options. And if tax were to become a sustainability topic under the EU’s Corporate Sustainability Reporting Directive, it would likely demand even greater transparency in terms of reporting obligations that companies face. 

The flurry of sustainability regulation and associated costs make foreign direct investment decisions more complex. Businesses undertaking this kind of transformation need confidence in policies, particularly when they’re working across borders. They need governmental reassurance in five significant areas: 

  • Rule of law: protection of corporate investments, especially against the expropriation of property
  • Regulation: clarity and transparency with administrative remedies in case of disputes
  • Foreign exchange: stable foreign exchange and cash repatriation regimes for financial, operational and tax considerations
  • Trade: relative openness to imports and exports via free trade agreements  
  • Tax: income tax rates and double tax treaties

There is also a growing need for business and governments to have better data and analytics. 

Data has become the fundamental ingredient for improving tax collection and audit systems; enhancing corporate compliance and efficiency; and informing complex decisions, both public and private. 

There have been significant developments in expanding data useability. Businesses are, for example, investing in developing advanced technologies, including generative AI, to manage supply chains and increasingly complex tax, customs and regulatory reporting requirements. 

But there is a need for further advances. Governments already use artificial intelligence for multiple purposes, including tracking trade flows, monitoring tax compliance, ensuring national security and conducting scenario analyses for a myriad of issues. AI progress in other areas such as weather, infrastructure, transportation, the power grid, and natural resources could help companies to modify supply chain footprints to drive efficiencies in planning, sourcing, making and moving goods.  

A mutual focus by governments, NGOs and private corporations on innovating through AI can enhance the efficiency of compliance while underpinning the power, agility and skill that comprise success in today’s working world.  

Emerging supply chain regulations rely on end-to-end supply chain visibility. But most companies struggle to capture, process and report necessary data, especially externally. 

As businesses work to support these initiatives and progress towards sustainability goals, governments must set them up for success by affirming the rule of law, reinforcing transparency, protecting foreign direct investment and using taxes and incentives in a balanced way to support supply chain transformations. Only then can there be confidence in efforts to accelerate the world’s sustainable supply chains.       

The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organisation or its member firms.