Tax and duty

Taxes and duties are generally used to model costs incurred during sales transactions (based on profitability) or when products are moved across borders or between legal affiliates (based on product valuation). You can address business problems such as:

• Reviewing tax implications within a fixed network structure.
• Understanding total sourcing cost with tax and duty considerations.
• Identifying opportunities for product postponement based on final production locations.
• Examining effects of network sourcing to take advantage of tax regulations such as duty free and free trade zones.

Supply Chain Guru X enables you to model taxes and duties in two distinct ways:

• Lane-based - In this case, you define the tax rate for a product on a specific lane in a given period. The lane is defined by source and destination locations, or by tax regions. Both refundable and non-refundable tax bases and percentages can be defined. You can use this approach when the locations affecting the tax rate are directly on the lane, or when taxes vary by period. This approach also enables you to layer multiple taxes on lanes.
• Path-based - The duty rate is determined based on the tax region for the start and/or end of the full path of the product. You define the lane(s) to which duty is applied. Use this approach when the duty rate is dependent on a node other than the current lane you have defined. Solve times may increase when using path-based duty rates.

Both support overrides for the product value by which the tax or duty is calculated.

In addition, you can use the Duty Rate column on the Transportation Policies table to apply a duty rate to the lane. You can use a combination of these tax and duty features within your model.

Lane-based taxes and duties

Lane-based taxes and duties provide visibility into tax accrual by lane and period. You can define multiple types of taxes on a lane, such as sales tax, excise tax and duties. This type of tax and duty modeling also supports tax balancing.

When products are brought into a location, tax may be due according to the value of the product, the applicable tax rate and the percentage of the product value that is subject to tax. When products are shipped to a customer, there is typically tax due on export, similar to the tax when a product is brought into a location.

Taxes and duties enable you to determine the credits and debits based on import and export of products with specific tax rates applied. From these, a net tax payable value is calculated and is included in the objective value as a cash outflow.

Tax paid on all imports to a location becomes a tax credit. This can be offset against tax arising from all exports from the location. If accumulated debit exceeds accumulated credit, this is the net tax payable to the tax authorities. Excess credit is carried forward to offset future debits.

In summary:

credit = Sum(Imports) tax rate * amount imported

debit = Sum(Exports) tax rate * amount exported

net tax payable = Max(0,debit - credit - (credit carried forward))

credit to carry forward = Max(0, credit + (credit carried forward) - debit)

Tax and duty assumptions include:

• Tax is determined as an amount of currency per unit of product.
• Purchase price and movement costs exclude any tax component.

You can review the taxes and duties using the Tax & Duty Summary and Tax & Duty Flows output tables.

Setting up lane-based taxes and duties provides an overview of the feature and Lane-based taxes and duties example illustrates the use of taxes and duties.

Path-based duties

With this type of duty modeling, you are considering the full path of the product from the manufacturer's location to the customer. The duty rate is applied based on the start of the path (Start Tax Region), the end of the path (End Tax Region), or the combination of both. Most often these locations use a tax region, such as a group of countries. The duty rate is calculated based on the product value, and then applied to the lane(s) defined by the Source and Destination in the Duty Rate table. These lanes must have associated Transportation Policies for the duty rate to apply.

When looking at finished goods and raw materials, the duty rate for the finished good can be constrained by the location where the product is manufactured, not the origin of any raw materials used in production of the finished good. For the raw materials, the start region is where those products are sourced and the end region is where they are consumed for production.

You can review the duties using the Duty Rate Details output table.

Determining product value

Taxes and duties are based of the value of the product being transported. There are a number of columns where you can define product value and there is a hierarchy to the use of these columns.

Lane-based determination

For all the sites with the same Tax Region, the average taxable value is calculated by default and this average is used as the product value. The value of the product can be based on either its source location or destination location. Use the Value Location Reference column in the Taxes And Duties table to determine which region is used for product value.

• Taxable Value Overrides - You can override the product value in a tax region using the Taxable Value Overrides table. You can enter a specific Product Value Override which overrides any calculated value. Alternatively, you can set the Product Value Calculation to either Minimum or Maximum which sets the product value to the smallest or largest value respectively within the tax region.
• Inventory Policies - If you are not using Taxable Value Overrides, you define the product value per site in the Product Taxable Value column in the Inventory Policies table. You can vary the product value by period using the Unit Taxable Value in the Inventory Policies Multi-Period table.
• Products - If a site with the Tax Region has no value for the Product Taxable Value in the Inventory Policies table, the Unit Value from the Products table is used.

If there is no Product Taxable Value in the Inventory Policies table nor Unit Value in the Products table, and you have not populated the Taxable Value Overrides table, then the Product-Site combination is assumed to have a 0 taxable value in the average calculation for product value.

Path-based determination

• Duty Rate - You can use the Product Value Override column in the Duty Rate table to override the product value for the specific tax regions.
• Inventory Policies - If you are not using the Product Value Override in the Duty Rate table and you have both Taxes And Duties records, as well as Duty Rate records, the product value per site in the Product Taxable Value column in the Inventory Policies table determines the product value.
• Products - If a site with the Tax Region has no value for the Product Taxable Value in the Inventory Policies table, the Unit Value from the Products table is used.