Supply Chain Frontiers issue #40
Brazilian state and municipal governments commonly use tax incentives to attract businesses to their regions in an effort to stimulate economic growth and promote technological development. In fact, the intense competition between these entities to offer favorable tax terms is often referred to as “fiscal war.” The problem is that these policies not only mask the true economic picture in the regions involved, but also can make supply chains less efficient and adversely impact the environmental performance of businesses.
Fiscal war tax incentives tend to increase the volume of goods processed by state customs authorities. However, increasing the flow of goods in this way does not necessarily translate into the creation of jobs and income, growth in local GDP, or more opportunities for generating revenue from commercial activities.
Enterprises can reduce operating costs through these incentives and increase profitability. However, companies also must have a cohesive operating strategy, and this is a challenge when they take advantage of tax breaks in different parts of the country. Distribution networks tend to be fragmented when designed according to the demands of tax codes rather than sound supply chain practices. This mismatch creates excessive inventory levels and inefficient product flows because there are too many nodes in the network. Environmental performance also is negatively impacted because products are shipped over longer distances.
Take, for example, a hypothetical company located in São Paulo, Brazil, that imports equipment from Argentina by road. The enterprise has a branch in Vitória, Espírito Santo, that wants to exploit the local tax incentives. Complying with local regulations in order to qualify for the incentives adds about 2,000 kilometers to the distance that the imported equipment is transported. The strategy achieves a legitimate reduction in the total cost of the imports, even taking into account logistical costs such as vehicle wear, fuel, toll charges, and insurance.
On the other hand, there are hidden costs that neither the government agencies or the enterprise have considered. These include supply chain penalties, such as an increase in lead time and inventory volumes caused by a delay of at least 35 hours in the delivery of each order.
In addition, there are socioeconomic costs, such as the impact on road infrastructure and environmental degradation. In this example, trucking the goods over the required incremental routes involves the consumption of approximately 1,000 liters of diesel fuel generating 2.4 tons of carbon dioxide emissions. The calculation is based on the Brazilian program for meeting international greenhouse gas emissions targets.
It should be noted that diesel is a non-renewable resource that has to be imported into Brazil. The latest National Energy Survey published by Brazil’s Energy Research Company estimates that the country imported 2.5 billion liters of diesel in 2009. This implies that the tax policies also have a detrimental impact on the nation’s balance of trade.
As can be seen, Brazil’s fiscal war tax incentives benefit certain entrepreneurs, but there are broader, societal consequences that need to be evaluated in greater depth. This is not an easy task. The commercial environment is dynamic and extremely complex, and there are conflicting interests involved that make it difficult to arrive at common solutions. Even so, the tax-based decisions that companies are taking do not always benefit society as a whole, and the costs will be passed on to future generations of Brazilians.
The supply chain implications are far-reaching. Developing more efficient supply chains and logistics operations promotes economic growth, and delivers important environmental benefits such as reductions in the use of non-renewable resources. The tax incentives create distortions that can have disastrous effects on supply chain management.
This article was written by Leise Kelli de Oliveira, Doctor of Industrial Engineering, Universidade Federal de Santa Catarina (UFSC) and Professor at Universidade Federal de Minas Gerais (UFMG); Ricardo de Mello Awazu, MSc in Energy, Universidade de São Paulo (USP), MBA Candidate, Institute of Education and Research (INSPER) and GC-LOG Candidate CLI 2011/CTL MIT; Vagner de Assis Correia, Master Candidate in Transportation Engineering (UFMG) and GC-LOG Candidate CLI 2011/CTL MIT. For more information, contact Vagner de Assis Correia at email: vagner.ac@gmail.com. GC-LOG is the Global Certificate in Logistics and Supply Chain Management offered by the Center for Latin-American Logistics Innovation (CLI). For more information on the program, go to the CLI website at: http://www.cli-logyca.org. UFMG and INSPER are partners of CLI.