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A significant feature of the disruption to markets resulting from the COVID-19 pandemic is a sudden and unexpected disruption to supply chains particularly those crossing multiple national borders. Supply of components used in a supply chain may be disrupted due to reduced manufacturing activity in the source country or re-direction by government fiat of those components for a different use. The resulting disruption may cause great difficulties for businesses relying on the normal workings of that supply chain.

Solutions that businesses may look to may include:

  • sourcing required components from different overseas markets;
  • sourcing that supply from domestic suppliers; or
  • insourcing the production of the required components.

Each of these solutions, produces a change to the taxation outcomes for the business concerned. Where the supply is sought from a different foreign market, the tax cost of doing so may be different. For example, where the component previously came from a country that has a free-trade agreement (FTA) with Australia, moving to a country that has no such FTA, or a less favourable FTA, may mean additional costs by way of customs duty on entry of the relevant goods for home consumption into Australia and navigating different rules of origin requirements. Conversely, where the new source of supply is a country with a more favourable FTA with Australia, the taxation outcome may be better for the importer.

Therefore, where the foreign supplier is sought in preference to a domestic supplier, then one of the factors that may be relevant in determining what foreign jurisdiction would be optimal for an Australian importer will be the relative benefits of FTAs with the alternative sources of supply. Even if there is a favourable FTA offering lower or no duty rates, there may be additional compliance obligations for the business concerning sourcing certificates of origin required to substantiate any available FTA treatment.

Where on the other hand, the new source of the supply is domestic, the customs duty element and customs compliance costs should no longer be a cost factor that is relevant. This may produce some degree of cost savings although offset against any higher costs of domestic production. There are already reports of the Federal government searching for domestic supply to replace disrupted overseas sources of supply in certain critical areas (“Coronavirus: Australian government mapping domestic supply chains for masks and gowns amid global shortage“, Canberra Times, 16 March 2020). Additionally, given Australia’s geographical distance from other parts of the world, Australian based businesses may find that the shift to local sourcing can offer flexibility, provide reliable sources of supply, lower speed to market and allow more efficient inventory management.

Where a local business makes a decision to source its supply of components from a domestic source, including by way of in-house production, further taxation issues arise in securing the intellectual property and technology required for such production where that intellectual property and technology is not found locally. Such a business hypothetically may find itself in the situation of once having imported physical goods, now needing to import intellectual property and technology. A different set of tax outcomes may ensue depending on the choices made.

While customs duties may no longer figure in the cost structure for production, the consequences of licencing the required intellectual property from overseas will instead require consideration including the application of withholding taxes and Goods and Services Tax. In the case of withholding taxes, the differential application of relevant income tax treaties and the recently introduced Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI) will be highly relevant considerations. In particular, Australia’s dense network of income tax treaties, and the extent to which the final adoption positions taken by other countries in respect of the various measures introduced under the MLI modify the application of those treaties to the supply chain in question, will need to be carefully navigated in working out the costs structure of all the alternatives.

While it may be too early to determine overall patterns of how supply chains may reorder themselves, a well-advised business should consider these questions sooner rather than later in making a decision that may be required to maintain reliable sources of supply.


Simone is a partner in the Sydney office of Baker McKenzie. She is ranked by Legal 500 as a Next Generation Partner and is listed as a Women Leader in Tax by the International Tax Review. Simone is also an author and contributor to Thomson Reuters and CCH tax commentary. She has been a guest speaker at University of Sydney and the University of New South Wales, and is a regular panelist and presenter at Global Taxation Executive Institute events, the Global Tax Disputes Forum and the Asia Pacific Tax conference.


Miles Hurst is a partner in Baker McKenzie's Tax team in Sydney with a broad range of tax advisory experience. Miles has extensive experience in fund structuring, infrastructure and real estate investment, M&A, restructures and cross-border tax issues. Miles is ranked by Asia Pacific Legal 500 as a New Generation Partner (Tax) for 2020 and is an author of Thomson Reuters' Laws of Australia Income Tax service. He is also a regular speaker at tax conferences including the Tax Executive Institute's Tax Summits, the Asia Pacific Tax Conference and AVCJ's Private Equity and Venture Capital Forum.


Amrit MacIntyre is a partner in the Sydney office of Baker McKenzie where he focuses on taxation planning and advisory work. He is one of Australia's most prominent tax lawyers and is a member of the Australian Taxation Office Public Rulings Panel and chairperson of Office of State Revenue/Taxation Institute of Australia Liaison Committee. Amrit is recognised as a leading practitioner in Asia Pacific Legal 500, Chambers Asia Pacific, International Tax Review's World Tax, International Tax Review's Indirect Tax Leaders Guide, International Tax Review's Tax Controversy Leaders Guide, PLC Which Lawyer?, Tax Directors Handbook, Who's Who Legal Corporate Tax and The Australian Financial Review's Best Lawyers in Australia.