Tax Co-Sourcing & Outsourcing: G&A Considerations
Outsourcing or co-sourcing tax functions can offer both qualitative and quantitative benefits so tax departments can focus on other areas that may be more beneficial for a company.
By Shaun Ahn, Amy Oeser and Eric Efron
Given the current economic environment and heightened scrutiny around general and administrative (G&A) costs, finance leaders are looking for innovative ways to contribute to their company’s bottom line. This means that resources must be allocated to align with the company’s objectives. Leaders can achieve this goal by identifying ways to optimize the time and skill sets of their in-house functional teams to be more strategic while looking outward to acquire alternative resources to provide stability and technical acumen for day-to-day functions.
As it relates to tax services, some companies want to own their entire tax function, while others want an experienced tax firm to be entirely accountable and responsible for their tax needs. Some want a mix of both. History has shown that the outsourcing or co-sourcing models were less prevalent as these models provided challenges and loss of control of business processes by the companies. Over the past few years, we’ve seen more companies move to these outsourcing or co-sourcing models that, when done strategically, may offer both quantitative and qualitative benefits, enabling tax departments to focus on other areas that may be more beneficial for the company.
Change in Philosophy
Execution of tax compliance and reporting directly affect cash flow, the defensibility of tax return positions, risk management and, ultimately, the company’s reputation. Tax laws and regulations around the world are ever changing, as most recently seen with the Coronavirus Aid, Relief and Economic Security (CARES) Act, Tax Cuts and Jobs Act of 2017 and various OECD initiatives. These new laws and regulations, coupled with a shortage of tax talent, has led many companies to reconsider their staffing needs. The introduction of advancements in tax technology, such as workflow and document management software, blockchain and robotic process automation (RPA) have also allowed companies to redefine how tax projects are executed.
Tax Outsourcing & Co-Sourcing Models
Areas within tax to consider for outsourcing or co-sourcing include financial reporting for tax, tax return preparation (whether in whole or in part), transfer pricing documentation, M&A support (including pre-transaction restructuring and post-transaction integration) and tax controversy support.
"Outsourcing or co-sourcing is not a one-size-fits-all solution. It’s a decision that should be made based on the needs of the individual company."
Tax controversy in particular is an area that many companies don’t specifically staff internally, but instead rely on other tax professionals within the company to take on. Unfortunately, these tax professionals are rarely controversy specialists, and more importantly, they have other responsibilities that they need to balance. This can be both a risk and a control issue for the company because the preparer of the tax documents or the planner of the transaction would be meeting with the IRS to discuss the returns.
Ideally, in an IRS audit setting it is best to have someone who was not directly involved in the preparation of the return or the transaction interact with the IRS. The unbiased review usually results in a better strategy and negotiating position. Tax audits are also subject to the ebb and flow of the IRS team’s capacity. Using an outside provider to assist with the audits would prevent the often-difficult task of hiring and then letting go of employees when the audit slows or ceases.
In 2017, PricewaterhouseCoopers (PwC) acquired most of General Electric (GE)’s tax department as GE transformed from an industrial equipment maker to a digital technology services company. GE started questioning whether the overhead costs of the tax unit made sense given the company’s transformation. In return, PwC would handle all of GE’s tax work.
In 2018, American International Group (AIG) and Ernst & Young (EY) announced a global tax compliance and technology operating agreement that involved a combination of managed tax services and transfer of select AIG employees to EY. In this arrangement, members of AIG’s global tax compliance and tax technology teams integrated into EY’s tax technology and tax compliance practices, allowing AIG to leverage EY’s tax services and technology resources while focusing the company’s internal tax team on more strategic initiatives.
What we’ve found is that full outsourcing works best for small- to mid-sized companies, mainly for economic reasons. Typically, there’s not enough work to justify hiring a full-time employee. And, in many cases, an employee may lack broad tax experience to perform different tasks such as tax return preparation, tax financial reporting, transfer pricing, etc. For large companies, co-sourcing works best because certain tasks don’t require a full-time employee while others might. For example, a company may need full-time employees to prepare tax returns and financial reporting, but not transfer pricing. Moreover, they may prefer to have access to someone with more expertise for certain areas of tax.
"What we’ve found is that full outsourcing works best for small- to mid-sized companies, mainly for economic reasons."
Outsourcing or co-sourcing is not a one-size-fits-all solution. It’s a decision that should be made based on the needs of the individual company. Whether the companies are publicly traded companies like GE or AIG, privately held companies or private equity-backed companies, there are a variety of different ways to ensure that these models are successful and provide efficiencies. That said, we find that small- and mid-sized companies can most benefit with some type of outsourcing model because it can help a company achieve its tax objectives in a more cost-effective manner.
When analyzing whether to staff your tax team with in-house professionals, external tax professionals or a mix of the two, you should consider the value of intangible items such as the benefits of the years of tax experience an outside firm could bring to a project, the education and guidance they could provide for your in-house tax team, and their access to tax technology and resources that your company may not be able to provide.
Tax team morale is also very important to consider in this process. How open is your team to the idea of additional resources to assist on a project? Are they overwhelmed with the number of hours they’re currently having to work to meet all of the various tax authorities’ filing and reporting guidelines? Evaluate the types of tasks that your tax team performs on a regular basis and discuss internally and perhaps externally ways to incorporate tax technology alongside a co-sourcing or outsourcing opportunity. Doing so will lower the G&A costs of your financial organization and help meet your company’s financial goals.