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Tax cosourcing: the flexible alternative to tax outsourcing.

As more companies debate whether to outsource their tax functions, one thing is clear: Tax outsourcing is a growing trend, not unlike information technology (IT) outsourcing was 25 years ago. The question now, as then, is whether to outsource portions or all of the tasks. And now, as then, many outsourcing service providers only offer one "flavor"--total outsourcing, in which the service provider typically assumes the entire tax compliance function.

Another approach exists, however--one that more closely mirrors the IT outsourcing world today. It's a concept that enables companies to have the best of both worlds. "Tax cosourcing" represents a more strategic approach in which a company keeps in-house those areas of the tax function that are most strategic and central to its mission and objective, while outsourcing those tasks that are resource intensive and non-value-added.

Because it is flexible and collaborative, tax co-sourcing focuses on aligning a company's tax functions with the strategic objectives of the organization. It helps a company optimize its tax resources. Leading companies today are leveraging cosourcing as a customized, strategic business option that enables their existing tax department to add the greatest value where it is needed most.

Adding Flexibility to the Equation

Cosourcing encompasses a wide range of options, making it vastly different from traditional outsourcing strategies. With cosourcing, a company can decide what areas to outsource, when, and for how long. This is a particularly appealing option for companies that are in transition because of a major merger or acquisition, financial distress, or outdated tax systems and processes.

To take advantage of this flexibility, some companies prefer to outsource one area--often a compliance function, such as sales and use tax or property tax. Like other compliance functions, these tax functions consume tremendous resources and can burden an entire tax department, especially during periods of change in the broader organization.

By engaging a trusted, qualified third party to take responsibility for this work, a tax department can achieve several critical objectives:

* Testing the outsourcing model at relatively low risk to the organization.

* Shifting resources to more productive, value-added work, such as overall tax planning, planning for critical upcoming business transactions, and attending to broader risk management activities that are common in the Sarbanes-Oxley era.

* Reducing costs by turning to a service provider whose large-scale resources can produce significant and immediate cost savings--potentially up to 30 percent--and help a company take advantage of state-of-the-art technology and tax processes, virtually overnight.

The experience of a venerable U.S. manufacturing company serves as a good example of the benefits of cosourcing. With business operations all over the world, this company is one of the rare manufacturers that still has production facilities and retail outlets. In anticipation of a major industry shift that is expected to have a devastating effect on its primary line of business, the company has made significant changes to its business model during the past few years, including making several acquisitions to reinforce its venture into new areas of business.

With the acquisition of these companies, the company faced another challenge: Its tax department had to manage the tax compliance needs of the newly acquired entities on top of the thousands of income, property, and sales and use tax returns that it already processed for the existing business. Moreover, despite the addition of these activities, the company wanted to cut costs across the board, including in the tax department.

Keeping Top Talent, Outsourcing Non-Value-Added Activities

Company officials discussed total tax outsourcing, but decided against it. The existing tax department had qualified people and a track record of success, and executives did not want to disrupt that operation. Instead, they decided to outsource only the sales and use tax function associated with the newly acquired companies--an area that they felt was performing below par and consuming too many valuable internal resources. The tax cosourcing approach offered the company the flexibility management sought; by outsourcing only the sales and use tax compliance work, the company was able to retain its highly valued tax professionals while dispensing with a highly repetitive and tedious manual function.

The company's tax department worked with the service provider to migrate not only the existing sales and use tax functions to the new cosourcing model, but also those from more than a dozen additional companies that were acquired after the engagement began. Tax cosourcing enabled the tax compliance function to keep pace with the company's growth initiatives, updating tax compliance processes and technology with little or no disruption to the tax department.

The tax cosourcing approach worked so well that the company is now considering cosourcing its property tax compliance as well.

Cosourcing: Simple Steps, Tangible Results

No matter what an organization needs, tax cosourcing offers ways to strategically outsource only those tasks that you deem appropriate, leaving the most valuable resources and activities to the company's internal staff.

One of the most common concerns expressed by tax executives about outsourcing is the perception that it will erode their control over the tax function. With cosourcing, however, tax executives may actually enjoy greater control. Consider these points:

* By cosourcing the most costly and time-consuming activities, tax executives demonstrate cost-consciousness. Cosourcing almost always produces at least a 10-percent savings over the cost of an in-house tax department, with savings often climbing to 30 percent. Using a combination of onshore and offshore resources allows a service provider to price the cosourcing services competitively, yet still ensure the highest quality work by following time-tested quality assurance practices.

* Cosourcing can also help tax executives address key risk management issues. The most burdensome and error-prone compliance functions are also fraught with significant risk. If, upon audit, a company is found to owe back taxes, penalties, and interest--and if those amounts are material to the company's financial standing--it may be required by new laws and regulations to report those risks. Tax cosourcing assures a company of on-time, accurate compliance, and shifts much of the associated risk to the service provider.

* Long considered a truly "back-office" function, the current business environment presents the tax department with the opportunity--if not the responsibility--to become more involved in key strategic business decisions. By shifting resources from non-value-added compliance activities to strategic planning, the tax department can grow both in visibility and stature across the organization.

Tax cosourcing provides tax executives with ultimate control over their company's tax function by giving them the ability to choose which activities to cosource, when, and how. A service provider should submit an initial assessment specifying which of the tax department's activities are most valuable to the organization and which are marginal, and recommending the best candidates for cosourcing. Starting with a pilot cosourcing program allows the tax department to get its proverbial feet wet with little disruption to the rest of the organization, and at minimal risk.

Momentum Is Gaining

The prospects are good that tax outsourcing will increase dramatically in the next decade. Whereas only a handful of companies sought outsourcing proposals from the Big Four accounting firms two years ago, this year at least 70 major U.S. companies are actively seeking proposals as they weigh their options.

While a few companies may jump completely onto the bandwagon by outsourcing their entire tax function, most will approach the decision more cautiously. By taking it one step at a time, companies can gain the strongest value from tax cosourcing, while retaining their top talent and control in-house. Tax cosourcing presents a winning solution to both types of companies.

ROBERT T. CHAPMAN is the National Partner-in-Charge of Tax Cosourcing for Deloitte Tax LLP. He has been with Deloitte for 24 years, and was previously the International and Japanese service coordinator for the Southwest, the Partner-in-Charge of the Mid-America Tax practice, and the National Partner-in-Charge of Multistate Tax Services. Mr. Chapman is both an attorney and a certified public accountant.
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Author:Chapman, Robert T.
Publication:Tax Executive
Date:Jan 1, 2005
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