The new face of tax outsourcing.
Today's ever-competitive environment challenges tax practitioners to provide clients with greater value. This value must be wed with cost reduction in the new economic reality many businesses face in the aftermath of the events of Sept. 11, 2001. More than ever, CFOs and tax executives are searching for methods to weather the economic uncertainty. Many of these companies are viewing outsourcing as a legitimate way to accomplish their business objectives.
Tax outsourcing confers more than just a deliverable, such as a tax return; it also provides cost-reduction, process simplification and increased shareholder value, while simultaneously reinforcing the tax-outsourcing provider as a trusted business adviser. When it comes to corporate success, companies have to take care of the core business; delegating nonessential functions to specialists helps them to achieve this goal.
Outsourcing has been around for many years. The world of information technology (IT) instituted one of the first large-scale applications of the outsourcing business model. Computers and networks were extremely complex and not a core process of organizations. Companies could not manage without computer systems, yet technology needs were here to stay. How could they run the intricate IT function without having to retain in-house experts? The cost, among other issues, would affect capital needed to operate the organization's core functions and the ability to increase market share. Enter IT outsourcing. Corporate executives "leased" the operation, maintenance and execution of key tasks without owning the employees or the hardware.
Tax outsourcing is a direct descendant of IT outsourcing. Over a decade ago, companies began to outsource additional noncore corporate functions--finance, accounting and tax among them. Businesses that had been in operation for years (as well as entrepreneurial startup companies) realized that these cornerstone processes could shed cost-center status and operate as value-added contributors to the bottom-line.
Over time, outsourcing's importance as a way to add value has become clearer. Economic globalization has made the business environment more complex and competitive than ever. Focus and commitment to core competencies has become a requirement for survival. Leveraging knowledge, providing value and process innovation are necessary to gain competitive advantage. In the world of tax, outsourcing to specialists who could do the work quickly and cost effectively frees corporate staff and resources to focus on strategic planning.
Outsourcing relationships have also changed over their history. These relationships were formerly defined in terms of the business tactics used to hammer out deals. The provider wanted the highest revenues possible with the smallest level of accountability. The buyer desired paying the lowest fees and blaming the outsourcer if anything went awry. Executives today realize that a true business relationship is necessary to satisfy all involved parties, and that this relationship begins on the day introductions are made. Sound trust provides a foundation for a lasting association that ultimately does more good than if trying to accomplish the same objectives alone.
With outsourcing's importance defined, and seeing its application in the realm of tax, corporate tax executives can delve into the tax function's needs and comprehend why outsourcing part or all of an enterprise's tax operations plants the seeds for achieving greater value from the tax department.
The Many Branches of the Tax Function
A tax department is central to the health of any company. Tax is often unrecognized for the value it can bring in spite of this key role. The tax function is considered a thorn more often than not, albeit a necessary one. Corporate tax departments shoulder broad responsibilities--with the local, state, national and international taxing jurisdictions, each having unique and constantly changing requirements--that demand equal attention in all compliance aspects. These areas draw the life from a tax department's resources, both in terms of professionals and time, leaving little for day-to-day tax accounting, responding to inquiries from multiple taxing authorities, tax data management, and of utmost importance, real-time tax planning. The effect is often quite costly
U.S. companies spend more than $9 billion a year on tax operations and pay more than $500 billion in direct and indirect taxes. These organizations are concerned with the true cost of the tax function. Once they add salary, benefits, technological and operating costs (even if they could calculate a true figure), the total is often astonishing. The corporate tax function is also far too often reactive, indicating that tax departments are cost centers for their companies. Globalization, business acquisitions and complex tax laws unfortunately bring with them increased compliance requirements, audit defenses and daily tax accounting that leave little time to be proactive. Outsourcing addresses these and many additional barriers and challenges that tax departments face.
Resources and expertise. Hiring high-quality tax professionals at a time when there is a drought of tax experts in the global market is hardly a simple task. If businesses were able to find the right people, most tax department budgets would probably prohibit hiring them. By outsourcing to tax specialists who keep up with the ever-changing tax laws, businesses capitalize on the service provider's expertise and economies of scale.
Changing technology. Most tax functions do not have access to sophisticated tax systems or the technological resources necessary to support many tax-processing needs and requirements. In addition, tax departments spend almost 70% of their time gathering data, and often use manual processes not integrated with financial and business systems. Just as any enterprise focuses on its core competencies to succeed, an outsourcer uses up-to-date, cutting-edge technological systems. Companies can outsource their huge data-gathering endeavor and focus instead on developing new business strategies.
Lack of core competency focus. Buried under a mountain of compliance work, a corporate tax department cannot participate in the company's strategic operational decisions. Outsourcing the compliance function alleviates this burden, allowing the tax department to transform from a cost center to an indispensable company asset.
Delivering value. The compliance-to-planning ratio of many tax departments is quite disconcerting. Inherent also is the cost sensitivity of delivering value. What does it cost to reap a good return on investment from a tax function? Do most tax departments even establish metrics? Outsourcing gives tax departments the opportunity to measure performance.
Corporate tax executives realize barriers exist; however, they are challenging their tax functions to add value to the business. The benefits abound for companies with the intuition to partner with specialty outsourcers that have the people, process and technology to help the corporate tax function reduce its compliance efforts and increase its value. Two benefits in particular are of note--first, a unique business partnership develops between the outsourcing provider and the business entity. From this partnership evolves loyalty, trust and continuous communication, which helps pave the way for a long-term, lasting venture and future opportunities. Second, through outsourcing the partners are in a position to identify significant business issues and events as they occur, leading to real-time business decisions, not after-the-fact reactions.
Tax-Outsourcing Opportunity Leaves are Abundant
Many financial and tax executives view tax outsourcing as a leading opportunity for growth. However, the question is whether outsourcing is appropriate for a particular company. Outsourcing the tax function completely transcends the boundaries of the corporate tax department's traditional role, regardless of its size or the organization's logistics.
There are countless opportunities to begin a transition to tax outsourcing; the service provider can determine what works best for each company on a client-needs basis. Every business enterprise in today's tough global environment has something that could perform better--the issue may be operational, people-based or linked to management. In partnership, corporate tax executives and the outsourcing provider will break the long-standing barriers to success faced by the tax department.
Outsourcing Agreements: Standing on Solid Ground
Every outsourcing partnership requires an explicit and easy-to-understand agreement that firmly establishes, in writing, all points of the engagement. Once a company decides to outsource its tax department, it must formulate an agreement before beginning the outsourcing engagement. In times of uncertainty, a contract serves as an essential reference tool for defining the engagement's scope. Achieving consensus among all parties when formulating the contract's specifics mitigates problems in the event of a dispute in the scope of the engagement.
Regardless of the size of the commitment or how routine the scope of services, every situation is unique. Additionally, tax outsourcing is usually a multi-year event. If the agreement is crafted in a manner that satisfies everyone's interests, client executives and staff work much more in harmony over the engagement's course and come to the table at contract renewal time with optimism.
Gaining a clear understanding of the road taken to develop a comprehensive tax-outsourcing contract is extremely valuable. At a minimum, the basic written agreement should include the following components:
Scope of services: As the heart of any tax-outsourcing arrangement, the scope of services should be as detailed and all-encompassing as possible. There are two types of scope circumstances--"in scope" and "out of scope." Although appearing quite simplistic, the context of scope is the gray area in tax outsourcing and is usually the source for contract disputes. The interpretation of "in scope" parameters on any engagement can be defined in different ways by different people reviewing the same contract. In no uncertain terms should an agreement's section on scope of services articulate anything less than complete clarification of all services to be (and not to be) performed.
Fees: The pricing strategy for tax outsourcing engagements is frequently driven by market conditions and is always driven by the current operating cost of a client's tax function. If possible, the revenue base should consider more than the professionals' salaries included in the client's tax department budget. Additional costs are hidden in other departments' budgets or in administrative overhead.
The longevity of tax-outsourcing engagements implies that the fees defined in the contract cover all years. A service provider's first-year costs frequently outweigh the cost of subsequent years; therefore, fees are often written into a contract on a sliding scale, with higher fees in the early years and lower fees in the later years.
Liabilities and dispute resolution: Every outsourcing contract requires dispute resolution procedures and language addressing liabilities between the parties.
All contract components should be fully discussed. Superb contract negotiations breathe life into the developing relationship between the outsourcing provider and service recipient.
The Pursuit of Excellence
The service provider interacts daily in the company's business activities and serves in both operational and consultative capacities, nurturing the business partnership that began at the early stages of interaction between the parties. This helps those in the tax function achieve higher performance and greater value contribution.
Identifying needs, drivers and business issues in operating the tax function provides the next Steps coveted by today's tax executives. The growing complexity, speed of business, changing regulations and demands and measurements for increased shareholder value have forced tax departments to change. Tax outsourcing is powerful, and the resulting transformation of traditional corporate tax departments fuels growth, success and the continued pursuit of excellence.
Editor's note: Mr. Holub is a member of the AICPA's Tax Division's Tax Practice Responsibilities Committee. He was formerly a member of the Member Tax Practice Improvement Committee and Chair of the Tax Practice Management Committee.
Ms. Totsch is a member of the Member Tax Practice Improvement Committee.
If you would like additional information about this article, contact Mr. Holub at (813) 222-8555 or firstname.lastname@example.org or Ms. Totsch at (214) 754-3499 or Melissa.Totsch@ey.com.
FROM MELISSA W. TOTSCH, CPA, GLOBAL TAX OPERATE, ERNST & YOUNG, LLP, DALLAS, TX
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|Author:||Holub, Steven F.|
|Publication:||The Tax Adviser|
|Date:||Mar 1, 2002|
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