First steps to finding the right tax department resource balance
3 questions to ask before choosing a tax outsourcing approach
The tax issues facing every company are unique, varied and complex, which means there is no one right way to address tax staffing. By extension then, tax co-sourcing is not an either/or decision between a large, in-house tax department and an outsourced solution. Rather, it should be a nuanced decision on how best to control your tax risks, use an outside resource to add value and manage your overall tax staffing expenses.
For tax directors and others looking at the potential for tax co-sourcing, this means considering the following key questions.
1. What is your full inventory of tax responsibilities?
Income-based taxes are always a top-of-mind concern, but they are just the tip of the iceberg. Indirect taxes, such as sales and use taxes and property taxes, and other related nontax responsibilities must be considered. For example, a restaurant chain with nearly six hundred locations used its corporate tax department to manage liquor license issues for each location. For this company, it made sense for this nontax responsibility to be handled within the tax function, as the tax group was already handling the specific food and beverage taxes that apply to liquor sales in each jurisdiction. They were familiar with each location’s operations and it seemed to be an efficient solution ... but such a scenario could easily be overlooked when evaluating tax function resources.
When you look at the tax department responsibilities you may wish to co-source or outsource, it is important to recognize all related business needs so that you can design an approach that ensures every area can rely on a qualified individual or team.
Initial questions to consider may include:
- Besides U.S. federal and state income taxes–what other indirect taxes or industry-specific “pseudo” taxes are imposed on your company?
- Do you have international operations that create foreign jurisdictional compliance and statutory reporting, transfer pricing or withholding obligations? Do your international operations present occasional or frequent expatriate concerns?
- What are your other common business issues that have associated tax implications? Are these handled inside or outside the tax department?
By starting with a complete understanding of tax issues you have to address, you can lay the foundation for a more informed business case for staffing needs or changes in process or workflow assignments.
2. Are your tax capabilities aligned with your corporate needs and priorities?
Is your tax function addressing its responsibilities in a way that effectively aligns with your company’s priorities? Yes, compliance is vital, but having returns and tax accounting done timely and accurately isn’t the whole story for high-performing tax departments. Your team needs the skills and experience necessary to address your full range of issues, and this may demand a new definition of team.
Historically, has the tax department been considered a critical team member on significant business transactions or corporate initiatives? If not, this could be an indication that there are gaps or mismatches between the company’s needs and internal capabilities–which can point to key co-sourcing opportunities.
Has the frequency of highly technical tax issues that require specific expertise changed from occasional to frequent? Honestly assess whether the skill sets in your tax function have kept pace with the evolution of the business and consider whether the time is right to grow the department by adding in-house specialists. If headcount is an issue, you may want to consider outsourcing routine compliance and redirect full-time employees to handle the tax technical challenges.
3. How effective are your current systems and processes?
Your tax function depends on timely and accurate access to data from your accounting and finance departments. In many companies, data and information flow between these functions seamlessly, while in other organizations, tax professionals are using spreadsheets and manual workarounds to gather the information they need to fulfill tax requirements.
Cost-effective co-sourcing arrangements rely on efficient methods of gathering, assembling and sharing data. So if you can readily share necessary data and if it is easy for your co-source vendor to understand how they fit into your overall operation, then chances of success are significantly improved. If, on the other hand, your current systems and processes make that difficult, it may make sense to work with your co-sourcing provider to address these challenges before establishing fixed-fee based arrangements predicated on existing tax operational systems.
What makes co-sourcing successful?
When considering tax co-sourcing, you need to balance the answers to each of the above three questions. Thoughtful assessment and understanding of your current state and future goals will allow you to evaluate the potential value of a solution against your tax opportunities and risks, as well as your business goals. Co-sourcing is an effective approach to balancing the technical demands placed on a corporate tax department with the efficiency demands placed on businesses overall. But doing it well requires advance planning.
In addition to answering the questions above, companies that co-source successfully share these key attributes:
- They are comfortable with the idea of co-sourcing, and they have buy-in from all critical stakeholders. This sounds simple, but it is vital. If you don’t believe that co-sourcing can provide value, then you are unlikely to reap the full benefits of such an arrangement.
- They have well-defined and effective processes, systems and controls–and a plan to refresh these on a regular basis to keep tax operations in alignment with corporate strategies and goals.
- They know exactly what they want their co-source vendor to do. Clearly defined responsibilities and measureable goals mean that co-sourced personnel can focus on assigned tax responsibilities. Clarity also facilitates accountability, allowing you to better measure the co-sourcing effort’s success by comparing ongoing results with baseline metrics.
Tax co-sourcing is not a simple, one-size-fits-all outsourcing arrangement, but when approached with open eyes and defined goals, it can often provide your tax department with:
- Additional resources to meet peak compliance demands, keeping your tax staff lean during slower periods
- The ability to conduct strategic tax planning in-house with the flexibility to execute those plans using scalable resources
A successful co-sourcing relationship is tailored specifically to your organization, and the right answer is driven by your circumstances. It can range from a completely in-house approach to working with one co-sourcing firm to enlist help from a variety of outside resources. Considering the questions above is a good way to start evaluating if and what type of co-sourcing relationship might work for you.
Are you considering or re-evaluating a co-sourced approach to your tax function?
We would love to help you navigate these questions. Contact our tax function optimization team and experience the power of being understood.