Outsourcing requires tax risk management
When outsourcing tax operations, tax directors have recommended businesses to ensure they have effective tax risk management measures.
In order to minimise costly errors, tax specialists advise firms to develop robust tax risk management systems when outsourcing tax operations.
Benoit Labiau, head of tax and treasury for EMEA at the medical technology business Terumo Europe in Brussels, asserts that the company's robust tax risk management means that it is in complete control of the compliance process.
“The fear is to lose control [of compliance] and you have to be able to trust the outsourcing partner by having clear processes in place to manage your tax risk,” says Labiau. The growing trend towards outsourcing tax functions can create systemic risks for businesses if the transition is not properly managed. This has sparked a debate among tax professionals about the limits of outsourcing compared to keeping functions in-house.
Joanna Davies, senior group VAT manager of the British telecoms corporation Vodafone, asserts that organisations must analyse the value of external consulting services while assessing possible outsourcing vendors.
“We need to really manage tax risk appropriately when deciding on outsourcing or in-house tax management and we need to understand where their [outsource partners] skill sets are,” says Davies.
As more nations continue to implement new tax obligations, such as e-invoicing, businesses are under increasing pressure to assure compliance. Partnering with professional outsourcing vendors is one method.
No one size fits everyone
Due to the increasing complexity of indirect tax compliance throughout the world, many firms are outsourcing their tax activities.
Companies have an abundance of options, ranging from organisations that provide whole business process outsourcing capabilities to those that outsource only a portion of their tax duties, such as tax audits.
“If you are overwhelmed by the amount of tax audits globally then you can find a partner that helps you manage the administration or ones on the more strategic side,” says David Peeters, senior director of global indirect tax at World Fuel Services, a global energy service provider in the US.
Peeters states that some organisations seek to outsource portions of their tax data management and worldwide VAT compliance operations.
“The decision-making process on what to outsource is not always a case of one size fits all, it can depend on the country and region as well,” he adds.
According to him, it is frequently more challenging to outsource VAT compliance in countries like Brazil, where the risk profile and complexity of indirect tax legislation are more evident.
When deciding between outsourcing and maintaining functions in-house, businesses must examine the scope of services, the availability of automated compliance methods, and the loss of other options.
“If you are a company that is growing by acquisition and with a high degree of manual compliance activities, then it’s very difficult to scale including bringing additional VAT returns in a very easy and rapid way without increasing costs,” says Peeters.
Businesses with highly automated tax compliance systems can quickly gain internal economies of scale by completing a greater number of returns at less expense.
When deciding whether to outsource or retain operations in-house, cost is one of the most important issues for firms.
“Companies make different decisions based on what they perceive would be the best option from a cost versus benefit point of view,” says Davies.
She reports that Vodafone has outsourced several tasks, namely tax and IT-related processes.
“It’s worth saying that not all solutions should just be assessed on a costs basis, but also on the understanding of what an external party can really bring to the table,” says Davies.
Before making a choice on outsourcing, businesses must also evaluate the value of advisory services, IT solutions, employee skills, and risk profile.
The COVID-19 outbreak and following wave of employee resignations underlined the necessity for organisations to plan for a high rate of employee turnover.
“What I see in-house, globally or regionally, is that we had to jump into an environment where you have people potentially leaving the organisation. The question is, how do you manage the turnover in a compliance environment, hence, ensure business continuity of your in-house indirect tax reporting activities?” says Peeters.
Additionally, tax departments struggle to address concerns of continuity and succession planning for worker attrition.
Businesses must also be able to evaluate the expense of investing in in-house teams versus the possible benefits of utilising outsourced vendors.
These include evaluating the cost of developing big in-house tax teams, which requires significant time, resources, and capital. This might be a diversion from the business's higher-value strategic activities.
Here, firms would do well to analyse and adopt a hybrid strategy in which certain services are retained in-house while others are outsourced.
Some businesses have opted for a compromise by adopting a hybrid operational strategy. This entails keeping key activities in-house while outsourcing the remainder.
According to Sabine Studer, head of group tax at the metal processing company Bystronic in Zürich, the hybrid model is the most popular among enterprises.
“I fully agree with the ‘Bermuda triangle’ on this hybrid approach as it is about time, cost and knowledge,” says Studer.
She asserts that if organisations do not have sufficient internal personnel to complete compliance needs in a timely manner relative to the speed of company expansion, they end up creating future hazards.
“If you have to outsource knowledge then this results in double costs because you still need somebody in house to monitor what’s going on and you need to build this bridge with the outsourced supplier,” says Studer.
Labiau says that the hybrid model is the optimal answer since it allows businesses to gradually outsource tasks as opposed to outsourcing everything at once.
It allows teams to adopt changes gradually while absorbing them, including monitoring processes, finding faults, and developing tighter control systems, according to him.
“I really like the hybrid model because it’s something you can manage and you can adapt to the speed of your business,” says Labiau.
Not everyone feels that the hybrid company approach is advantageous. Peeters thinks that the hybrid approach might present additional challenges for businesses, particularly internal indirect tax leaders. A hybrid strategy necessitates more extensive end-to-end management of stakeholders, which can be challenging.
Peeters states that one of the advantages of the hybrid approach is the ability to employ indirect tax compliance technology platforms from third-party service providers.
This is accomplished while maintaining engagement with the many business departments involved in indirect tax procedures from beginning to finish. This facilitates the execution of a corporation's tax transformation plan.
Despite disagreements about the optimal technique, the majority of tax experts believe that outsourcing allows organisations to focus on important areas.
This, in conjunction with automated technology solutions and robust tax risk management processes, might enable organisations to achieve compliance needs while allowing employees to focus on higher-value work.
By fLEXI tEAM