In recent years the tax affairs of large multinational organisations have been subject to greater scrutiny than ever before. Both the global media and national governments seem intent on uncovering more examples of tax avoidance, citing these as examples of “big business” not paying their “fair share” and “exploiting” tax legislation.
Tax legislation remains profoundly complex, especially when trading across international borders. Laws are often old, subject to ever changing case law and often lacking clarity.
Direct taxes have historically been the main concern for organisations which are those profits generated from trading and capital gains. However survey after survey appears to evidence that the global tax base is shifting away from direct taxation and towards indirect taxation, the taxing of transactions and consumption. This significant shift in global tax policy has left many businesses with a knowledge gap to fill, namely that of indirect tax understanding and compliance.
How can businesses fill this gap in tax knowledge? The recruitment of a team of indirect tax specialists would have been the traditional response together with a significant associated and sustained investment in knowledge management and compliance systems.
FiscalReps, for the past twelve years has offered multinational businesses with an alternative to the traditional recruitment route, an outsourced indirect tax solution.
Although outsourcing was not officially identified as a business strategy until the late 1980’s, many organisations had grappled with the decision whether to outsource or not prior to that date and then dealt with the consequences, both good and bad, of their decision.
Outsourcing as a business strategy has had mixed results. Many high profile failures to implement the strategy has led to money being wasted and decisions being reversed, often with damage to reputations as significant as the costs written off.
Of the reasons cited for outsourcing failures a lack of clarity over scope, poor vendor selection, short term financial pressures and poorly structured contracts are commonly used.
However the outsourcing of indirect tax compliance would appear to work certainly based on our experience, by focussing on the strengths of the core outsourcing model but then applying basic principles of indirect tax compliance.
The scope of an outsourced tax compliance engagement can be determined precisely. Detailed knowledge of the tax legislation concerned and a clear understanding of the business of the entity with the tax reporting requirement will mean that the exact tax compliance requirements can be determined. In Europe there are in excess of ninety different premium taxes that can apply to insurance companies writing business across the European Union. An analysis of their licencing status in every country provides you with precision in terms of taxes payable but also tax reporting requirements.
A precise scope of work from the outset together with a simple allocation of responsibilities means that there will be no room for doubt as the contract goes live.
At FiscalReps the simple rule employed is that the client is responsible for submitting tax data and tax funds to FiscalReps in a certain consistent format and by agreed deadlines. The job of FiscalReps is to validate the data, then prepare and submit tax returns by the agreed local tax deadlines and effect the payment of taxes due locally at the same time.
When it comes to tax, knowledge really is everything. But not theoretical knowledge based on a review of the legislation and case law. On top of that it is essential to build in an understanding of the logistics of preparing tax returns and submitting them in all countries. Only when you have had to physically file returns, make payments, deal with tax officials, queue in tax offices and generally “join the dots” to complete the task can you really claim to be an expert in tax compliance.
This kind of work can be tedious and time consuming and many service providers are unwilling or unable to go the extra mile to complete these tasks with precision. Your vendor of choice is someone who can demonstrate the basic tax knowledge but also has a proven track record of successful operational tax compliance in the territories where the services are required.
There were two certainties in life according to Benjamin Franklin, “death and taxes”. Tax legislation will always be subject to change, but taxes will always exist and tax compliance will always be required. Therefore any outsourcing decision has to accommodate the fact that this solution will be long-term by its very nature. The right structure will be able to manage short term politically driven tax changes, but ensure that long term compliance is sustained.
Service providers must therefore also plan to exist for the long-term as their services will be required. At FiscalReps we took a deliberately prudent view on revenue recognition and have focussed on building a sustainable cash positive business to ensure that we can meet the needs of our clients over the longer term. Our business is nearly twelve years old. Many clients have been engaged for over seven or eight years, demonstrating a commitment to long term compliance.
Senior Executive Support
With the introduction of Sarbanes Oxley in the USA and Senior Accounting Officer rules in the UK, senior Board Members are more personally accountable for the tax compliance of the businesses they run than ever before.
Personal accountability together with media, stakeholder and governmental scrutiny has meant that many Boards have taken the view that a policy of transparent tax compliance is the basic starting requirement. Plus those companies that have already fallen foul of complex indirect tax laws in countries where they operate but are not head-quartered will have already counted the cost of non-compliance and will be keen as a Board to avoid those mistakes again.
A service provider that can instil credibility and confidence at senior levels of business but also convey often technical tax issues simply and without jargon is a must.
Budgets are always being squeezed. Managers are always demanding greater performance year on year. Against this backdrop of increasing corporate and stakeholder expectations, using those scarce business resources to support non-core, back office processing operations can appear to be wrong decision.
The investment required to recruit the right staff, train them, keep their knowledge up to date and then ask them to process hundreds if not thousands of tax filings per annum seems like an unwise use of resources when the overall business objectives are focussed on revenue generation, client servicing and product innovation on an international scale.
Unfortunately the outsourcing model has often been used as a justification for closing an office, reducing headcount and cutting costs. In fact, quite the opposite route should be considered. An outsourced solution can free up existing human resources, business intelligence and office space enabling the organisation to focus directly on its business objectives.
Even if the cost of the outsourcing engagement is $100k, if say a new revenue stream generating profits of $200k can be generated from the freed up resources then maybe the business performance is enhanced overall.
Outsourcing tax compliance as a driver of increased corporate performance? Absolutely, if it is employed correctly.
Access to Greater Capabilities
FiscalReps operates in the areas of premium tax, VAT & goods/services tax and gambling levies. Premium taxes and gambling levies are very niche areas of indirect tax and VAT whilst being more main stream can be extremely complex in some of its more niche areas.
What this means is that such skills, knowledge and experience can be hard to recruit, retain and manage internally. There are a limited number of people in the world who can critically review your annual global premium tax calculations and then prepare and file all the necessary returns. The task itself may not need one full time recruit in terms of hours required, but may need the input of a team of specialists all with a specific role to play in order to maintain tax compliance. The question almost then becomes why you wouldn’t outsource such a task to a specialist organisation.
The further benefit is by choosing an outsourced solution the time investment required to identify and recruit the necessary individuals can be halted immediately, allowing HR and talent management to focus on finding people to propel the organisation forwards.
FiscalReps has focussed on building a team of global indirect tax experts, each person with a unique depth of expertise in their particular area of specialism. By adding all the elements together it creates an outsourcing model which has proven to be compelling for over 300 clients.
For an outsourcing engagement to work there must be a clear scope but also a fair allocation of risk between the contracted parties. Essentially the service provider must assume some level of financial risk for failure within the engagement. In a tax compliance environment this is easy to determine.
If the company is unable to provide timely and accurate transactional data to the outsourcing provider within the agreed parameters then any penalties for tax non-compliance rests on the shoulders of the company. If however the company does everything required and the outsourcing party files the return late or incorrectly then the penalties fall upon the shoulders of the outsourcer.
These issues of risk transfer can be clearly defined at inception of the contract and then monitored periodically to determine whether either party is a serial offender, with maybe annual fee increases and contract renewals linked directly to performance.
The concept of risk transfer can also be viewed as a positive for any companies that have suffered financially as a consequence of tax non-compliance. If structured correctly the cost of the outsourcing engagement is a “hedge” against the cost of any future non-compliance; effectively using the outsourcing suppliers own E&O policy to underwrite the cost of non-compliance.
Indirect tax compliance outsourcing is probably more akin to KPO (Knowledge Process Outsourcing) rather than traditional BPO (Business Process Outsourcing) due to its reliance on highly skilled personnel delivering clients with high end service levels. But tax does continue to bewilder and cause general unease amongst many corporate executives, with the fear of non-compliance or merely the “not knowing what to do” adding to corporate stresses.
Whilst an outsourcing engagement is no replacement for a sensible and transparent corporate tax strategy, when used effectively the outsourcing of indirect tax compliance can ensure that the strategy is implemented successfully and may also be a catalyst for the creation of other business efficiencies. History has consigned many “blanket” outsourcing strategies to the corporate waste bin; in a niche area such as indirect tax compliance an outsourced solution may well be the most tax effective decision your organisation will ever make.