Changing rules and new technologies are causing corporate tax departments to rethink their operations

If necessity is the mother of invention, then there is no better time for heads of corporate tax departments to keep this in mind as they examine how their departments operate.

Over the years, some tax departments have taken a specific position on the best way to conduct business within their department; and that was fine five or ten years ago. Today, however, such outdated thinking will no longer provide the same efficiency and effective workflow needed. A revision is therefore necessary.

The need to manage ever-changing corporate tax policies has created uncertainty for many tax leaders who fear they may not be able to fully anticipate all possible audit risks and exposures their companies may face.

Tax jurisdictions around the world are constantly reviewing and upgrading the ways in which tax data can be collected and are demanding that tax departments provide even greater transparency in their business operations. In the United States, for example, the Internal Revenue Service will receive $80 billion over the next 10 years as part of the Inflation Reduction Act of 2022, with more than half of that money earmarked for tax enforcement, such as reviews, collections, criminal investigations, legal and judicial support and monitoring of digital assets.

Globally, the Organization for Economic Co-operation and Development (OECD) rules on BEPS 2.0 (Base Erosion and Profit Shifting), which includes the move to a global minimum tax, have created further concerns, requiring tax departments to define how they operate.

As tax department heads seek to better manage how they will approach department operations, particularly around compliance work, it may be necessary to review and evaluate what the tax team in currently available. Key questions in this assessment should include: How does the department collect data? How many people are needed to get specific tasks done, specifically compliance work? What are the current technologies that the department uses, as well as others accessed from other parts of the business? And what are the other ways the tax department serves the entire company? As an advisor or by providing data analysis to guide business decisions?

Changing the tradition of indoor work

Historically, corporate tax departments have basically kept all or most of their work in-house, using an operating model that has done as much work as possible within the department. According to a 2019 Deloitte survey, more than 80% of respondents “use some kind of centralized global tax delivery model,” meaning that most of their work is done “in-house.”

As times change and tax regulations grow in volume and complexity, resource-strapped tax departments have been forced to look for ways to improve the efficiency of the way they work. The same Deloitte report noted that about 30 percent of respondents said they outsourced some of their work to a third-party vendor. Today, the percentage of tax work that is outsourced is significantly higher, especially for tax compliance work. And while many departments benefited from having some or all of their compliance work done outside the organization, there were concerns about the quality of the work done and the potential risk to the business of the work being done outside the enterprise.

The risks and concerns associated with outsourcing vary, of course, depending on where the work is performed. Whether it is onshore outsourcing (work that is done outside the organization by a third party in the same country) or offshoring outsourcing (work that is done outside the country by a third party), many of the same risks and issues are often cited by tax authorities. These concerns include:

        • quality of work;
        • the knowledge and skill levels of employed workers;
        • loss of control over quality of work or processes used; and
        • change or loss of experience in the third party company. (For example, if there is a need to review previous work for an ongoing tax preparation or audit, the tax department may not have access to the people who originally did the tax preparation.)

Despite the risks and concerns associated with outsourcing, the many benefits outweigh them, including that outsourcing allows:

        • tax department employees from tedious compliance tasks;
        • departments with limited staff can do compliance work; and
        • the department can do more strategic tax work, including tax planning.

This is further highlighted by a recent KPMG survey of more than 300 chief tax officers at large public and private US companies, which showed that more than 80% plan to use outsourcing or other managed services models in the next three years. The study also included the use of co-sourcing, which — while not a new concept — many departments find in most cases better suited to the way they work.

In a joint hire arrangement, tax departments can choose a third party to work alongside the in-house team on specific projects. This allows the department to participate in every step of the work, alleviating concerns about potential errors and creating more transparency in the work of the third party. A secondary benefit is that co-sourcing allows the in-house tax team to work on different types of projects, which can help reduce the burnout that comes from doing repetitive work.

The corporate tax department’s operating models must continue to evolve to accommodate the ever-expanding global tax regulations. Many tax departments have long operated in a reactive manner, with some leaders admitting that it is a challenge to get all the work done from one tax season to the next. Clearly, this way of working is not sustainable and is one of the leading reasons tax professionals burn out and leave—in some cases, not just their current job, but the entire accounting profession. In addition, many tax leaders are being asked to provide more analysis and insights to their business parent, placing them in a business advisor role, according to the Thomson Reuters Institute State of the Corporate Tax Department 2022 research.

To meet all of these challenges, corporate tax departments will need to have the resources and bandwidth to ensure that their team members are free to take on these new roles. This means that having an operating model within the department that allows this to happen is paramount.

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