Understanding Tax Compliance Sourcing Strategies
As your business grows and you enter new markets, the traditional perspective was that all your teams, processes, and needs must grow as you scale, but this traditional paradigm has changed with the digital economy, and teams must continue to deliver with minimal scaling or changes. On top of that, the landscape of digital services is rapidly evolving, and businesses are forced to deal with every country’s specific rules and regulations on indirect tax compliance. So, what options do you have when your compliance responsibility has grown?
Insourcing: Building Internal Tax Compliance Expertise
Insourcing involves handling most aspects of indirect tax compliance internally within the organization. This strategy gives companies maximum control over their processes but requires significant investment in talent, technology, and ongoing training.
It is not common for the tax team headcount to grow in order to cover every new responsibility that the scaling of the business brings to the table. Most simply, these new responsibilities are being distributed among the existing team members. As new obligations arise, a good practice is to take the opportunity to review the existing processes and procedures to see if and how they can be improved.
In light of this, teams often look to technology to automate processes, but automation frequently requires a great deal of expertise to manage and is not always affordable to introduce.
Tax Software exists on the market, but much of it is designed to replace Excel and does not address many (or any) of the real underlying issues. The unfortunate reality is that poor communication, data quality concerns and tight compliance deadlines will remain an issue with most automation solutions.
As a result, teams continue to seek and explore alternative options like outsourcing or co-sourcing.
Important Aspects of the Insourcing Approach
| Model characteristics |
- Most or all work is done internally by the team and resources of the company.
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| Benefits |
- Can be cost efficient in absolute sense.
- Companies have direct oversight and control over their tax compliance processes.
- Process and quality control.
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| Potential drawbacks |
- Opportunity cost: Expensive resources could add more value elsewhere.
- Requires ongoing investment in training, technology, and regulatory updates.
- Often single point of failure (SPOF) risk with key employees holding critical knowledge.
|
| Role of technology |
- Often times, no dedicated solutions.
- Data from ERP and finance systems manually manipulated in excel or excel like solutions.
- Audit trail not always consistently captured.
- No single source of truth.
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| Key decision criteria |
- Available resources for development (financial, human, time).
- Relevant tax and compliance skills internally available.
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| Designed to support |
- Teams with relevant knowledge and experience, looking for maximum control.
- Typically large businesses with extensive global operations and dedicated (tax) compliance and reporting teams.
- Businesses with a very local presence (only a few countries).
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| Key considerations |
- Capacity: Ensure internal capacity within the necessary teams (tax, compliance, fintech and engineering) to build, monitor and maintain the solutions and processes you design.
- Future-proofing: Short and mid-term expectations on work volume and growth are good to take into account early on.
- SPOF: Avoid single points of failure by maintaining proper documentation and that any changes over time continue to be reflected.
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Outsourcing: Leveraging External Compliance Expertise
Outsourcing involves partnering with third-party service providers to handle some or most aspects of indirect tax compliance. This strategy allows companies to leverage external expertise while directing scarce internal resources to core business activities.
Outsourcing has traditionally been viewed as the great saviour for tax teams that are facing a mountain of work, but while it may be an excellent short-term solution, it often introduces new hurdles and doesn't address many of the same problems that insourcing has.
The idea of having an external team that handles your compliance work end-to-end without any help is, unfortunately, very much a dream. Yes, they are external, and they often do not know your data, and data problems remain unfixed. Thus, much of your time is either spent helping the external team correct your data, providing context, or, in some cases, still doing 90% of the work.
There are also some practical considerations to an outsourcing arrangement. One of these concerns is cost. Often, the cost per return is substantially higher than the initial quote, which is normally due to billable hours and other charges. Most of the automation is having many people externally do the work, but throwing an army at the problem often leads to varying quality of the underlying submissions. Then there is the big question of who is responsible when things go wrong.
Important Aspects of the Outsourcing Approach
| Model characteristics |
- Majority of work done externally by compliance service providers and tax advisors.
|
| Benefits |
- Easily scalable.
- Access to specialized knowledge and skills.
- External validation (tax advisor validation and ’stamp’).
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| Potential drawbacks |
- Can be expensive.
- Companies may have less direct control over the compliance process.
- Potential vendor lock (loss of control, knowledge and data).
|
| Role of technology |
- Outsourcing partners often use specific country tax compliance solutions which can enhance efficiency.
- For global engagements providers often have a management dashboard or workflow/tracking solution.
- Typically no single source of truth.
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| Key decision criteria |
- Cost considerations.
- Global presence.
- Lack of specific subject matter expertise or dedicated resources.
- Fiscal representation requirements.
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| Designed to support |
- Businesses lacking tax resources dedicated to tax compliance.
- Fast growing or extensive global footprint businesses.
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| Key considerations |
- Clear scope: Understand exactly who does what - from extracting the numbers from your systems to the filing of your return and payment of any taxes due.
- Value: Ensure that you are getting value that you are paying for. You are likely to be outsourcing for experience, speed, efficiency — make sure you are getting these.
- Economies of scale: If appointing a global provider, leverage your scale to obtain better pricing.
- Knowledge: Get the relevant expertise that you are paying for and ensure you get proactive and reactive advice based on your filings.
- Consistency: Make sure that your service provider institutionalises knowledge so you won’t have to explain to new staff time and time again.
- Vendor Lock: Make sure you know what happens should your cooperation agreement end or you need to change providers (who retains the data and has access to the technology used to provide the returns and workings for the statutory limits retained).
- SLA confusion: Make sure you and your providers know and agree on your responsibilities.
- Mis-alignment: Ensure you and your provider are aligned with the policies of your company and your tax team (e.g. should the provider request refunds of VAT when the cost of answering the mandatory desk audit will exceed the refund?).
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Co-sourcing: Balancing Internal and External Resources
A new emerging trend is co-sourcing. Co-sourcing is a collaborative approach, where the company retains some in-house functions while outsourcing others. This strategy provides a balance between control and external expertise.
Co-sourcing is also where a software solution is used to automate tasks like data ingestion, data enrichment, validation and then the data is used to generate things like returns/reports etc. From there, responsibility for certain tasks is split between internal and external teams. This gives you the benefits of both worlds, allowing your team to focus on the high-value (or high-risk) countries and processes, and allowing an outsourcing partner to do the low-value tasks like last-mile delivery, or handling things like international payments.
By having a single platform, it reduces the burden on the existing team and centralises communications, processes and procedures. Ultimately providing a transparent flow of data internally and externally, making it easy to get the work done.
Important Aspects of the Co-sourcing Approach
| Model characteristics |
- A combination where internal and external resources divide and conquer the workload and process. Often the division is either a process split or geographical split.
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| Benefits |
- Flexible: Companies can retain control while leveraging external expertise where needed.
- Reduces dependency on partners.
- Scalable (no human resource limitations).
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| Potential drawbacks |
- Coordinating internal and external systems and processes requires experience.
- Bulk discounts of using one global external vendor may not be available.
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| Role of technology |
- Typically a mix of internal and external solutions, leading to suboptimal use of technology.
- Typically no single source of truth.
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| Key decision criteria |
- Global presence
- Risk tolerance when using 3rd party services.
- Fiscal representation requirements.
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| Designed to support |
- For businesses that want to focus on in-house strengths while outsourcing non-core functions.
- Both small and large businesses lacking tax resources and/or having a global footprint.
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| Key considerations |
- Efficiency: Identify your areas of genuine strength and genuine weakness. Source accordingly.
- Control: Allow your internal teams to stay in the driver's seat and in control regardless of what service provider you use in each country each period.
- Collaboration: Find the most efficient and effective central collaboration process possible. Establishing an effective process is incredibly important for success.
- Confusion: A mixed approach requires very clear coordination as to who is responsible for filing, what technology is used and where.
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Watch Fonoa's Is “Co-Sourcing” the future of Indirect tax return filing? webinar to learn more about co-sourcing, how it is changing the landscape, and if you can level up how you handle global indirect tax compliance.
How can Fonoa Help
To facilitate the efforts needed to comply with GST and VAT filing obligations globally, Fonoa developed Fonoa Returns. The Fonoa Returns product supports the preparation, review, and submission of returns globally. It is the ideal product for multinational businesses with teams looking to take advantage of a co-sourcing solution.
The product allows for collaboration and workflow tracking with in-house and multiple external providers, depending on your business needs.
Simply contact our team if you would like to receive more information.
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