Outsourcing Tax Compliance Functions and Global Compliance Management: Perspectives from Betty Ann Jarrett

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Episode 27: Outsourcing Tax Compliance Functions and Global Compliance Management: Perspectives from Betty Ann Jarrett

Release date: Aug 17, 2010
Guest: Betty Ann Jarrett
Running time: 11:35 minutes

Outsourcing or co-sourcing tax compliance functions, whether domestic or global, can be a way to free-up limited internal resources and still meet increasing expectations, while controlling costs. These are desirable characteristics in times of hiring freezes and economic pressures. Applying her experience in PwC’s Global Compliance Services practice, Betty Ann Jarrett describes different types of arrangements and outlines key considerations, including the scope of the arrangements, supporting technology and troubleshooting.

Learn how to reap the benefits of outsourcing or co-sourcing tax compliance functions, while avoiding potential pitfalls.

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Outsourcing tax compliance functions and global compliance management – perspectives from Betty Ann Jarrett

You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.

Gerry Lewandowski: Here with us today is Betty Ann Jarrett, the leader of PwC Canada’s global compliance services practice. Betty Ann has been with PwC Canada for over 20 years and, among other things, she advises Canadian companies on various corporate tax compliance matters including the outsourcing of domestic and international tax compliance functions. Betty Ann will share with us some of her insights and experiences working with tax directors in managing global or multi-jurisdictional regulatory and tax compliance requirements.

Thanks for joining us Betty Ann.

Betty Ann: Thanks, Gerry.

Gerry: Betty Ann, as you know, continued challenging economic times, combined with increased regulatory requirements, complexity and risk, have presented tax directors with a “perfect storm” of strict budgets, resource shortages and increased expectations from management around performance of the tax function such that tax directors are looking for relief anywhere they can find it. Outsourcing of various responsibilities within the tax function has existed for many years as a potential solution to some of these problems.

Firstly, is this the right time for tax directors to be considering outsourcing responsibilities of the tax function and, if so, what are the advantages and disadvantages of doing so?

Betty Ann: Well, Gerry, it is the right time to be considering outsourcing.

Outsourcing and co-sourcing are generally recognized as ways to reduce costs and save money, and so, during these challenging economic times they will potentially become even more attractive to tax directors facing budget constraints and hiring freezes.

Given the increased spotlight that tax compliance has been brought into recently, outsourcing is often the only way that tax directors can be sure that they are meeting their compliance obligations as the costs and risks of addressing these increased compliance requirements with in house resources can be prohibitive.

Most importantly, one of the worst things tax directors can do at this time is to limit their dealings with external advisors. If the tax department is already overburdened and relies on external advisors to 'pick up the slack,' making the decision to utilize external advisors less can be short sighted and lead to problems in the short to medium term.

There are several advantages of outsourcing of tax compliance.

  • Firstly, it enables scarce internal tax resources to focus on tax planning and other value added activities that will help to reduce cash taxes payable and effective tax rates, rather than having these scarce resources being bogged down with heavy compliance loads.
  • Outsourcing also provides access to trained resources in any country that you do business in – resulting in accurate and timely compliance – without the need to hire, train, and pay for full time staff in these locations. This enables tax directors to deal with resource constraints in a time of 'hiring freezes.'
  • Finally, outsourcing encourages innovative ideas and the sharing of best practices through having a “different sets of eyes” looking at the same issues.

However, there can be some challenges in tax outsourcing. For example, it may not be achievable if the consultancy budget has been slashed. There is also a perception that there can be a loss of control over certain tax processes if the internal tax function is not involved. This can be addressed by considering flexible arrangements with the outsourcing provider.

And finally, the outsourcing provider may not have sufficient knowledge of the company or the industry it operates in... And this can often be addressed through training and a consistent experienced outsourcing team.

Gerry: What services of the tax function are typically outsourced?

Betty Ann: Well, Gerry, most large Canadian companies are already outsourcing some of their activities in the tax function.

Some of the compliance obligations that are typically outsourced are the following:

  • Corporate income tax return preparation or review, including Canadian returns, but more commonly, for the foreign jurisdictions they operate in
  • Could also include sales tax or VAT compliance
  • Payroll services
  • Statutory financial statements which are required for filing with tax returns in some foreign countries
  • It could include tax provision work, and
  • Transfer pricing documentation

Other functions that can be outsourced include Canadian foreign affiliate compliance (the T1134 forms) and surplus calculations, transaction support, due diligence, and the administration of international assignments of key employees.

The important thing to keep in mind is that the outsourcing arrangement is flexible and can be tailored to your company’s needs and objectives.  For example, PwC’s Global Compliance Services (or GCS offering) provides tremendous flexibility in scope, both in terms of which jurisdictions are covered and the range of services available. It is not a 'one-size-fits-all' solution.

Gerry: Betty Ann, in your opinion, how does a tax director maintain control over the processes of the tax function when outsourcing?  Is there not communication breakdown when tax compliance and tax planning are done by separate parties?

Betty Ann: Well, Gerry, there is a natural fear on the part of tax directors when speaking of outsourcing because they fear certain knowledge and experience will be lost when outsourced. The level of control a tax director would prefer to exercise over certain tax processes will vary.

In respect of tax compliance, here are a few suggestions:

  • Consider co-sourcing where only a part of the compliance function is outsourced. For instance, only certain entities in particular jurisdictions.
  • Co-sourcing could also mean shared sourcing, where the external advisor does part of the compliance function, for instance during peak periods or filing deadlines.
  • Another aspect of tax compliance co-sourcing is that tax directors can maintain the review function in-house and outsource just the preparation function, or, vice-versa.
  • Most importantly, various co-sourcing models with external advisors can give tax internal tax departments the relief they need during particularly busy seasons or in areas where their skill sets are not as strong but, at the same time allowing the tax function to retain some level of control and involvement in the final product.

Gerry: What are some of the challenges that a tax director will face when outsourcing?

Betty Ann: Well, there are a number of issues that have to be considered.

  • One of the key ones is dealing with the scope of the outsourcing arrangement and the problem of scope creep. This is mainly an issue of communication and flexibility. The terms of the contractual arrangement for the outsourcing with the external service provider have to be specifically set out, including the terms of the service and the level of the service. However, sufficient flexibility has to be built into the outsourcing arrangement in order to ensure that the contract can be refined, either on a regular or ad hoc basis, to deal with realities of the business environment.
  • Supporting technology is also an important consideration and critical to the success of many large outsourcing arrangements….particularly those that require a significant degree of communication between the company and the outsourcing provider.
  • Lastly, troubleshooting and escalating service issues – Even the best outsourcing arrangements have the potential for service delivery issues; and it’s important to understand the communication and resolution process at the outset of the relationship. PwC’s GCS approach is unique, with our Client Relationship Manager role. The CRM co-ordinates the global compliance contract, ensures service delivery, troubleshoots and provides a single point of contact for tax directors.

Gerry: So Betty Ann, from your experience, what would you say are the characteristics of a successful outsourcing relationship between a tax director or tax function and an external service provider?

Betty Ann: There are many outsourcing arrangements that fail to deliver the value that was expected of them up front. However, from my experience, the characteristics of a successful outsourcing relationship mirror in many ways the characteristics of a successful client/advisor relationship. These would include:

  • A strong working relationship that involves trust, cooperation and open communication
  • A clear understanding of expectations and the value proposition to both the company and the outsourcing provider, including clear escalation and issue resolution processes
  • An outsourcing provider that provides added value to the tax function in terms of expertise, new perspectives and new approaches to problems, and
  • Lastly, a fee structure that is innovative and flexible to meet the ongoing and changing demands of the company

Gerry: In closing, how would a company start to consider outsourcing of its tax compliance obligations?

Betty Ann: Well, Gerry, deciding on whether to outsource some elements or all of a global tax compliance function can be a very difficult and complex decision, and then the decision process around choosing a service provider can also be challenging. PwC has a lot of experience in dealing with these issues and has developed a toolkit for companies which will aid them in 'managing a global compliance' proposal. The kit discusses:

  • One, how to establish your needs and objectives
  • Secondly, the proposal process and best practices
  • Also, the request for proposal itself – including the scope of services, pricing strategy and approach, what information will be made available to service providers, and the role of technology
  • Also, discusses deciding on the deliverables out of the proposal process, and
  • Making the decision on a service provider and building a transition team

It is a real help for any companies that might be considering outsourcing any or all of their global compliance obligations.

Gerry: We would like to thank Betty Ann Jarrett for sharing her perspectives on outsourcing tax compliance functions and global compliance management. For additional information on global compliance services, please go to pwc.com/ca/tmas.

Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.

The information in this podcast is provided with the understanding that the authors and publishers are not herein engaged in rendering legal, accounting, tax or other professional advice or services. The audience should discuss with professional advisors how the information may apply to their specific situation.

Copyright 2010 PricewaterhouseCoopers LLP. All rights reserved. PricewaterhouseCoopers refers to PricewaterhouseCoopers LLP, an Ontario limited liability partnership, or, as the context requires, the PricewaterhouseCoopers global network or other member firms of the network, each of which is a separate and independent legal entity. For full copyright details, please visit our website at pwc.com/ca.

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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.