Shifting rules and new technology have corporate tax departments reviewing their operations

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

The need to manage ever-changing corporate tax policies has created uncertainties for many tax department leaders, who fear they may not be able to fully anticipate all of the possible audit risk and exposure that their companies may face.

Tax jurisdictions around the globe are continually revising and upgrading the ways in which tax data can be collected and requiring tax departments to provide even greater transparency into their business’s operations. In the United States, for example, the Internal Revenue Service will receive $80 billion over the next 10 years, as a part of the Inflation Reduction Act of 2022, with more than half of that money being dedicated to tax enforcement, such as examinations, collections, criminal investigations, legal & litigation support, and digital asset monitoring.

Worldwide, the Organisation for Economic Co-operation and Development (OECD) rules around BEPS 2.0 (Base Erosion and Profit-shifting) included the move to a global minimum tax has created even more concerns, requiring tax departments to button-up how they function.

As tax department leaders seek to better manage how they’ll approach department operations, especially around compliance work, it may be necessary to make a review and assessment of what the tax team currently has at its disposal. Key questions in this assessment should include: How does the department gather data? How many people it takes to get specific tasks done, specifically compliance work? What are the current technologies the department uses, as well as others it can access from other parts of the business? And what are the other ways the tax department serves the overall company? As an advisor, or by providing data analytics to guide business decisions?

Changing the tradition of working in-house

Historically, corporate tax departments have primarily kept all or most of their work in-house, using an operational model that had as much work done within the department as possible. According to a 2019 Deloitte survey, more than 80% of respondents were “operating some type of centralized global tax delivery model” meaning most of their work was being done “in-house”.

As times changed and the volume and complexities of tax regulations grew apace, resource-challenged tax departments were moved to look for ways to improve the efficiency of the way they worked. The same Deloitte report noted that about 30% of respondents said they moved some work to a third-party vendor. Today the percentage of tax work that is being done by a third party is significantly higher, especially for tax compliance work. And while many departments benefited by having some or all of their compliance work done outside of the organization, there were concerns about the quality of the work being done and the potential risk to the business of having work done off-premises.

Risks and concerns related to outsourcing varies, of course, depending on where the work is being done. If its on-shore outsourcing (work that is being done outside of the organization by a third party in the same country) or off-shoring outsourcing (work being done out of country by a third party), many of the same risks and concerns are often cited by tax departments. These concerns include:

• • • • the quality of work;
      • the knowledge and skills levels of the outsourced workers;
      • loss of control over the quality of work or the processes used; and
      • change-over or loss of experience at the third-party firm. (For example, if a need arises to review past work for a current tax prep or audit, the tax department may not be able to access the people that originally did the tax prep.)

Despite the risks and concerns with outsourcing, a multitude of benefits outweighs them, including that outsourcing allows for:

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

This is further underscored by a recent KPMG survey of more than 300 chief tax officers at large public and private U.S. companies that showed that more than 80% plan to use outsourcing or other managed services models in the coming three years. The survey also included the use of co-sourcing, which — although not a new concept — many departments are finding in most cases a better fit for how they work.

In a co-sourcing arrangement, tax departments can choose to have a third-party work together with the in-house team on specific projects. This allows the department to be involved every step of the way as the work is being done, alleviating concerns about potential errors, and creating more transparency into the third party’s work. A secondary benefit is that co-sourcing allows the internal tax team to work on different kinds of projects, which can help reduce burnout that comes from doing repetitive work.

Corporate tax department operational models must continue to evolve to accommodate continuously expanding global tax regulations. Many tax departments have long worked in a reactive way, with some leaders admitting that it’s a challenge to get all the work done from one tax season to the next. Clearly, this way of working isn’t sustainable, and it is one of the leading reasons for tax professionals burning out and quitting — in some cases, not just their current job but the entire accounting profession as well. In addition, many tax department leaders are being asked to provide more analytics and insights to their parent business, placing them in a business advisory role, according to the Thomson Reuters Institute’s 2022 State of the Corporate Tax Department survey.

In order to do address all these challenges, corporate tax departments will need to have the resources and bandwidth to ensure that their team members are free to step up into these new roles. That means, having an operational model within the department that allows this to happen is paramount.