Why is it beneficial to outsource Tax Services in current global environment
Globalization is not a new phenomenon, though it is broadly been referred to as a 20-21st century phenomena. This is due to the fact that governments, institutions and international bodies are playing an important, organized and rule driven role in globalization.
Outsourcing is an outcome of globalization primarily driven by cost effectiveness and reduced burden of resource management. Now that the scenario has evolved, companies have started outsourcing complex work because of the maturity in the outsourcing industry. Maturity is measured through value addition, transformation, error free delivery models and the ability to deliver complex knowledge and technological services.
Most global enterprises and in the recent past governments have taken vastly to outsourcing of its technology platform and processes. Taxation is one such complex knowledge based services that is being outsourced.
Global market and global profit has driven all governments to have stringent tax legislations to ensure that there are minimal tax leakages from the profit earned and derived from transaction within or through its jurisdiction. Revenue authorities ensure that there is strict compliance on taxation. This has led both business enterprises and governments to comply and enforce tax compliance respectively
The challenge faced by global business enterprises with holdings and subsidiaries across regions is the rigorous tax compliance through complex reporting formats, technology changes in the platforms of the revenue departments and frequent changes in the compliance procedures. These make it challenging for the tax team of a global organization to keep itself updated with such frequent fiscal and procedural changes further constrained by cost and difficulty in resource management.
Tax compliance services by an outsourcing partner is provided through efficient cross border/cross jurisdiction tax knowledge collaboration, structured risk and control mechanism for compliance, a structured quality control mechanism, ever evolving process improvements, automation of tax processing activities, value addition through analysis support for audit and assessment and strong knowledge base of ERPs.
A global enterprise demarcates its operations based on regions from where they operate or have the largest business / revenue stake; this leads to bulk processes being outsourced based on region - Europe, North America, APAC etc.
Though tax is a separate domain, it is fundamentally linked with finance and accounting services - AP, AR and R2R and compliance alone forms an independent service.
To illustrate, invoice processing, the most popular and common outsourcing segment in F&A, is done on this principle of demarcation - covering various countries. One may start thinking as to why invoice processing has any relevance at this point of discussion, but a mention here is required because one of the most important line items of entry is the Tax amount. Transactional txes vis-à-vis VAT, sales tax, withholding tax, and service tax import duty ... requires country based domain knowledge. Any error in this critical activity has a far reaching consequence on tax claim and calculation. A global outsourcing partner has the ability to address these errors through continuous training from center of excellence and structured tax quality check while processing invoices.
The list of taxes both direct and indirect is extensive - corporate income tax, payroll tax, deferred tax, property tax, capital gain tax, withholding tax, transactional taxes, etc. The more the taxes to be compiled the better it is managed through outsourcing.
Governments and its agencies also face the budgetary challenge of maintaining its resources. Hence the trend of outsourcing is also catching up in government departments /agencies.
For example, the Government of India -Income Tax department under the Ministry of Finance has partnered with global enterprises in this direction.
The benefits of tax process outsourcing by global enterprises having divisions across jurisdictions and Governments can be classified as below:
- Cost effectiveness
- Reduced resource management
- Reduction of time in repetitive processes
- Quick turnaround time - achieved through implementation of process improvement and automation tools
- Centralized service delivery and accountability
- Mitigation of risk and non-compliance
- Accessibility to cross jurisdiction tax knowledge.
And most importantly outsourcing gives time to the core team to work on key strategies -- conceptualizing and arriving at strategically important decisions which will help in the focus on productivity and revenue increase.