The tax function for corporates in house or outsource

This article appears in the April issue of our International Corporate Structures Newsletter.

In January 2017, PwC issued a press release announcing the onboarding of GE’s tax talent to PwC. Clearly this is a major outsourcing to a professional services firm.

In their press release, PwC seemed to justify the switch on the grounds that “professional services are simply not part of GE’s core business.’’

The press release also stated that the model goes beyond tax and could apply to a company’s other in house functions such as internal audit and data processing. Presumably though the PwC logic could also apply to all in house staff functions including finance, legal and human resources.

In my opinion, such wholesale outsourcing of core staff functions should be treated with extreme caution as in the longer term they tend not to be economically beneficial to the company, and the quality of service may not prove “best in class’’.

Am I against outsourcing? Absolutely not, but I do believe a company’s overall tax objectives are best achieved by a combination of in house tax resources and external tax advisers.

The level of each at any point in time will depend upon the stage the company is at in its development.

A newly established business will generally tend to rely upon its external tax advisers for compliance and planning support. At this stage, in house tax resource is neither economically viable nor necessary.

However, as a company grows, its staff function needs to change in all areas.

So what benefits are there to having dedicated in house tax resources?

The answer can be summarised as:

• costs more controllable
• greater business knowledge
• expertise on call for the company and not a broader client portfolio
• better able to define and achieve the company’s tax strategy
• problems handled from start to finish
• ability to act proactively and speedily without other client conflicts
• able to develop ongoing day to day relationships with tax authorities.

An in house tax function takes time to build. Before that, the CFO will need to obtain approval to invest in appropriate resources over a number of years, and then maintain that investment.

In addition to headcount needs, the company’s current and future requirements will necessitate up to date technology, adapted as necessary to the company’s business activities.

An intermediate step might be to have a mix of permanent and interim staff. The benefit of interim help is the short term nature of assignments, and contracts can be for specified periods which can be renewed or not.

During the development stage of building an in house tax team, day to day tax tasks need to be performed. Having suitable interims on hand to fill that requirement on a temporary basis is generally beneficial. This does need proper managing as the cost of an interim is higher than permanent staff but generally lower than external adviser charges.

External tax advisers can then be engaged to work with the in house team on specific projects such as general planning, tax audit resolution, transfer pricing strategy and M & A.

The external adviser remains a critical player in a company’s tax world but working with the in house team – each provides its own specialist knowledge and expertise.

To me, the most critical step for larger businesses is to get the balance right between in house tax expertise and ongoing use of tax advisers.

So, I reiterate my view that outsourcings like the PwC/GE model need to be treated with caution. I do not share the view that a company’s tax function is not core to a business.