Looking outward for a solution
In order to deal with this increased risk, many businesses are considering outsourcing. Indeed, according to research from EY Tax and Finance Operate survey report, when those surveyed felt that there was going to be just a slight increase in tax risk from digital tax filing requirements, the likelihood to outsource leapt by 20pp.
The picture is slightly different when it comes to workload. A perceived slight increase in workload had no effect on the shift to outsourcing, but when there was an anticipated moderate increase, the likelihood to outsource rises by 10pp. This indicates that tax and finance functions are willing (or able) to handle some additional workload, but when that pressure grows, outsourcing becomes more attractive as a solution.
These responses indicate that the pressure to “get things right” seems to be greater when digital tax requirements are introduced, hence the immediate turn towards outsourcing as a solution. This higher sense of urgency is likely because taxpayer’s have less time to self-audit and correct errors and tax administrations have more opportunities to find errors and challenge tax positions.
On the surface, this shift to outsourcing in regard to both risk and workload is understandable – to partner with a third-party that has the systems and expertise to manage all the reporting obligations and handle the workload, yet who will be able to flex and adapt as the regulations continue to change. But is there a danger that automatically leaping to outsourcing, especially when it comes to managing risk, is something of a knee-jerk reaction?
Liza Drew, EY Asia-Pacific FSO Indirect Tax Leader, thinks the picture is far more nuanced. “Even without the risk from digital tax filing requirements, there’s been a general increase in terms of the regulatory requirements that tax functions have had to deal with,” she explains. “It’s been accumulating for some time now. When you add in digital requirements – with companies needing to upskill their technology and systems to comply – you can see why it’s a fairly natural reaction for companies to think they’ve reached a tipping point.”
The sourcing dilemma
This begs the questions whether outsourcing is the best solution. Under what circumstances might it be best and when might it not?
As Arman points out: “The real question is whether outsourcing makes sense based on a business’s current set up. If you already have a team in place in-house and you can manage the changes, the move to outsourcing doesn’t make sense from a business and cost standpoint, and also in terms of maintaining control. Secondly, the outsourcing provider can only help you to a certain point. They can’t book transactions in your enterprise resource planning (ERP) system, for instance.”
This latter point is a taken further by Gino Dossche, EY Americas VAT Compliance Leader and US Consumption Tax Leader, EY LLP. “You can effectively put indirect tax submissions into different categories,” he explains. “There’s the periodic reporting of transactions to tax authorities, such as Making Tax Digital in the UK and SAF-T in Poland. Then there’s the near-real-time data that is sent to government through a third-party solution or a direct ERP connection, such as in SII in Spain or e-invoicing in Mexico.
“The periodic reporting is where the shift to outsourcing makes sense, because it is possible to hand this on to a provider. Where the taxpayer must make a direct connection to the tax administration to submit transactional data straight to them, on the other hand, can be harder to outsource.”
All of this points to the fact that the picture is far more complex than simply shifting to outsourcing because the tax risk or workload is increased. Effectively, there are many moving parts to the decision-making process. Companies may not be in a position to outsource or simply choose not to. They may feel that co-sourcing or in-sourcing is a better option – or, indeed, a hybrid of all three approaches may be most appropriate. This may be especially true of companies that have a global footprint.
As Dossche notes: “An organization may choose one approach in one country because of the reporting requirements, but a different approach in another country. You can’t throw a blanket over everything anymore. Strategically you need a more targeted and focused approach to compliance these days.”
