Understanding tax co-sourcing in the Pillar Two era

To manage and comply with contemporary tax processes, organisations have generally had a choice of two approaches: either carry out the work in-house or outsource it to a specialist third party. However, we have recently started to see a change in how many corporations are approaching their tax compliance processes. As the domestic and international regulatory burden increases, so do the resources required to meet the associated high volume and complex workloads. And whilst it is widely acknowledged there is a cost associated with this compliance, there is an equal and opposite drive for increased efficiencies and cost savings that needs to be achieved. It is this balancing act that is prompting businesses to reconsider an approach that they may have previously discounted – co-sourcing. For instance, the arrival of Pillar Two, the OECD’s global minimum tax regime, means many tax teams must allow for a further set of requirements and their accompanying complexity. Compliance is dependent on a wide range of processes, including applying Pillar Two rules and regulations across multiple jurisdictions, the integration of data from various sources, and an understanding of both global and local reporting requirements. When looking at pure outsourcing, compliance looks very expensive, as there is far more “data wrangling” required from various sources than a typical CT process, for example. So, what can be done to address these issues? Enter co-sourcing, a hybrid tax management model where businesses selectively outsource specific tax tasks to external advisors while retaining other activities in-house. It’s an approach designed to optimise efficiencies, manage costs and enable businesses to access specialist expertise without fully outsourcing their tax function. Co-sourcing has also been given significant momentum by the development of cloud-based software services that facilitate collaboration, real-time data access, workflow automation and integration between in-house tax teams and external advisors, regardless of geographical location. Which when it comes to global regulations is certainly helpful, perhaps explaining why it’s gathering significant momentum. A study by Deloitte, for example, suggests that nearly half of businesses will implement co-sourcing for their Pillar Two compliance. Hybrid models and cloud-driven innovation How does this approach work in practice? Organisations that adopt the hybrid tax model do so to address three key priorities: creating value, managing risk and reducing cost. These are transformational goals involving highly strategic decisions about which tax activities to retain in-house and which will be outsourced to external specialists. Looking at how this impacts businesses’ approach to Pillar Two tax in particular, corporates are purchasing software to undertake computations backed by external advisors to help with specific needs, such as reviewing and checking in-house computations and analyses. Others use external specialists to advise on the reporting dimensions, level of data quality and availability that will be needed to satisfy Pillar Two for each jurisdiction in which they operate. Others simply opt for a “review only” service from an advisor to check their first round of calculations. Co-sourcing can also be implemented to deliver consistency across local and global data and processes. Here, businesses will engage with providers that can handle data collection and storage for multiple jurisdictions and advise on where they stand with regard to their current reporting status. Whichever particular hybrid style and partnership structure an organisation adopts, co-sourcing operates in contrast to traditional approaches, where tax professionals often work in siloed environments. In particular, the cloud-enabled co-sourcing model promotes collaboration and efficiency across multiple teams and geographies, as advisors and businesses have access to the same information and systems. Those suspicious about security when it comes to the cloud can rest easy – access to information can be granted based on role rather than location, with the option to choose data to be stored securely in a specific country or region. In common with many applications across other sectors, the benefits of cloud technology have removed barriers that have made it difficult for corporations to initiate co-sourcing tax models. Instead, they can cherry-pick which tasks to retain in-house and which to outsource. Pillar Two is a major development in global tax regulations in its own right. It’s also indicative of a shift towards a greater role for compliance, with authorities demanding significantly more of businesses to ensure they play by the rules. As a result, the trend in favour of co-sourcing is likely to accelerate as awareness grows and organisations share the benefits of tailored services and powerful cloud-based technologies. These are welcome developments, not least because the bottom-line benefit for all stakeholders will be a tax system that operates with less friction and more efficiency.