The first thing to be clear on is the target operating model for your tax function. They are all different. What are you good at that you should keep doing, how is your company’s technology and operating model changing and how should you adapt your team, and what is best to outsource to others?
We observe four key sourcing / operating models used in practice, two of these emerging in more recent times.
1. Insourcing
Insourcing involves the tax department undertaking all of the compliance obligation in-house. It can be well suited for larger tax teams and brings great control, but often involves little or unsophisticated technology, unless licenced from a third party.
Even with an insourced model, the ATO is expecting more external review of governance controls and testing over tax processes. This is often the first thing the ATO asks to see when commencing a review. What do you have in place and what is your 3 year roadmap to extend and improve it?
2. Outsource
Covering everything on the spectrum from co-source to outsource to managed services, this is a wide field of play. It may involve as little as a high level review of an FBT return that was prepared in-house, to an outsource of a corporate tax return preparation, or even full accountability of the end to end process in a managed service.
Where it is best for you to play across all of your obligations will depend on your target operating model.
A couple of key things to keep in mind:
- To avoid important obligations falling through the cracks, all processes should be connected.
- Many are consolidating external advisers to bring more connectedness to reporting responsibilities.
- If you are using email as an integral part of your process, it is likely you already have, or will have a governance gap that leads to inefficiencies at best, and failures at worst.
- Outsourcing can be efficient as the provider may be able to leverage lower cost, specialist labour, more technology and it relieves tax departments of employee managerial responsibilities like hiring, technical training and performance management.
3. Hybrid in a technology evolving corporate
Insource / Outsource have been the traditional sourcing models for tax compliance, but the bright line delineation around this is changing. We are now starting to see corporations invest heavily in new transformative technology as they migrate to a cloud ERP platform. Some are also implementing third party tools seeking more automation across certain taxes (see more below).
Where this is occurring, the sourcing / operating model for tax functions is being turned upside down. The question they pose is, “how can you assist us by leveraging our own broader technology investments, including being agile to change your delivery model to our company as we evolve?”. This requires new ways of thinking about old sourcing models. It’s more about systems configuration, ensuring content such as rules and rates is constantly updated, governance over data flows to third party tools and more analytics to understand trends and look for outliers.
All of this still needs to be connected in a way that those responsible for tax reporting gain comfort over positions taken and returns filed.
4. On System
We use this term to describe a future state, available when an organisation has decided to migrate to Enterprise Resource Planning (ERP) cloud software. This is becoming prolific, particularly in the US and UK who are a few years ahead of Australia, however some Australian companies have now started to explore on system opportunities for GST, withholding tax, fixed assets, operational transfer pricing, tax provision and tax return calculation as their companies migrate to the cloud. This could be the ultimate form of really “connected compliance”.
Follow our series as we outline the current tax reporting capabilities of ERP systems and the opportunities that are available for tax functions now, and those opportunities which we see emerging in the short term.