Outsourcing and Co-Sourcing: Enabling Flexibility for a Strategic Tax Function

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In 2024, tax leaders are being asked to do more than ever. Along with compliance and reporting, tax leaders are now acting as strategic advisors across the business, collaborating with internal stakeholders to drive value. But compliance and reporting requirements are also growing more complex, meaning tax leaders may not always have the resources or bandwidth to fully engage in this strategic work while maintaining their focus on core responsibilities. Outsourcing and co-sourcing tax work can provide much-needed flexibility and help elevate the tax function.?

The Outsourcing and Co-Sourcing Landscape?

Outsourcing and co-sourcing allow tax leaders to leverage the knowledge and experience of tax advisors to help with complex and burdensome tax work. With this support in place, the tax function can turn its attention to strategic planning and value creation. BDO’s Tax Strategist Survey identifies two types of tax leaders: Tax Strategists — proactive advisors across the business who often lead an elevated tax function — and Tax Tacticians — professionals who may be limited to a more reactive role due to resource or talent constraints on their tax teams.??

BDO’s 2024 Tax Strategist Survey revealed that both types of tax leaders see the value of outsourcing and co-sourcing services. Tax Strategists (52%) and Tax Tacticians (42%) both strongly indicated that they intend to increase their budgets for outsourcing and co-sourcing in the next 12 months. But despite the fact that many tax leaders recognize the value of investing in outsourcing and co-sourcing, a significant number of tax leaders said they have no plans to co-source or outsource in the next 12 months — and this trend is intensifying year over year.?

If this trend continues, it could represent a missed opportunity. Companies that have no plans to invest in outsourcing and co-sourcing may be limiting their tax leaders’ ability to drive growth by aligning tax strategies with the overall goals of the business. They may also be leaving tax savings on the table.??

Barriers to Outsourcing and Co-Sourcing?

BDO’s survey showed that fewer tax leaders have co-sourced or outsourced tax work in the past 12 months compared to the previous year. Several factors might explain this development.??

Budgetary constraints remain a prime barrier to investing in flexible workforce options, as tax leaders across the board are asked to do more with less. The uncertainty inherent in an election year (in the U.S. and abroad) could also be weighing on tax leaders, who may be opting for a more cautious, “wait-and-see” approach to strategic planning, resulting in a stronger internal focus on compliance and reporting.?

In a move that could compound these factors, it's possible that fewer tax leaders set aside funds in their budget for outsourcing and co-sourcing in 2024, looking instead to investments in technologies like artificial intelligence (AI) to help perform routine tasks and reduce the burden on tax teams.?

This year’s survey data also yielded an interesting result regarding different tax leaders’ approaches to outsourcing and co-sourcing: Tax Tacticians were more likely to outsource or co-source in the past 12 months than Tax Strategists.?

At first glance, Tax Strategists, who regularly take their seat at the table when business-wide decisions are made, might seem more likely to embrace outsourcing and co-sourcing. But in 2024, the total number of Tax Strategists pursuing these options decreased. This may be because the majority of Tax Strategists (58%) were CFOs who have less day-to-day operational oversight of tasks that require flexible workforce strategies and solutions.?

On the other hand, Tax Tacticians — whose ranks include tax directors and tax executives — may be finding that they need extra support given their evolving roles and mandates that extend beyond compliance and reporting.?

Despite budget constraints and lack of certainty about the future, outsourcing and co-sourcing tax work remains an attractive strategy for all tax leaders. The right outsourcing and co-sourcing relationship can be scaled up or down and tailored to an organization's budget and evolving needs. This approach may be easier and more cost-effective than hiring to fill gaps in internal capabilities, especially given ongoing talent shortages in the tax and accounting industry. Leveraging the technological capabilities of external advisors may also be more efficient and cost-effective than purchasing and adopting new software tools in-house.?

Focus Areas for a Total Tax Managed Service Model?

To help navigate the complexities of the evolving tax landscape, leaders are seeking external advisors who can bring their experience and resources to assist with compliance and reporting on a global, national, and local scale.?

BDO’s survey data revealed that tax leaders are planning the most significant increase in their outsourcing and co-sourcing investments, measured as year-over-year growth, in global tax compliance (8% YoY increase) and credits and incentives (6% YoY increase).?

Global Tax Compliance?

U.S.-based multinational enterprises (MNEs) are increasingly focused on global tax compliance due to heightened scrutiny of cross-border transactions. Transfer pricing, long a subject of interest from tax authorities, is a particularly complex area of tax, and a recent string of IRS wins in transfer pricing litigation may warrant that more attention be paid to transfer pricing compliance.?

The Organisation for Economic Co-operation and Development (OECD)’s Pillar Two model rules, which have been enacted domestically in several jurisdictions, impose a minimum tax on some MNEs, adding complexity and workload to the tax functions of in-scope organizations, generally those with global revenue above EUR 750 million.?

Federal Tax Credits?

The Inflation Reduction Act created new opportunities for organizations by expanding some federal renewable energy tax credits and allowing businesses to transfer certain federal credits, introducing a simpler way to monetize tax credits.??

Credit transferability enables tax teams to use cash to purchase credits at a discount. By purchasing credits, businesses can reduce their tax liability. But, while potentially valuable, these credit transactions can be complex — making them an ideal option for outsourcing or co-sourcing if a tax team lacks the internal resources to pursue them.?

State and Local Tax Credits?

State and local tax credits and incentives represent an underutilized opportunity for tax teams to unlock savings. Thousands of credits and incentives are available across the U.S., and across all industries, that can help companies drive innovation and expand their operations. BDO’s 2024 Tax Strategist Survey found that only 34% of CFOs planned to optimize costs by claiming credits in the next 12 months, which indicates many businesses may be leaving opportunities on the table. Outsourcing and co-sourcing for SALT credits and incentives allows businesses that may otherwise lack adequate resources, bandwidth, or tax accounting continuity to pursue and fully implement these opportunities.?

Global tax compliance and tax credits and incentives are just a few examples of the many areas where collaborating with a third-party advisor can offer numerous benefits. Leveraging the knowledge of experienced, reliable professionals can bolster compliance work and enable in-house tax leaders to offer strategic insight to the C-suite — both of which ultimately drive sustainable value and mitigate tax risk exposure.?

Want to know more about how outsourcing or co-sourcing can add strategic value to your tax function? Read more in BDO’s Tax Strategist Survey or ask me a question below.?