31 August 2010

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The key competencies balance conundrum

The core objective of an effectively managed tax function should be the enhancement of shareholder value as part of the execution of the overall business strategy.

To achieve this, the tax function requires a balance between three key performance areas - tax risk management, tax compliance and strategic tax planning.

Increased regulatory requirements and the risk of costly mistakes have caused the pendulum to swing towards a bias for tax compliance in recent times.

To restore the balance between tax risk management, tax compliance and tax planning, an intervention is required. This must avoid erosion of and enhance shareholder value. Ultimately it involves a cost-benefit analysis.

Cost of operation tax functions

Tax functions require suitably skilled and experienced people with strong technical abilities. Ideally they should also have a working knowledge of International Financial Reporting Standards (IFRS) and other accounting conventions applied by the organisation.

Tax executives should also act as ambassadors for the tax function in the larger organisation in collaboration with all levels of company.

The above combination of skills is scarce and unlikely to be found in a single individual. If available it comes at a high cost with limited security of tenure. The risks that this poses have caused many organisations to consider the option of outsourcing.

The outsourcing alternative

The outsourcing of income tax compliance and ad-hoc technical tax compliance is common for most corporate taxpayers. The level of involvement in operational issues influencing tax matters by suppliers of tax services is however often superficial and only scratches the surface.

Full outsourcing of the tax function in South Africa is still in its infancy but is gaining momentum as the paradigm of in-house control slowly shifts to a more global system based view of conducting business.

Current levels of outsourcing vary from full to co-sourcing of tax-function key elements. Full outsourcing is likely to be the dominant approach in the future as corporate entities get more comfortable with the idea. Essentially it is a process of education and developing trust that will ultimately achieve the paradigm shift needed to give impetus to the process.

Why outsource?

Outsourcing effectively addresses the two most critical tax risks facing modern companies: access to global knowledge and experience and ;the need for succession.

Outsourcing can also serve to restore the balance required between the key performance areas in corporate tax functions. The introduction of global best practice can best be achieved through service providers with exposure to a wide client base, hence the attractiveness of outsourcing.

True north - it is not about costs

While outsourcing the tax function may lead to cost savings, this should not be the major driving force behind a decision to outsource the tax function. The outsourcing decision should always be viewed as a management tool to ensure the effective execution of the business strategy.




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