Private equity (PE) firms are constantly looking for ways to improve their operations and create value for their shareholders, and outsourcing their tax and compliance operations is one way this can be made possible. As these firms navigate through a complex web of regulatory demands and aim to enhance operational efficiencies, outsourcing has emerged as a strategic lever for managing compliance risks and streamlining tax operations.
The Drive Towards Outsourcing
PE firms are often mired in a maze of tax compliance and regulatory measures that consume a considerable amount of time and resources. According to a survey, 76% of PE firms report that their teams are spending an inappropriate amount of time on tax compliance and related data tasks. Given the intensifying pressure from global regulations, including the pressures of Base Erosion and Profit Shifting (BEPS) 2.0 and impending ESG regulations, PE firms are motivated to look for efficient solutions to manage these growing complexities while maintaining a focus on their core deal-making activities.
Outsourcing addresses these challenges by redeploying the valuable time of in-house professionals towards more strategic, higher-value tasks while leaving routine compliance work to specialized external service providers. This strategy not only alleviates the burden of managing intricate compliance details but also allows firms to leverage external expertise in tax laws and regulatory nuances allowing them to foresee and navigate potential risks.
Data and Technology as Catalysts for Change
The critical role of data and technology in tax transformation cannot be understated. Data centralization leads to more efficient processes and greater compliance, as it helps in establishing a ‘single source of truth‘ that serves as a cornerstone for accurate reporting and strategic decision-making. Advanced data analytics tools provided by outsourcing partners allow PE firms to harness the power of their data for predictive analytics, risk assessment, and more informed operational decisions.
Furthermore, as technology becomes central to tax functions, with 50% of tax and finance model changes in PE firms focusing on co-sourcing with providers holding significant tech capabilities, PE firms require access to sophisticated tax and finance technology. This need is being met by outsourcing firms who invest heavily in innovative solutions to streamline compliance processes and offer insights into broader enterprise operations.
How Outsourcing Can Help Reduce Tax Risks
Co-sourcing or fully outsourcing tax and finance activities can lead to significant cost savings for PE firms and allow management-level tax professionals to devote their time to strategy and planning. A third-party assessment by a specialized outsourcing firm can identify operational gaps and opportunities, and tailor solutions that not only enhance value but ensure compliance from day one.
The 2022 EY Tax and Finance Operations Survey highlights that 94% of private companies will likely co-source these activities within the next two years, reflecting a prevalent and growing trend in the industry. The technology leveraged by these third-party service providers is particularly critical, offering a consolidated view of data with robust analytics that provide control and visibility around the globe.
The Bottom Line
Outsourcing tax and compliance operations offer PE firms the advantage of accessing a pool of specialized talent that is up-to-date on the latest tax laws and technology while retaining oversight of strategic tax issues. Â By leveraging industry-specific expertise and sophisticated technological resources, PE firms can focus on their principal investment activities, secure in the knowledge that their tax and compliance functions are being managed effectively and efficiently.
PE firms looking to maintain competitive edge and agility in an intricate fiscal landscape should consider the strategic value that outsourcing brings to the table – a balanced approach where control, visibility, and strategic tax management coalesce to support their long-term growth ambitions.
Learn more about private equity tax advisory services and how E78 can help your alternative investment firm with tax and compliance services.
