Offshoring of Tax Work: The Small-Firm Perspective
The big-4 and mid-tier accounting firms have been moving tax work offshore for more than a decade, and the advantages of such a move – labour cost savings and greater availability of staff — are well-known. (Offshoring has been concentrated in compliance and provision work; advisory work, such as tax planning and dispute resolution, has tended to stay at home because of the greater need for client contact and the broader knowledge base required.) However, offshoring in only now being considered by the broad base of smaller firms (say, 25 professional staff) in Canada, and the risks involved may be significantly different for such firms.
For larger accounting firms, offshoring can involve setting up an offshore tax captive — a branch of the Canadian firm in India or the Philippines to do the Canadian tax work. A Deloitte study suggests that such in-sourcing of the offshore work is a viable option where the firm has enough tax work for 50 or more full-time employees. Clearly, this is a lower-risk approach in terms of ensuring that the work product is of the expected quality.
Smaller firms do not have the choice of a captive. In that case, they must contract with a service provider in that country to supply the services. As described in the Deloitte study, two options are most common: (1) the contract personnel model, in which the service provider’s professionals work under the direct supervision of the Canadian firm’s staff; and (2) the outsourcing model, in which the service provider assumes responsibility for the work done by its professionals, with a correspondingly lower level of control and supervision being exercised by the Canadian firm.
The elephant-in-the-room issue with such non-captive arrangements is the quality of the product. The challenges include:
- Such service providers often have received a significant amount of work in the past from Australia and the USA and regularly receive high-quality training from professionals from those countries, but this is less true for work from Canada. In essence, the service providers want their clients to invest their own staff into training their team in Canadian tax.
- Turnover within the offshoring firm, which exacerbates the training problem. Of course, the same problem occurs with hiring staff in Canada, but in the case of such service providers, the new staff may be switching into Canadian work for the first time.
- Besides cultural issues, there is an unavoidable difficulty in timely communication; in particular, the Philippines operates approximately on the exact opposite time zone as Canada does. While some of these firms will work night shifts, this does not seem to be a long-term feasible solution. (Large Canadian firms, with their global reach, are of course used to this; but this may be a new problem for a smaller Canadian firm to be dealing with.)
There can also be an issue about assuring client confidentiality. One would need to physically visit and see their processes and facilities before providing highly sensitive information such as personal tax data; a virtual tour is hardly sufficient.
If offshoring is used, clients should be informed via the client engagement letter that services may be rendered from time to time outside of Canada. Combining this with verbal reminders would be prudent.
Finally, it is important not to become completely reliant on outsourced services. Country risk may also be a concern; in that case, the Canadian firm may wish to divide up its work between service providers in two countries.
Jamie Herman, BAS, MTax, CPA, CA – Chief Financial Officer of MIG Group
Jamie Herman currently serves as the Chief Financial Officer for an ultra high net worth family. With over a decade of professional firm experience advising high net worth individuals and their families on complex tax and accounting transactions, his focus has turned to assist one family in holistically managing their assets. His role includes managing investment, tax and accounting operations, reviewing internal domestic and international commercial structures, analyzing potential strategic acquisitions and divestitures, personal financial planning for shareholders and liaising with external professional advisers.
MIG Group, Toronto