Earlier this year, 600 of General Electric’s (GE) global tax professionals did something that no corporate tax team has done before: they officially joined accountancy firm PwC. While other companies like Siemens, McDonald’s and Shell have outsourced or co-sourced tax activities in the past, the agreement between GE and PwC stands out.
It’s not an outsourcing agreement, but rather, a transfer of GE’s employees, proprietary software, and processes in exchange for PwC’s tax compliance services and a share of the revenues the former GE unit will generate for PwC.
This naturally raises two questions. First, how will the arrangement work in practice? And, second, will other tax functions follow in GE’s footsteps?
The Mechanics of the Arrangement
Six hundred accountants, lawyers, and other tax professionals across GE’s corporate tax team and businesses joined PwC as permanent employees. They are handling GE’s tax compliance work including tax returns, transfer pricing, and BEPS-related activities. These former GE employees will also provide tax services to other PwC clients.
The transfer still leaves GE with about 250 business-level tax employees who will continue to provide tax services to individual units. This group will focus on non-compliance work such as planning strategies and mergers and acquisitions.
GE’s corporate tax team, which now consists of about 20 employees, will focus on strategic initiatives. It’s responsible for overseeing the 250 business-level tax employees as well as the company’s tax relationship with PwC. This is all in addition to the 400 or so shared services employees at GE, some of whom perform technical tax work.
PwC’s new unit, called Global Enterprise Tax Solutions, is projected to generate more than $1 billion in revenue per year coming from GE and other clients. For its part, GE estimates that it will save about $500 million in costs over the course of the five-year agreement.
Will Other Tax Functions Follow Suit?
The answer to this question is not straightforward. In today’s complex and unpredictable tax environment, companies are already seeking more help from accounting and tax services firms because it’s increasingly difficult to maintain the deep expertise needed in-house.
The prospect of reducing fixed employee costs and switching to a variable cost model is certainly appealing. In some cases, the fees charged by a “big four” accounting firm (of which PwC is one) will be more manageable than hiring full-time staff. This explains the dozens of calls PwC reportedly received from other interested companies shortly after the GE deal was announced.
However, the sheer size of GE’s tax function makes its situation unique. Most organizations won’t find themselves in a position where they can shed so many employees while still retaining a tax team of more than 200.
Also, increased regulation and heightened scrutiny of tax issues exposes companies to increased risk of someone in the tax team making a mistake. For most tax departments, it will remain important to maintain a certain level of control over the most important and sensitive aspects of tax compliance. So while a similar deal may make sense for other large, complex organizations that operate in many global jurisdictions, or for companies that deal with complicated tax issues far removed from core operations, most tax functions will not follow in GE’s footsteps.
Rather than signing a similar agreement with a big four accounting firm, the average tax function can increase efficiency and effectiveness by improving the way it responds to unpredictable work, adopting a more flexible staffing model, and taking a long-term approach to process improvement.