Outsource to Reduce Your Tax Liability

The business practice known as “outsourcing” was coined in the 1980s.  Outsourcing is a process involving the commission or transfer of a business process to an outside organisation capable of fulfilling that function.  Many types of business functions can and are being outsourced, such as accounting, customer support, human resources, information technology, real estate management, and customer support.

What is Outsourcing?

Outsourcing is an organisational decision usually requiring top-tier management approval.  The decision to divest is not a light one, as it involves the transfer of assets and people, which – depending on the laws of the country in which the outsourcing company is resident – can be assessed capital gains tax.

There are various reasons why companies outsource.  Some want their organisational effort to be focused on their so-called ‘core competencies’, and thus distribute ancillary tasks to an outsourcing entity.  Others are in a fiscal situation that requires them to transfer people and assets to offshore locations in order to avoid or minimise taxes that would be otherwise imposed on them.

Outsourcing is not exactly the same as off-shoring, however interchangeably the terms might be used.  When one outsources, he or she enters into a contract with a supplier or service provider, while off-shoring simply means the transfer of a function – which may or may not remain within the parent organisation – to an overseas location.  It is also different from subcontracting in that the supplier is not involved in a specific project only, but in the ongoing activities of the contracting firm.

Tax Benefits of Outsourcing

Businesses want to streamline their budget and reduce their tax liabilities.  By outsourcing certain tasks, they can operate under the aegis of the supplier and have minimal exposure in the supplier’s resident country.  This means that they will also have a minimal amount of the legal responsibility that accompanies such functions as the recruitment and termination of workers, property purchases, accounting functions such as payroll, and sometimes even incorporation.

Outsourcing is a way to reduce tax liabilities because with the expenses being incurred with the outsourcing process, the company can sometimes be assessed for a lower income tax.  In an era where companies do their utmost to streamline tax outlays and other expenditures to achieve the maximum possible efficiency, this can prove to be a winning edge in a very competitive arena.

Outsourcing can also save the contractor money because a lot of foreign outsourcing destinations offer tax incentives to entice companies to avail of the services of locally-based suppliers.  These can take the form of regional tax perks or income tax relief, and is a factor whose effect is usually taken into consideration early on in the outsourcing process.

Other Benefits

Outsourcing also offers other advantages apart from the reduction in tax liabilities.  It enables access to a larger labour pool whose talents may have been previously inaccessible had the contracting organisation chosen to keep the process in-house; the service provided is backed by a binding contract with legal redress; the provider can give higher-quality service than possible within the parent organisation; it reduces time-to-market; and if and when the outsourced function is no longer needed, the contract can be terminated and the services either given to another supplier or taken back into the company that outsourced it in the first place.