The Power of Hybrid Tax Operations

By Philip V. Giuca

The tax implications of launching and managing a new investment fund are incredibly complex, even without considering the significant expertise and operational costs required.

This reality creates a dilemma for tax departments at investment firms, which must contend with conflicting pressures to keep fees low; to deliver quick, accurate services that meet compliance and reporting requirements; to mitigate risks; to make smart hires while dealing with a shortage of talent; and to show their value by helping the core business meet their strategic and growth objectives.

Reconsidering operating models

To meet these demands, tax departments at many investment firms are rethinking how they work and which aspects of the business they might outsource to trusted advisors. Many have gravitated to hybrid tax operating models that make it possible to both improve operations and reduce costs while offering compelling career opportunities to current and potential employees.

Expanding capacity

Few tax departments have enough specialists and senior experts to do all the work associated with complicated investment funds. A critical early step is to decide which work to retain and which to outsource.

Today’s investment firms expect their tax departments to support growth and profitability, so it makes sense to partner with a dedicated third-party service provider for tasks such as compliance and reporting. The best choice is a firm with functional tax specialists in multiple jurisdictions, along with a deep bench of professionals who have direct experience supporting the investment-management sector across a range of geographies, financial products and instruments, and investor profiles.

Accessing powerful technology

Beyond their depth of talent, leading providers of tax services have also invested in technology platforms and solutions that make core tasks more efficient.

Many investment firms spend the majority of their technology budgets on client-facing solutions and far less on internal systems. Tax-services providers, in contrast, tend to be further along on their digital transformation journeys, using robust, automated tax ecosystems to make compliance and reporting processes fast, cost-effective, and accurate. Many providers have expanded even beyond this transformation to develop proprietary technology for more strategic tasks such as valuation calculations, deal planning support, and due diligence across many jurisdictions.

In practical terms, such outsourcing could drive employee movement from in-house teams to the service provider, yielding further savings and efficiencies. And there are clear benefits to an investment firm and its tax-services provider, each of which has its unique assets and capabilities and assumes different but complementary roles. Deal flow can progress unimpeded, with less risk of errors and missed deadlines—and shared confidence that a transaction, filing deadline, or funding round will close on time and at the anticipated cost.

Improving the employee value proposition

Partnering with a tax-services provider to automate certain activities and provide deal-specific tax expertise also frees tax directors to put more time and budget toward long-term goals.

Like so many other organizations today, investment firms’ tax departments are facing a major talent crunch; partnering with a tax-services provider can help close the capability gap. Trusted advisors not only have proven capability themselves; they can also assist a firm in internal capability-building.

To attract and retain talent, many tax departments need to offer learning opportunities, but they’re constrained by limited training budgets. Working alongside the experienced specialists of a global professional services provider can deepen both old and new employees’ skills in compliance, reporting, and other core activities.

Deloitte provides services to a full range of global investment-management firms, each with a unique operating model. Our consultants can share a wealth of best practices, design technology solutions, and provide insights to help tax department leaders recalibrate how they build their internal teams and expand their options. This expertise directly benefits tax departments seeking to distinguish themselves and add value for their firms.

Creating a hybrid operating model with a services provider is a proven way for tax departments in investment-management firms to efficiently expand capacity, access new technology, and free up valuable staff time to focus on strategic initiatives. These internal teams can take on a more valuable, strategic advisory role, focusing on developing their team’s capabilities by outsourcing compliance and reporting to external specialists.

Learn more about Deloitte’s Operate solution and read our research.

Philip V. Giuca is a partner for Deloitte US.

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