Outsourcing and Tax

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Sourcing Bulletin -- August 8, 2007

This article covers two subjects. Firstly, it addresses the complex tax issues that can arise on an outsourcing

project. And, secondly but no less importantly, it explains the connection between tax, outsourcing and Attila

the Hun. Given the amounts at stake, readers involved in outsourcing projects should have a clear grasp of the

first subject – as well as a curiosity to discover why specialists in tax and/or outsourcing are such wild and

crazy guys.

Tax issues are clearly a significant driver of business behaviour. Companies go to considerable lengths to

structure their arrangements in the most tax advantageous way within what the law allows. Tax issues become

proportionately more difficult as transactions cross borders and potentially involve more than one possible tax

regime.

But whereas companies routinely use tax planning as part of M&A or corporate reorganisation programmes, perhaps surprisingly tax issues are often an afterthought in many outsourcing transactions. This may be because outsourcing originated as a simple concept of an in-country arms’ length services transaction with few tax complexities or opportunities for legitimate tax planning. But that has now changed and tax issues loom large in many outsourcing deals – especially those with a heavy financial services component or cross-border element.

This article introduces the most common tax issues that should be considered on any outsourcing or offshoring

project. Clearly, the various issues and the application of tax laws vary according to each individual transaction

and depend highly upon the parties’ exact circumstances and the services, structures and jurisdictions involved. This article is written primarily from a UK and wider European base – although similar principles ought to concern parties to outsourcing transactions in the United States or any other country.

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